Dissolution of partnership firm -with Examples

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

1. all the partners except one become insolvent or all the partners become insolvent
2. 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,

1. when a partner has become of unsound mind
2. when a partner has become permanently incapable of performing his duties as a partner
3. when a partner is guilty of misconduct which is likely to affect prejudicially the business of the firm
4. when a partner wilfully and persistently commits breach of agreement regarding management of the affairs of the firm,
5. when a partner has transferred the whole of his interest to a third party,
6. 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:

1. that the solvent partners should bring in cash equal to their respective shares of the loss on realisation
2. 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:

1. building –3,00,000
2. machinery –1,40,000
3. stock ——-77,000
4. debtors—–1,26,000
5. 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:

1. Realisation Account
2. capital Accounts and
3. 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