Class 12 Accountancy Dissolution of Partnership firm notes
Dissolution of Partnership firm.... Short & Easy Notes for Board Exam
=> Any change in the relation among the partners is called dissolution of partnership. In case of dissolution of partnership, the firm constituted in reconstituted firm.
Dissolution of firm means termination of the business of the firm. Where all the partners break the relationship with the firm and the firm totally closed down.
Dissolution of the firm means;
i. Termination of the firm business.
ii. Disposal of the assets and liabilities to the third party creditors.
iii. Distribution of remaining cash between the partners.
Circumstances of dissolution;
i. When all partners are agree for dissolution.
ii. When all the partner except one become in solvent.
iii. When business of the firm becomes unlawful.
iv. In case of partnership at-will, any partner can dissolve the firm by giving notice.
v. On death of any partner.
vi. On expiry of the firm of duration of the firm.
vii. On completion of the venture.
viii. When a partner become unsound mind.
ix. When Court may order for dissolution of the firm.
#2. Difference between dissolution of partnership and dissolution of the firm.
=> Dissolution of partnership;
i. When some partners break the relationship from partnership.
ii. The business is not terminated.
iii. The book of accounts need not to be close.
iv. Court does not interfere.
v. It is voluntary.
vi. Dissolution of partnership is a normal process.
Dissolution of firm;
i. When all partners break the relationship from the firm.
ii. The firm's business fully closed on.
iii. All the book of accounts are closed.
iv. Court can be interfere. It may be.
v. It may be voluntary or mandatory.
vi. It is abnormal. Process only once in the life of the firm.
#3. What do you mean by realization account?
=> Realization account is an account which is drawn on the dissolution of the partnership firm. The main objective of the realization account is to close the book of a dissolved firm, and to show profit and loss on realization of Assets and liabilities.
Flowing are its characteristics;
i. It is a nominal A/c.
ii. It is open on the dissolution of the firm.
iii. Its objective is to find-out profit and loss on realization of assets and payment of liabilities.
iv. The profit or loss on realization is distributed among all partner in their profit sharing ratio.
#4. Difference between Revaluation A/c and Realization A/c.
=> Revaluation A/c;
i. It is prepared when there is reconstitution of partnership
ii. Its objective is to determine the profit or loss on revaluation of Assets and liabilities.
iii. It record increase or decrease on revaluation of Assets and liabilities
iv. It is prepared many times during the life of the firm.
Realization A/c;
i. It is prepared when there is a dissolution of partnership firm.
ii. Its objective is to know the profit or loss on realization of difference Assets and payment of liabilities.
iii. It records assets and liabilities at their book value and also recorded realized value of Assets and actual payment of liabilities.
iv. It is prepared only once during the life of the firm.
JOURNAL ENTRIES;
i. All assets except cash and bank balance will be transferred to realisation account at their book value.
Realisation A/c.....Dr
To sundry assets A/c
(being assets transfer to realisation account)
ii. All liabilities are also transfer to realisation account except partner's capital, partner's loan and fund.
All liabilities A/c......Dr
To realisation account
(being liabilities transferred to realisation account
iii. For transfer of provision and reserve.
Provision for doubtful debts A/c.....Dr
Investment fluctuating fund A/c......Dr
Provision for depreciation A/c......Dr
Joint life policy A/c.....Dr
To realisation account
(being reserve and fund transferred)
iv. For realisation of assets.
Bank account.......Dr
To realisation A/c
(being assets realised)
v. When assets taken over by a partner.
Partners capital A/c......Dr
To realisation A/c
(being assets taken over by partner)
vi. when assets is given to creditors toward payment of dues.
No entries are required.vii. For payment of liabilities.
Realisation A/c.....Dr
To bank A/c
(being payment made for Liabilities)
viii. When liabilities is taken over by a partner.
Realisation A/c......Dr
To partner's capital A/c
(being taking off by a partner)
ix. For payment of expense.
Realisation A/c......Dr
To bank A/c
(being expense paid)
x. When expense paid by a partner on behalf of the firm.
Realisation A/c.......Dr
To partners capital A/c
(being expense paid by the partners)
xi. When expense Born by a partner and paid by the firm.
Partners capital A/c......Dr
To bank A/c
(being expense paid off by the firm)
xii. For profit on realisation.
Realisation A/c......Dr
To partner's capital A/c
(being profit transferred to partners capital account)
xiii. For transfer of loss.
Partners capital A/c......Dr
To realisation account
(Being loss transferred to partner capital account)
xiv. For payment of partners loan.
Partners loan A/c.......Dr
To bank A/c
(Bank partners loan paid off)
xv. For transfer of Reserve and undistributed profit.
General reserve A/c.....Dr
Profit and loss A/c......Dr
Contingencies A/c.....Dr
To partner's capital A/c
(being reserve and profit transferred to partners capital A/c)
xvi. For transfer of loss.
partner's capital A/c......Dr
To profit and loss A/c
To fictitious assets A/c
(being loss account being loss transferred to partners capital A/c)
xvii. For payment made to partners.
