Accountancy · Ch 4 — Dissolution of Partnership Firm
Dissolution of Partnership
Dissolution of Partnership
Dissolution of Partnership vs. Dissolution of Partnership Firm
The first critical distinction to grasp is that dissolution of partnership is not the same as dissolution of the firm. Dissolution of partnership means a change in the existing relationship among partners — the old agreement ends, but the firm may continue its business under a new agreement. For example, when a new partner is admitted or a partner retires, the partnership is dissolved and a new one is formed, but the firm's business carries on.
In contrast, dissolution of the partnership firm means the entire business is wound up — assets are sold, liabilities are paid, and the firm ceases to exist. This section (4.1) deals only with the first type: dissolution of partnership, where the firm continues.
Ways in Which Dissolution of Partnership May Take Place
The textbook lists seven specific situations that bring about a dissolution of partnership (but not the firm):
- Change in existing profit-sharing ratio among partners — When partners agree to revise their profit-sharing ratio, the old partnership is dissolved and a new one begins with the new ratio.
- Admission of a new partner — A new partner joins, the old partnership ends, and a fresh partnership deed is created.
- Retirement of a partner — A partner leaves the firm, the remaining partners continue with a new agreement.
- Death of a partner — The partnership is dissolved automatically on the death of a partner; the legal heirs may be paid off or a new partnership formed with the remaining partners.
- Insolvency of a partner — If a partner becomes insolvent, the partnership is dissolved (though the firm may continue if the remaining partners agree).
- Completion of the venture — If the partnership was formed for a specific venture (e.g., constructing a building), the partnership dissolves once that venture is completed.
- Expiry of the period of partnership — If the partnership was for a fixed term, it dissolves automatically when that period ends.
In all seven cases above, the firm continues its business — only the partnership agreement changes. The accounting treatment for these events (revaluation of assets and liabilities, adjustment of goodwill, etc.) is covered in earlier chapters on admission, retirement, and death of a partner.
Accounting Treatment — What This Section Does NOT Cover
The textbook text for section 4.1 is purely conceptual — it defines dissolution of partnership and lists its modes. It does not provide any journal entries, account formats, or numerical examples. The actual accounting treatment (Realisation Account, settlement of claims, etc.) appears later in the chapter under "Dissolution of Partnership Firm" (section 4.2 onwards). …