Dissolution of partnership firm
what is meant by dissolution of the firm,
meaning of dissolution firm : dissolution of partnership between all the partners of a firm is called the dissolution of the firm , in such a case, the business of the firm also comes to an end
The circumstances under which a firm is dissolved
A firm may be dissolved on any one of the following grounds
(i) by Agreement: A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners
(ii) Dissolution by notice: in case of partnership at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolved the firm
(iii) Compulsory Dissolution : A firm is compulsorily dissolved if
- all the partners except one become insolvent or all the partners become insolvent
- the business of the partnership has become illegal by happening of an event,
(iv) Dissolution by the court: The court may, at the move of a partner, dissolve a firm in any one of the following ways,
- when a partner has become of unsound mind
- when a partner has become permanently incapable of performing his duties as a partner
- when a partner is guilty of misconduct which is likely to affect prejudicially the business of the firm
- when a partner wilfully and persistently commits breach of agreement regarding management of the affairs of the firm,
- when a partner has transferred the whole of his interest to a third party,
- any other ground which renders it just and equitable that the firm should be dissolved ,
(v) subject to contract between the partner’s ; a firm is dissolved
- by the expiry of the term for which the firm was formed: or
- by the completion of the venture for which the firm was formed , or
- by the death of a partner, or by the adjudication of a partner as an insolvent
Distinguish between dissolution of the partnership and dissolution of the firm
| basic of distinction | Dissolution of the partnership | Dissolution of the firm |
| (1) when Dissolved | A partnership is dissolved when a new partner is admitted or an old partner retires or dies, | A firm is dissolved by the partners mutually or by the court |
| (2) Termination of the business | The business of the firm is not terminated | the dissolution of the firm means termination of the partnership business |
| (3) treatment of assets and liabilities | In the event of dissolution of partnership, assets and liabilities are revalued and a new balance sheet is drawn, | In the event of dissolution of the firm, assets are realized and liabilities are paid of, |
| (4) Preparation of Accounts | Revaluation account is prepared to ascertain the profit or loss on revaluation, | Realisation account is prepared to ascertain the profit or loss on realisation |
| (5) Creation of new partnership | The dissolution of a partnership will create a new partnership | The dissolution of a firm will not create a new partnership |
Short note on rule Garner vs Murray
Rule laid down in Garner vs murray: under section 42 of the Indian partnership act, 1932 if a partner of a firm becomes insolvent, the firm is dissolved insolvency means that the partner is unable tp pay off his liabilities towards the firm thus if at the time of dissolution of the firm , any partner’s capital account shows a debit balance he is to pay the amount as a debt to the firm , but if he is insolvent and can’t pay his debt due to the firm , the deficiency of the capital will be between them, if there is no such provision in the partnership agreement deficiency of the capital will be borne by other solvent partners in accordance with the decision in the English case of Garner vas, Murray
Unless otherwise agreed, the decision in Garner vs Murray requires:
- that the solvent partners should bring in cash equal to their respective shares of the loss on realisation
- that the solvent partners should bear the loss arising due to the insolvency of a partner in the ratio of their , last Agreed capital, i;e capital Ratio
Note: A partner having a debit balance or nil balance , will not have to bear the loss due to insolvency of a partner,
| case | Meaning of last agreed capital |
| (a) In case of fixed capitals | last agreed capital means the fixed capital (given in the balance sheet without any adjustment , |
| (b) In case of fluctuating capitals | last agreed capital means the capital after adjusting all the reserves and accumulated profits to the date of dissolution , interest on capital and drawings to the date of dissolution but before adjusting profit or loss on realisation to the date of dissolution, |
Distinguish between Realisation Account and Revaluation Account
| Basic of Distinction | Realisation Account | Revaluation Account |
