<h5 id="41-dissolution-of-partnership">4.1 Dissolution of Partnership</h5> <ul> <li>Dissolution of partnership does not necessarily mean the end of the business.</li> <li>The firm can continue to operate as before the dissolution.</li> <li>Dissolution can occur due to:</li> </ul> <ol> <li>Change in profit sharing ratio</li> <li>Admission of a new partner</li> <li>Retirement of a partner</li> <li>Death of a partner</li> <li>Insolvency of a partner</li> <li>Completion of the venture or expiry of the partnership period.</li> </ol> <p>======</p> <h5 id="42-dissolution-of-a-firm">4.2 Dissolution of a Firm</h5> <ul> <li>Dissolution of a partnership is different from dissolution of a firm. In a partnership, economic relationships between partners continue in a changed form, while in a firm, economic relationships between partners come to an end.</li> <li>A partnership is dissolved when there is a death of a partner.</li> <li>A firm is dissolved when all partners give consent to it. This is known as dissolution by mutual agreement.</li> <li>A firm is not compulsorily dissolved when a partner decides to retire.</li> <li>Dissolution of a firm necessarily involves dissolution of partnership.</li> <li>A firm is compulsorily dissolved when all partners or when all except one partner become insolvent.</li> <li>Court can order a firm to be dissolved when a partner becomes insane, but dissolution of partnership can still take place without intervention of the court.</li> </ul> <p>======</p> <h5 id="43-settlement-of-accounts">4.3 Settlement of Accounts</h5> <ul> <li>During firm dissolution, all claims are paid in the following order:</li> </ul> <ol> <li>Debts to third parties</li> <li>Partner advances</li> <li>Capital contributions</li> <li>Residue distributed according to profit sharing ratio</li> </ol> <ul> <li>Losses, including capital deficiencies, are paid in this order:</li> </ul> <ol> <li>First from profits</li> <li>Next from partner capital</li> </ol> <p>======</p> <h5 id="44-accounting-treatment">4.4 Accounting Treatment</h5> <ul> <li>On dissolution of a firm, bank overdraft is transferred to the Realisation Account.</li> <li>On dissolution of a firm, partner’s loan account is transferred to Partner’s Capital Account.</li> <li>After transferring liabilities in the Realisation Account, unpaid liabilities are treated as partly paid.</li> <li>When realisation expenses are paid by the firm on behalf of a partner, such expenses are debited to the Realisation Account.</li> <li>Unrecorded assets when taken over by a partner are shown in the Credit of Realisation Account.</li> <li>The accumulated profits and reserves are transferred to Partners’ Capital Accounts.</li> <li>On dissolution of the firm, partner’s capital accounts are closed through the Realisation Account.</li> </ul> <p>(Note: There are 2 correct options for question 3, it could be either (a) or (c) depending on the situation)</p> <p>======</p> <h5 id="441-journal-entries">4.4.1 Journal Entries</h5> <ul> <li>The journal entries for the transfer of assets and liabilities during the dissolution of a partnership firm involve transferring all asset accounts, excluding cash, bank, and fictitious assets, to the debit side of the Realisation Account at their book values. External liability accounts, including provisions, are closed by transferring them to the credit side of the Realisation Account.</li> <li>The Realisation Account is debited and the Bank Account is credited for the sale of assets, payment of liabilities, settlement with the creditor through transfer of assets, and payment of realisation expenses.</li> <li>The Partner’s Capital Account is debited or credited when a partner takes over an asset or assumes a liability. No entry is required when a partner or creditor accepts a fixed asset in payment of his dues.</li> <li>The Realisation Account is debited and the Partner’s Capital Account is credited for the agreed remuneration to a partner who undertakes the dissolution work. The Bank Account is credited for the transfer of unrecorded assets, and the Realisation Account is credited for the settlement of unrecorded liabilities.</li> <li>The Realisation Account is debited and the Partner’s Capital Account is credited for the transfer of profit and loss on realisation. The Bank Account is credited for the settlement of loans by a firm to a partner, and the Partner’s Capital Account is credited for the transfer of accumulated profits in the form of general reserve to partners’ capital accounts.</li> <li>The Partner’s Capital Account is credited or debited for the payment of loans due to partners, and the Bank Account is credited or debited accordingly. The Partner’s Current Accounts are transferred to respective Partners’ Capital Accounts.</li> </ul> <p>======</p>