Dissolution of Partnership Firm Commerce Notes | EduRev

Crash Course of Accountancy - Class 12

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Commerce : Dissolution of Partnership Firm Commerce Notes | EduRev

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 Dissolution of Partnership 
According to Section 39 of the partnership Act 1932, the dissolution of partnership between all the partners of a firm is called the dissolution of the firm. That means the Act recognises the difference in the breaking of relationship between all the partners of a firm and between some of the partners; and it is the breaking or discontinuance of relationship between all the partners which is termed as the dissolution of partnership firm.

The dissolution of partnership may take place in any of the following ways:
(1) Change in existing profit sharing ratio among partners;
(2) Admission of a new partner;
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if partnership is formed for that; and
(7) Expiry of the period of partnership, if partnership is for a specific period of time;


 Dissolution of a firm 
Dissolution of a partnership firm may take place without the intervention of court or by the order of a court, in any of the ways specified later in this section. It may be noted that dissolution of the firm necessarily brings in dissolution of the partnership.

Dissolution of a firm takes place in any of the following ways:
1. Dissolution by Agreement-with the consent of all the partners.
2. Compulsory Dissolution
(a) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership
3. On the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved :
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the adjudication of a partner as an insolvent.
4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved if any one of the partners gives a notice in writing to the other partners, signifying his intention of seeking dissolution of the firm.
5. Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved on any of the following grounds:
(a) when a partner becomes insane;
(b) when a partner becomes permanently incapable of performing his duties as a partner; (c) when a partner is guilty of misconduct which is likely to adversely affect the business of the firm;
(d) when a partner persistently commits breach of partnership agreement;
(e) when a partner has transferred the whole of his interest in the firm to a third party;
(f) when the business of the firm cannot be carried on except at a loss; or
(g) when, on any ground, the court regards dissolution to be just and equitable.

Distinction between Dissolution of Partnership and Dissolution of Firm

Basis

Dissolution of Partnership

Dissolution of Firm

1. Termination of business

The business is not terminated.

The business of the firm is

2. Settlement of assets and liabilities

Assets and liabilities are

revalued and new balance

sheet is drawn.

Assets are sold and liabilities are paid-off.

3. Court's intervention

Court does not intervene because partnership is dissolved by mutual agreement.

A firm can be dissolved by the court's order.


Economic relationship between the partners comes to an end.

4. Economic relationship

Economic relationship between the partners continues though in a changed form.

5. Closure of books

Does not require because the business is not

terminated.

The books of account are

closed.

6. Other dissolution

It may or may not involve

dissolution of the firm.

It necessarily involves

dissolution of partnership.

Accounts to be prepared at the time of dissolution
· Realisation a/c
· Partners capital a/c
· Cash a/c or bank a/c · Partners loan a/c

Step for dissolution (BAPP)
1. balance sheet khali karu (clear the balance sheet- X me )
2. assets and liabilities to be sold off (bank or by PCA- X me )
3. Profit and loss for realisation( transferred to PCA - X me)
4. Partners capital is paid off ( transferred to bank a/c - X me)

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