Dissolution of Partnership Firm - PDF

Dissolution of Partnership Firm 5 Y ou have learnt about the reconstitution of a partnership firm which takes place on account of admission, retirement or...

Dissolution of Partnership Firm 5 Y ou have learnt about the reconstitution of a partnership firm which takes place on account of admission, retirement or death of a partner. In such a situation while the existing partnership is dissolved, the firm may continue under the same name if the partners so decide. In other words, it results in the dissolution of a partnership but not that of the firm. LEARNING OBJECTIVES According to Section 39 of the partnership Act 1932, After studying this chapter the dissolution of partnership between all the partners you will be able to : of a firm is called the dissolution of the firm. That State the meaning of means the Act recognises the difference in the dissolution of breaking of relationship between all the partners of a partnership firm; firm and between some of the partners; and it is the Differentiate between dissolution of partner- breaking or discontinuance of relationship between ship and dissolution of all the partners which is termed as the dissolution of a partnership firm; partnership firm. This brings an end to the existence Describe the various of firm, and no business is transacted after modes of dissolution of dissolution except the activities related to closing of the partnership firm; the firm as the affairs of the firm are to be wound up Explain the rules by selling firm’s assets and paying its liabilities and relating to the discharging the claims of the partners. settlement of claims among all partners; 5.1 Dissolution of Partnership Prepare Realisation Account; As stated earlier dissolution of partnership changes the existing relationship between partners but the firm may continue its business as before. The dissolution of partnership may take place in any of the following ways: (1) Change in existing profit sharing ratio among partners; (2) Admission of a new partner; 2022-23 Dissolution of Partnership Firm 217 (3) Retirement of a partner; (4) Death of a partner; (5) Insolvency of a partner; (6) Completion of the venture, if partnership is formed for that; and (7) Expiry of the period of partnership, if partnership is for a specific period of time; 5.2 Dissolution of a Firm Dissolution of a partnership firm may take place without the intervention of court or by the order of a court, in any of the ways specified later in this section. It may be noted that dissolution of the firm necessarily brings in dissolution of the partnership. However, dissolution of partnership would not necessarily involve dissolution of firms. Dissolution of a firm takes place in any of the following ways: 1. Dissolution by Agreement: A firm is dissolved : (a) with the consent of all the partners or (b) in accordance with a contract between the partners. 2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases: (a) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract; (b) when the business of the firm becomes illegal; or (c) when some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership, e.g., when a partner who is a citizen of a country becomes an alien enemy because of the declaration of war with his country and India. 3. On the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved : (a) if constituted for a fixed term, by the expiry of that term; (b) if constituted to carry out one or more ventures, by the completion thereof; (c) by the death of a partner; (d) by the adjudication of a partner as an insolvent. 4. Dissolution by Notice: In case of partnership at will, the firm may be dissolved if any one of the partners gives a notice in writing to the other partners, signifying his intention of seeking dissolution of the firm. 5. Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved on any of the following grounds: (a) when a partner becomes insane; (b) when a partner becomes permanently incapable of performing his duties as a partner; 2022-23 218 Accountancy – Not-for-Profit Organisation and Partnership Accounts (c) when a partner is guilty of misconduct which is likely to adversely affect the business of the firm; (d) when a partner persistently commits breach of partnership agreement; (e) when a partner has transferred the whole of his interest in the firm to a third party; (f) when the business of the firm cannot be carried on except at a loss; or (g) when, on any ground, the court regards dissolution to be just and equitable. Distinction between Dissolution of Partnership and Dissolution of Firm Basis Dissolution of Partnership Dissolution of Firm 1. Termination of The business is not The business of the firm is business terminated. closed. 