Dissolution of Partnership vs. Dissolution of a Firm

These two terms sound alike but mean very different things, and the MSBSHSE HSC Accountancy examination frequently asks students to distinguish between them.

Dissolution of Partnership refers to a change in the relationship among the partners — for example, when a partner is admitted, retires, dies, or becomes insolvent — while the remaining partners continue the same business under a fresh (reconstituted) partnership agreement. The old partnership technically ends and a new one begins, but the firm's business goes on without a break; only the Revaluation Account and the partners' capital balances are adjusted, and the books of account are not finally closed.

Dissolution of a Firm, by contrast, means the partnership relationship among all the partners comes to an end and the firm's business itself is discontinued. Every asset is sold or collected, every outside liability is paid off, the accounts between the partners are finally settled, and the books of the firm are closed permanently. There is no question of the business continuing afterward under the same firm.