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Key Notes: Dissolution of a Partnership Firm | Accountancy Class 12 - Commerce PDF Download

Dissolution of Partnership:

  • Definition: Dissolution of partnership refers to the termination of an old partnership agreement (Partnership Deed) and the possible reconstitution of the firm.
  • Causes: It can occur due to changes in profit-sharing ratios among existing partners, admission of a new partner, retirement, or death of a partner.
  • Business Continuation: It may or may not result in the closure of the business as the remaining partners may choose to continue the business under a new agreement.

Types of Dissolution of Firms:

(A) Without the Intervention of the Court:

  • Voluntary Dissolution: When all partners agree to dissolve the firm.
  • Compulsory Dissolution: Occurs when all partners, except one, become insolvent or when the business becomes unlawful.
  • Events-based Dissolution: Occurs on specific events like a partner's insolvency, fulfillment of the firm's objective, or the expiry of the firm's predetermined period.
  • Dissolution by Notice: When the partnership has a fixed duration, any partner can dissolve it by giving notice.

(B) Dissolution by Order of the Court:

  • Partner's Incapacity: When a partner becomes of unsound mind or permanently incapable of performing their duties.
  • Misconduct: When a partner's misconduct harms the partnership.
  • Breach of Partnership Agreement: If a partner consistently and deliberately breaches the partnership agreement.
  • Transfer of Interest: When a partner transfers their entire interest to a third party without the consent of existing partners.
  • Unavoidable Loss: When the court is satisfied that the partnership cannot continue without incurring losses.
  • Equity and Justification: When the court deems dissolution equitable and justified.

Accounting Treatment of Dissolution:

  • Realisation Account: To ascertain profit or loss on the realization of assets and payment of outsiders' liabilities.
  • Partner’s Loan Account: If a partner has given a loan to the firm, it's settled after paying outside liabilities but before distributing capital.
  • Partner’s Capital Accounts: Used to distribute profits, losses, and any remaining assets among the partners.
  • Cash or Bank Account: Final account to ensure the books balance.

Preparation of Realisation Account:

  • Entries for closing asset accounts and liability accounts are made.
  • Provisions and reserves against assets are transferred to Realisation Account.
  • Liabilities are transferred except for partner's loans and undistributed profits.
  • Workmen’s Compensation Fund may be transferred partially if required.
  • Realisation expenses are accounted for.
  • The final balance indicates either profit or loss on realization.

Preparation of Partner’s Loan Account:

  • If a partner has given a loan to the firm, the loan is repaid after outside liabilities are settled.

Preparation of Partner’s Capital Accounts:

  • Undistributed profits and reserves are credited.
  • Loss on realization and any assets taken over by partners are debited.
  • Final payments to partners are made.

Preparation of Cash or Bank Account:

  • Cash or bank balances are recorded.
  • Any withdrawals or deposits are accounted for.

Preparation of Memorandum Balance Sheet:

  • If not provided in the question, prepare a Memorandum Balance Sheet on the date of dissolution to determine the balancing figure.

Common Mistakes to Avoid:

  • Ensure correct entries for assets and liabilities taken by partners.
  • Account for dissolution expenses.
  • Recognize the realization of unrecorded assets.
  • Make provisions for payment of unrecorded liabilities.
  • Treat fictitious assets correctly.

Key Points:

  • Dissolution can occur voluntarily or involuntarily.
  • Court intervention may be necessary in some cases.
  • Proper accounting ensures a fair distribution of assets and liabilities among partners.
  • A Memorandum Balance Sheet helps determine the final financial position of the firm.
The document Key Notes: Dissolution of a Partnership Firm | Accountancy Class 12 - Commerce is a part of the Commerce Course Accountancy Class 12.
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