2. Settlement of Assets and liabilities are Assets are sold and assets and revalued and new balance liabilities are paid-off. liabilities sheet is drawn. 3. Court’s Court does not intervene A firm can be dissolved by intervention because partnership is the court’s order. dissolved by mutual agreement. 4. Economic Economic relationship Economic relationship relationship between the partners between the partners continues though in comes to an end. a changed form. 5. Closure of books Does not require because The books of account are the business is not closed. terminated. Test your Understanding – I State giving reasons, which of the following statements are true or false: 1. Dissolution of a partnership is different from dissolution of a firm, 2. A partnership is dissolved when there is a death of a partner, 3. A firm is dissolved when all partners give consent to it. 4. A firm is compulsorily dissolved when a partner decide to retire. 5. Dissolution of a firm necessarily involves dissolution of partnership. 6. A firm is compulsorily dissolved when all partners or when all except one partner become involvent. 7. Court can order a firm to be dissolved when a partner becomes insane. 8. Dissolution of partnership can not take place without intervention of the court. 2022-23 Dissolution of Partnership Firm 219 5.3 Settlement of Accounts In case of dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. For this purpose, it disposes off all its assets for satisfying all the claims against it. In this context it should be noted that, subject to agreement among the partners, the following rules as provided in Section 48 of the Partnership Act 1932 shall apply. (a) Treatment of Losses Losses, including deficiencies of capital, shall be paid : (i) first out of profits, (ii) next out of capital of partners, and (iii) lastly, if necessary, by the partners individually in their profit sharing ratio. (b) Application of Assets The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order: (i) In paying the debts of the firm to the third parties; (ii) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan); (iii) In paying to each partner proportionately what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in their profit sharing ratio. Thus, the amount realised from assets along with contribution from partners, if required, shall be utilised first to pay off the outside liabilities of the firm such as creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured loans have precedence over the unsecured loans); the balance should be applied to repay loans made by the partners to the firm. (in case the balance amount is not adequate enough to pay off such loans and advances, they are to be paid propartionately). The amount left thereafter is utilised in settlement of capital account balances. Then the surplus if any is divided among partners in their profit sharing ratio. Private Debts and Firm’s Debts: Where both the debts of the firm and private debts of a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply. (a) The property of the firm shall be applied first in the payment of debts of the firm and then the surplus, if any, shall be divided among the partners as per their claims, which can be utilised for payment of their private liabilities. (b) The private property of any partner shall be applied first in payment of his private debts and the surplus, if any, may be utilised for payment of the firm’s debts, in case the firm’s liabilities exceed the firm’s assets. It may be noted that the private property of the partner does not include the personal properties of his wife and children. Thus, if the assets of the firm are not adequate enough to pay off firm’s liabilities, the partners have to contribute out of their net private assets (private assets minus private liabilities). 2022-23 220 Accountancy – Not-for-Profit Organisation and Partnership Accounts Inability of a Partner to Contribute Towards Deficiency In the context of settlement of accounts among the partners there is still another important aspect to be noted, i.e., when a partner is unable to contribute towards the deficiency of his capital account (the account finally showing a debit balance), he/she is said to be insolvent, and the sum not recoverable is treated as capital loss for the firm. In the absence of any agreement, to the contrary, such a capital loss is to be borne by the remaining solvent partners in accordance with the principle laid down in Garner vs. Murray case, which states that the solvent partners have to bear such loss in the ratio of their capitals as on the date of dissolution. However, the accounting treatment relating to dissolution of partnership on account of insolvency of partners is not being taken up at this stage. 