| (1) Meaning | Realisation account records the realisation of the assets and settlement of the liabilities | Revaluation account records the effect of revaluation of the assets and the liabilities |
| (2)Purpose | it is prepared for determining the net profit/loss on realisation of the assets and settlement of the liabilities | it is prepared to find out the net profit / loss on revaluation |
| (3) when prepared | it is prepared at the time of dissolution of the firm | it is prepared at the time of admission, retirement or death of a partner, |
| (4) contents | In this account, all the assets and the liabilities are recorded | In this account, only changes in the assets and the liabilities are recorded |
| (5) preparation of account | This account is prepared only once during the file of a firm | this account may be prepared at a number of occassions during the file of a firm |
| (6) profit or loss | The profit / loss on realisation is transferred to all the partner’s capital accounts, | The profit/ loss on revaluation is transferred to the old partner’s capital accounts in the profit sharing ratio, |
Example:1 A,B and C were partners in a firm sharing profits and losses in the ratio of 3:2:1 the balance sheet of the firm as at 31ts march, 2012 was as follow:
| liabilities | Amount | Assets | Amount |
| capital accounts | Building | 2,00,000 | |
| A-2,00,000 | machinery | 1,50,000 | |
| B-1,50,000 | stock | 85,000 | |
| C-1,00,000 | 4,50,000 | sundry debtors -140,000 | |
| General Reserve | 24,000 | less: provision –(15,000) | 1,25,000 |
| Investment fluctuation fund | 5,000 | Investments | 20,000 |
| sundry creditors | 1,21,000 | cash at bank | 20,000 |
| 6,00,000 | 6,00,000 |
The firm was dissolved various assets realised as follows:
- building –3,00,000
- machinery –1,40,000
- stock ——-77,000
- debtors—–1,26,000
- Investments–27,000
there was an unrecorded assets, its value was estimated at Rs, 30,000, half of this assets was taken over by an unrecorded creditor, the other half was taken over by A, Realisation expenses amounted to Rs, 8,000
Prepare:
- Realisation Account
- capital Accounts and
- cash at bank account
Solution
Realisation Account
| particulars | Amount | particulars | Amount |
| To building A/c | 2,00,000 | by provision | 15,000 |
| To machinery | 1,50,000 | by sundry creditors | 1,21,000 |
| To stock | 85,000 | by investment fluctuation fund | 5,000 |
| To sundry debtors | 1,40,000 | by bank A/c (assets Realised ) | |
| To investments | 20,000 | building | 3,00,000 |
| To bank A/c | machinery | 1,40,000 | |
| S’creditors ——1,21,000 | stock | 77,000 | |
| expenses——–8,000 | 1,29,000 | debtors | 1,26,000 |
| To profit transferred to : | Investments | 27,000 | |
| A’s capital A/c —-51,000 | by A’s capital A/c | 15,000 | |
| B’s capital A/c —-34,000 | (unrecorded assets ) | ||
| C’s capital A/c —17,000 | 1,02,000 | ||
| 8,26,000 | 8,26,000 |
capital Accounts
| particulars | A | B | C | particulars | A | B | C |
| To Realisation A/c | 15,000 | — | — | by balance b/d | 2,00,000 | 1,50,000 | 1,00,000 |
| To bank A/c | 2,48,000 | 1,92,000 | 1,21,000 | by General Reserve | 12,000 | 8,000 | 4,000 |
| final payment | by Realisation | 51,000 | 34,000 | 17,000 | |||
| 2,63,000 | 1,92,000 | 1,21,000 | 2,63,000 | 1,92,000 | 1,21,000 |
Cash at bank Account
| particulars | Amount | particulars | Amount |
| To balance b/d | 20,000 | by Realisation A/c | 1,29,000 |
| To realisation | 6,70,000 | by A’s capita; a/c | 2,48,000 |
| by B’s capital a/c | 1,92,000 | ||
| by C’s capital a/c | 1,21,000 | ||
| 6,90,000 | 6,90,000 |
Example:2 X,Y and Z are three partners in a partnership firm sharing profits and losses equally, the balance sheet of the firm as on march 31, 2013 was as under”:
| Liabilities | Amount | Assets | Amount |
| sundry creditors | 25,00,000 | cash in hand | 25,000 |
| X’s loan | 5,00,000 | stock | 4,00,000 |
| capital | debtors | 5,00,000 | |
| X:-4,00,000 | plant and machinery | 10,00,000 | |
| z;-2,50,000 | 6,50,000 | furniture and fittings | 4,00,000 |
| land & building | 10,00,000 | ||
| Y’s capital | 3,25,000 | ||
| 36,50,000 | 36,50,000 |
The firm is dissolved due to weak financial position of the partners assets realized
stock-Rs, 2,50,000, plant & machinery-Rs, 5,00,000, furniture and fittings Rs, 100,000; land and building Rs, 4,00,000 and debtors-Rs, 2,75,000 only, Realisation Expenses amounted to Rs, 25,000
The following was the position of the partners:
| partner | Private Estate (Rs) | Private liabilities (Rs) |
| X | 25,00,000 | 35,00,000 |
| Y | 16,00,000 | 15,00,000 |
| Z | 20,00,000 | 30,00,000 |
prepare necessary ledger accounts in the books of the firm,
Solution:
Realisation Account
