Class 12 Book Keeping and Accountancy Chapter 6: Dissolution of Partnership Firm

Key concepts: Dissolution of Partnership Firm

Dissolution of firm

Under Sec. 39 of the Indian Partnership Act 1932, dissolution of the partnership between all the partners is dissolution of the firm. The business stops and the books are closed for good.

Dissolution of partnership vs firm

In dissolution of partnership the business may go on with a reconstituted partnership and books are not closed finally. In dissolution of the firm the business ends and the books are finally closed.

Realisation Account

A nominal account that shows the profit or loss on selling assets and paying outsiders. Assets go to its debit and outside liabilities to its credit; a debit balance is loss and a credit balance is profit.

Order of payment (Sec. 48)

Realisation expenses first, then outside liabilities, then loans given by partners (shared in proportion if cash is short), and any surplus goes to partners' capital in profit sharing ratio.

Three stages of simple dissolution

Transfer stage (assets and outside liabilities to Realisation A/c at book value), realisation stage (sales, payments, take-overs) and distribution stage (close Realisation, Current and Capital accounts).

Special items

Unrecorded assets and liabilities are entered only when realised or paid. Goodwill is treated like any other asset. A partner's loan is not transferred to Realisation A/c; it is repaid after outsiders.

Insolvent partner and capital deficiency

A partner is insolvent when liabilities exceed assets. If his capital account still has a debit balance after his private estate pays, the deficiency is borne by the solvent partners in profit sharing ratio.

When all partners are insolvent

Outside liabilities are not transferred to Realisation A/c. Available cash is shared among them in the ratio of their amounts and the unpaid part goes to a Deficiency Account.

Quick revision: important points

• Sec. 39 defines dissolution of a firm; Sec. 48 gives the order of payment on dissolution.
• Order of payment: realisation expenses, outside liabilities, partners' loans, partners' capital.
• Realisation A/c: debit balance = loss, credit balance = profit; shared in profit sharing ratio.
• Partner takes over asset: Dr Partner's Capital A/c, Cr Realisation A/c (at agreed value).
• Insolvent partner's deficiency is shared by solvent partners in profit sharing ratio.
• All partners insolvent: outside liabilities stay out of Realisation A/c; unpaid amount goes to Deficiency A/c.

Practice MCQs with answers

1. According to Sec. 39 of the Indian Partnership Act 1932, dissolution of a firm means dissolution of the partnership between:

   1. Any two partners of the firm
   2. All the partners of the firm
   3. The majority of the partners only
   4. The working partners only
   Show answer

   Answer: B. All the partners of the firm
   Sec. 39 says that dissolution of the partnership between all the partners is called dissolution of the firm.

2. A partnership at will can be dissolved by a partner giving notice of how many days?

   1. 7 days
   2. 30 days
   3. 14 days
   4. 21 days
   Show answer

   Answer: C. 14 days
   The chapter lists dissolution of a partnership at will by giving 14 days notice as one of the reasons.

3. Which feature applies to dissolution of the firm but NOT to dissolution of partnership?

   1. The business continues under a reconstituted partnership
   2. Only revaluation of assets and liabilities is needed
   3. A court cannot order it
   4. The books of accounts have to be finally closed
   Show answer

   Answer: D. The books of accounts have to be finally closed
   When the firm is dissolved the business ends completely, so final closure of the books is needed and assets and liabilities are realised.

4. Which of the following can be a ground for a court to order dissolution of a firm?

   1. A partner becomes of unsound mind
   2. The firm earns very high profits
   3. A new partner is admitted
   4. The firm has run for many years
   Show answer

   Answer: A. A partner becomes of unsound mind
   Misconduct-type grounds such as a partner becoming of unsound mind or a breach of agreement allow the court to order dissolution.

5. Under Sec. 48, which payment is made straight after all outside liabilities have been paid?

   1. Partners' capital
   2. Loans given by partners to the firm
   3. Realisation expenses
   4. Reserve fund
   Show answer

   Answer: B. Loans given by partners to the firm
   The order is realisation expenses, outside liabilities, partners' loans, and only then partners' capital in profit sharing ratio.

All Class 12 Book Keeping and Accountancy chapters

• Chapter 1: Introduction to Partnership and Partnership Final Accounts
• Chapter 2: Accounts of Not for Profit Concerns
• Chapter 3: Reconstitution of Partnership (Admission of Partner)
• Chapter 4: Reconstitution of Partnership (Retirement of Partner)
• Chapter 5: Reconstitution of Partnership (Death of Partner)
• Chapter 6: Dissolution of Partnership Firm
• Chapter 7: Bills of Exchange
• Chapter 8: Company Accounts - Issue of Shares
• Chapter 9: Analysis of Financial Statements
• Chapter 10: Computer in Accounting

Class 12 Book Keeping and Accountancy notes: all chapters