5.4 Accounting Treatment When the firm is dissolved, its books of account are to be closed and the profit or loss arising on realisation of its assets and discharge of liabilities is to be computed. For this purpose, a Realisation Account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities which may be is transferred to partner’s capital accounts in their profit sharing ratio. Hence, all assets (other than cash in hand bank balance and fictitious assets, if any), and all external liabilities are transferred to this account. It also records the sale of assets, and payment of liabilities and realisation expenses. The balance in this account is termed as profit or loss on realisation which is transferred to partners’ capital accounts in the profit sharing ratio (see figure 5.1). Dr. Realisation Account Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Intangible Assets xxx Bank Loan Mortgage xxx Land and Building xxx Sundry creditors xxx Plant and Machinery xxx Bills payables xxx Furniture and Fittings xxx Bank overdraft xxx Loan to other parties xxx Outstanding expenses xxx Bills receivables xxx Provision for doubtful debts xxx Sundry debtors xxx Cash/Bank (sale of assets) xxx Cash/Bank xxx Partner’s capital account xxx (payment of liabilities) (assets taken by the partner) Cash/Bank xxx Loss (transferred to partners xxx (payment of unrecorded liabilities) capital accounts) Partner’s capital account xxx Loss (transferred to partners xxx Investments xxx Investment Fluctuation Fund xxx (liability assumed by the partner) Profit (transferred to partners’ xxx capital account’s in their profit sharing ratio) Total xxxxx Total xxxxx Fig. 5.1: Format of Realisation Account 2022-23 Dissolution of Partnership Firm 221 Test your Understanding – II ) the Correct Answer Tick ( 1. On dissolution of a firm, bank overdraft is transferred to : (a) Cash Account (b) Bank Account (c) Realisation Aaccount (d) Partner’s capital Account. 2. On dissolution of a firm, partner’s loan account is transferred to: (a) Realisation Account (b) Partner’s Capital Account (c) Partner’s Current Account (d) None of the above. 3. After transferring liabilities like creditors and bills payables in the Realisation Account, in the absence of any information regarding their payment, such liabilities are treated as: (a) Never paid (b) Fully paid (c) Partly paid (d) None of the above. 4. When realisation expenses are paid by the firm on behalf of a partner, such expenses are debited to: (a) Realisation Account (b) Partner’s Capital Account (c) Partner’s Loan Account (d) None of the above. 5. Unrecorded assets when taken over by a partner are shown in : (a) Debit of Realisation Account (b) Debit of Bank Account (c) Credit of Realisation Account (d) Credit of Bank Account. 6. Unrecorded liabilities when paid are shown in: (a) Debit of Realisation Account (b) Debit of Bank Account (c) Credit of Realisation Account (d) Credit of Bank Account. 7. The accumulated profits and reserves are transferred to : (a) Realisation Account (b) Partners’ Capital Accounts (c) Bank Account (d) None of the above. 8. On dissolution of the firm, partner’s capital accounts are closed through: (a) Realisation Account (b) Drawings Account (c) Bank Account (d) Loan Account. 2022-23 222 Accountancy – Not-for-Profit Organisation and Partnership Accounts Illustration 1 Supriya and Monika are partners, who share profit in the ratio of 3:2. Following is the balance sheet as on March 31, 2020. Balance Sheet of Supriya and Monika as on March 31, 2020 Liabilities Amount Assets Amount (Rs.) (Rs.) Supriya’s Capital 32,500 Cash and Bank 40,500 Monika’s Capital 11,500 Stock 7,500 Sundry Creditors 48,000 Sundry debtors 21,500 General Reserve 13,500 Less: Provision 500 21,000 for doubtful debts Fixed Assets 36,500 1,05,500 1,05,500 The firm was dissolved on March 31, 2020. Close the books of the firm with the following information: (i) Debtors realised at a discount of 5%, (ii) Stock realised at Rs.7,000, (iii) Fixed assets realised at Rs.42,000, (iv) Realisation expenses of Rs.1,500, (v) Creditors are paid in full. Record necessary journal entries at the time of dissolution of a firm. Solution Books