| particulars | Amount | particulars | Amount |
| To stock | 4,00,000 | by cash A/c (assets ) | |
| To debtors | 5,00,000 | stock –2,50,000 | |
| To furniture and fittings | 4,00,000 | debtors-2,75,000 | |
| To plant & machinery | 10,00,000 | furniture and fittings-1,00,000 | |
| To land and building | 10,00,000 | plant & machinery-5,00,000 | |
| To bank A/c | 25,000 | land & building-4,00,000 | 15,25,000 |
| (Realisation Expenses ) | by loss on Realisation | ||
| transferred to | |||
| X’s capital A/c -6,00,000 | |||
| Y’s capital A/c -6,00,000 | |||
| Z’s capital A/c -6,00,000 | 18,00,000 | ||
| 33,25,000 | 33,25,000 |
cash Account
| particulars | Amount | particulars | Amount |
| To balance b/d | 25,000 | by Realisation A/c (Expenses ) | 25,000 |
| To Realisation A/c | 15,25,000 | by sundry (creditors) | |
| To Y’s capital A/c | 1,00,000 | (balancing figure) | 16,25,000 |
| 16,50,000 | 16,50,000 |
sundry Creditors Account
| particulars | Amount | particulars | Amount |
| To cash A/c (final payment ) | 16,25,000 | by balance b/d | 25,00,000 |
| To deficiency A/c | 8,75,000 | ||
| 25,00,000 | 25,00,000 |
capital Account of partners
| particulars | X (Rs) | Y (Rs) | z(Rs) | particulars | X (Rs) | Y (Rs) | Z(Rs) |
| To balance b/d | — | 3,25,000 | — | by balance b/d | 4,00,000 | — | 2,50,000 |
| To Realisation A/c (loss) | 6,00,000 | 6,00,000 | 6,00,000 | by cash A/c | — | 1,00,000 | — |
| To Deficiency A/c | 3,00,000 | — | — | by Loan A/c | 5,00,000 | — | — |
| by deficiency A/c | — | 8,25,000 | 3,50,000 | ||||
| 9,00,000 | 9,25,000 | 6,00,000 | 9,00,000 | 9,25,000 | 6,00,000 |
Deficiency Account
| particulars | Amount | particulars | Amount |
| To Y’s capital A/c | 8,25,000 | by sundry creditors A/c | 8,75,000 |
| To z’s capital A/c | 3,50,000 | by X’s capital A/c | 3,00,000 |
| 11,75,000 | 11,75,000 |
Example;3 vk, pk and dk were equal partners and their balance sheet as on 31-3-2015 was follows ”
| liabilities | Amount | Assets | Amount |
| creditors | 2,00,000 | plant & machinery | 1,00,000 |
| bank Loan (secured against plant & machinery ) | 50,000 | land & building | 1,15,000 |
| vk’s Loan | 65,000 | furniture & fixtures | 40,000 |
| capital | Inventory | 40,000 | |
| vk | 40,000 | debtors | 35,000 |
| Dk | 25,000 | computer | 15,000 |
| cash in hand | 2,500 | ||
| pk’s capital | 32,500 | ||
| 3,80,000 | 3,80,000 |
The firm was dissolved on the above date, vk and dk could not contribute anything and pk contributed Rs, 10,000 only all of them were declared insolvent
Assets realized the following amounts:
Inventory Rs, 2,500 plant & machinery Rs, 50,000, land & building Rs, 40,000 furniture and fixtures Rs, 10,000, debtors Rs, 19,250 and computer Rs, 8,250 Realization expenses amounted to Rs, 2,500
Prepare Realisation account, partners capital Account , deficiency account, cash account and liabilities account
solution:
Realisation A/c
| particulars | Amount | particulars | Amount |
| To plant & machinery A/ c | 1,00,000 | by cash A/c | |
| To land & building A/c | 1,15,000 | Inventory | 2,500 |
| To furniture and fixtures A/c | 40,000 | plant & machinery | 50,000 |
| To Inventory A/c | 40,000 | land & building | 40,000 |
| To debtors A/c | 35,000 | furniture and fixtures | 10,000 |
| To computer A/c | 15,000 | Debtors | 19,200 |
| To cash A/c (Realisation Expenses ) | 25,00 | computer | 8,250 |
| by capital Accounts | |||
| loss on Realisation | |||
| vk –72,500 | |||
| dk–72,500 | |||
| pk–72,500 | |||
| 3,47,500 | 3,47,500 |
partner’s capital A/c
| particulars | vk | dk | pk | particulars | vk | dk | pk |
| To balance b/d | — | — | 32,500 | by balance b/d | 40,000 | 25,000 | — |
| To realisation A/c | 72,500 | 72,500 | 72,500 | by vk’s Loan A/c | 65,000 | — | — |
| To deficiency A/c | 32,500 | by cash A/c | — | — | 10,000 | ||
| by Deficiency A/c | — | 47,500 | 95,000 | ||||
| 1,05,000 | 72,500 | 1,05,000 | 1,05,000 | 72,500 | 1,05,000 |
bank Loan A/c
| particulars | Amount | particulars | Amount |
| To cash A/c | 50,000 | by balance b/d | 50,000 |
| 50,000 | 50,000 |
Creditors A/c
| particulars | Amount | particulars | Amount |
| To cash A/c | 90,000 | by balance b/d | 2,00,000 |
| To deficiency | 1,10,000 | ||
| 2,00,000 | 2,00,000 |
cash A/c
| particulars | Amount | particulars | Amount |
| To balance b/d | 2,500 | by Realisation A/c | 2,500 |
| To Realisation A/c | 1,30,000 | by bank loan A/c | 50,000 |
| To pk’s capital A/c | 10,000 | by creditors A/c | 90,000 |
| 1,42,500 | 1,42,500 |
Deficiency A/c
| particulars | Amount | particulars | Amount |
| To dk’s capital A/c | 47,500 | by vk’s capital A/c | 32,500 |
| To pk’s capital A/c | 95,000 | by creditors A/c | 1,10,000 |
| 1,42,500 | 1,42,500 |