Partner's capital A/c......Dr
To Bank a/c
(being final dues paid)
xviii. For payment receive from partner's.
Bank A/c......Dr
To partners's capital A/c
(being amount brought by partners)
POINTS;
#1. There are two methods of dealing with Goodwill on admission of a new partner;
i. Premium method = when new partner bring cash for goodwill and the same amount is shared by the old partners in their sacrificing ratio.
ii. Revaluation method = when new partner does not bring cash for goodwill
#2. Joint Life Policy (J.L.P) = Joint life policy is an insurance policy, which is taken up by the firm on the lives of partner jointly. Premium on Joint life policy is paid by the firm. These policies are the Assets of the firm and every partners are entitled to share the proceeds of life policies. The amount of the policy is received by the firm either at a death of the partner or after the expiry of the duration of the policy.
#3. Name two items which are credited to the capital account of deceased partner.
i. His share in Goodwill of firm.
ii. His share in Joint life policy.
#4. There are two methods of calculating deceased partner's share in profit of the firm up to date of his death.
i. On the basis of time,
Deceased partner's share in profit = Amt. of profit*Share in profit*alive period/12 or 365.
ii. On the basis of sales & turnover,
deceased partner's share in profit = Sale up to date of death*Rate of profit*share in profit/100.
#5. Accounting treatment of goodwill at the time of death of a partner.
i. When a partner dies, The remaining partner acquire his share of profit for his gain. Remaining partner are required to compensate the deceased partner in the form of goodwill.
Journal Entries
Gainer partner's capital A/c.......Dr
To deceased partner's capital A/c
ii. Goodwill written-off, If any appearing in the book of the firm (Balance sheet) on the date of death of a partner.
Journal Entries
All partner's capital A/c......Dr
To goodwill A/c
(being goodwill written-off in old ratio)
#6. What accounting record is made on dissolution of partnership firm?
On dissolution, the book of the firm are closed. For closing book of the firm, following accounting procedure are followed;
i. Passing necessary journal entries in the book of the firm.
ii. Preparing realization A/c.
iii. Closing of partner's loan A/c, if any
iv. Prepare ledger for partner's capital A/c.
V. Preparation of bank or cash A/c.
#7. Following are the modes of dissolution of a firm;
i. Dissolution by agreement.
ii. Compulsory dissolution.(If business is unlawful).
iii. Dissolution by notice.
iv. On happening of contigencies. like, death of a partner, on any partner become insolvent, on completion of venture.
v. Dissolution by court. (Section 44).
#8. Two problem which arise at the time of dissolution of firm;
i. Settlement of accounts.
ii. Payment of firm's debts and private debts.
SOME MORE POINTS;
1. Share of goodwill brought in cash by the new partner is called premium.
2. Profit or loss on revaluation is Born by old partner.
3. A minor cannot be admitted as a partner.
4. New profit sharing ratio is calculated at the time of admission of a new partner.
5. Revaluation A/c and Profit & loss adjustment A/c are same.
6. The balance of revaluation A/c is transferred to old partner's capital A/c in their old ratio.
7. A retiring partner is entitled to have a share in the goodwill of the firm.
8. The executor of a deceased partner will be paid interest @ 6% P.A on amount due from the date of his death.`
9. On retirement of the partner, revaluation profit should be credited to capital account of all partners in old profit sharing ratio.
10. In the event of death, the amount of general reserve, profit and loss (credit balance) profit and loss (Debit balance), revaluation of profit or loss is transferred to partners capital account.
11. The deceased partner's executor are entitled to his share of profit till the date of death.
12. On dissolution of the firm, bank overdraft is transferred to realisation account.
13. On dissolution of the firm, partners loan account is transferred to his loan account.
14. Undistributed profit, loss, reserve are transferred to partner's capital account.
15. Realisation account is a nominal account.
16. Realization account is open on dissolution of the firm.
17. Dissolution of partnership different from the dissolution of the firm.
18. Any changes in the relation of the partners is called The dissolution of partnership. It means, whenever a new partner is admitted and a old partner retired or die, partnership is reconstituted. In all those cases where a partnership is reconstituted, there is dissolution of partnership.
19. Unrecorded liabilities, when paid-off, are shown in debit side of realisation account.
20. After passing necessary journal entries in the book of the firm. realisation account is prepared.
21. On the retirement of a partner, profit on revaluation of Assets and liabilities should be credited to the capital account of all partners in their old profit sharing ratio.
22. Joint life policy reserve is in the nature of accumulated policy.
23. On the death of partner, the amount of Joint life policy insurance is credited to the capital account of all partners including the deceased partner.
24. On the death of a partner, the remaining partner who have gained due to change in profit sharing ratio, should compensate the remaining partners (who have sacrified) as well as deceased partner.
25. General reserve at the time of admission of a new partner is transferred to profit and loss adjustment account or revaluation account.
THE END
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