Accountancy · Ch 8 — Dissolution of Partnership Firm
Summary
Summary
- Dissolution of Partnership vs. Dissolution of Firm: Dissolution of partnership is a change in the existing agreement (e.g., retirement, admission) — the firm continues. Dissolution of the firm means the entire business is wound up; the firm ceases to exist.
- Modes of Dissolution: A firm may be dissolved by (a) agreement of all partners, (b) compulsory dissolution (e.g., all partners become insolvent), (c) on the happening of a contingent event (e.g., expiry of fixed term), (d) by notice (in a partnership-at-will), or (e) by court order (e.g., insanity, misconduct, persistent losses).
- Settlement of Accounts (Section 48): After all assets are realised and liabilities paid, the order of settlement is:
- Outside liabilities (third-party debts).
- Partners' loans (loans by partners to the firm).
- Partners' capital (in the profit-sharing ratio). Any surplus is distributed in the profit-sharing ratio; any deficiency is borne in the same ratio.
- Realisation Account: A nominal account opened to record the sale of assets and payment of liabilities. All assets (except cash/bank and fictitious assets) are transferred to its debit side at book value; all external liabilities are transferred to its credit side. The profit or loss on realisation is transferred to partners' capital accounts in their profit-sharing ratio.
- Treatment of Undistributed Reserves & Accumulated Losses: Reserves (e.g., General Reserve) and accumulated profits (e.g., P&L credit balance) are credited to partners' capital accounts in the profit-sharing ratio. Accumulated losses (e.g., P&L debit balance) and fictitious assets (e.g., Goodwill already written off) are debited to partners' capital accounts in the same ratio.
- Payment of Partners' Loan: A partner's loan is repaid before any capital is returned, but after all outside liabilities are settled. It is not transferred to the Realisation Account — it is paid directly from the bank account.
- Insolvency of a Partner (Garner vs. Murray Rule): If a partner is insolvent and has a debit balance in his capital account, the loss from his deficiency is borne by the solvent partners in their capital ratio (not profit-sharing ratio). This rule applies when the partnership deed is silent on how such a deficiency is to be borne. …