of Supriya and Monika Realisation Account Date Particulars L.F. Debit Credit 2017 Amount Amount (Rs.) (Rs.) Mar., 31 Realisation A/c Dr. 65,500 To Stock A/c 7,500 To Sundry Debtors A/c 21,500 To fixed Assets A/c 36,500 (Assets transferred to realisation account) 2017 Mar., 31 Sundry Creditors A/c Dr. 48,000 Provision for doubtful debts A/c Dr. 500 To Realisation A/c 48,500 (Liabilities transferred to Realisation A/c 2017 Mar., 31 Bank A/c Dr. 69,425 To Realisation A/c 69,425 (Assets Realized) 2022-23 Dissolution of Partnership Firm 223 2017 Mar., 31 Realisation A/c Dr. 49,500 To Bank A/c 49,500 (Creditors and realisation expenses paid) 2017 Mar., 31 Realisation A/c Dr. 2,925 To Supriya's Capital A/c 1,755 To Monika's Capital A/c 1,170 (Realisation Profit transferred to partners' capital account) 2017 Mar., 31 General Reserve A/c Dr. 13,500 To Supriya's Capital A/c 8,100 To Monika's Capital A/c 5,400 (Profit in realisation transferred to partners' capital accounts) 2017 Mar., 31 Supriya's Capital A/c Dr. 42,355 Monika's Capital A/c 18,070 To Bank A/c 60,425 (Final accounts due paid to partners) Working Notes: Books of Supriya and Monika Realisation Account Dr. Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Assets transferred: Provision for doubtful debts 500 Stock 7,500 Sundry creditors 48,000 Sundry debtors 21,500 Bank Fixed assets 36,500 Debtors 20,425 Bank Stock 7,000 Creditors 48,000 Fixed assets 42,000 69,425 Realisation expenses 1,500 Profit transferred to: Supriya Capital 1,755 Monika Capital 1,170 2,925 1,17,925 1,17,925 2022-23 224 Accountancy – Not-for-Profit Organisation and Partnership Accounts Partners Capital Accounts Dr. Cr. Date Particulars J.F. Supriya Monika Date Particulars J.F. Supriya Monika (Rs.) (Rs.) (Rs.) (Rs.) Bank 42,355 18,070 Balance b/d 32,500 11,500 Reserve fund 8,100 5,400 Realisation (Profit) 1,755 1,170 42,355 18,070 42,355 18,070 5.4.1 Journal Entries 1. For trnasfer of assets All asset accounts excluding cash, bank and the fictitious assets, if any are closed by transfer to the debit of Realisation Account at their book values. It may be noted that sundry debtors are transferred at gross value and the provision for doubtful debts is transferred to the credit side of Realisation Account along with liabilities. The same thing will apply to fixed assets, if provision for depreciation account is maintained. Realisation A/c Dr. To Assets (Individually) A/c 2. For transfer of liabilities All external liability accounts including provisions, if any, are closed by transferring them to the credit of Realisation account. Liabilities (individually) Dr. To Realisation A/c 3. For sale of assets Bank A/c Dr. with the same value To Realisation A/c 4. For an asset taken over by a partner Partner’s Capital A/c Dr. with the amount To Realisation A/c assets are taken over 5. For payment of liabilities with the amount Realisation A/c Dr. at which settled To Bank A/c 2022-23 Dissolution of Partnership Firm 225 6. For a liability which a partner takes responsibility to discharge Ralisation A/c Dr. To Partner’s Capital A/c 7. For settlement with the creditor through transfer of assets when a creditor accepts an asset in full and final settlement of his account, no journal entry needs to be recorded. But, if the creditor accepts an asset only as part payment of his/her dues, the entry will be made for cash payment only. For example, a creditor to whom Rs. 10,000 was due accepts office equipment worth Rs. 8,000 and is paid Rs. 2,000 in cash, the following entry shall be made for the payment of Rs. 2,000 only. Realisation A/c Dr. To Bank A/c However, when a creditor accepts an asset whose value is more than the due amount he/she pay cash to the firm for the difference for which the entry will be: Bank A/c Dr. To Realisation A/c 8. For payment of realisation expenses (a) When some expenses are incurred and paid by the firm in the process of realisation of assets and payment of liabilities: Realisation A/c Dr. To Bank A/c (b) When realisation expenses are paid by a partner on behalf of the firm: Realisation A/c Dr. To Partner’s Capital A/c (c) When a partner has agreed to bear the realisation expenses: (i) if payment of realisation expenses is made by the firm Partner’s Capital A/c Dr. To Bank A/c (ii) if the partner himself pays the realisation expenses, no entry is required Note: In the absence of information about who is paying the expenses, it is implied that expenses are paid by the partner who has agreed to bear expenses. 9. For agreed remuneration to such partner who agrees to undertake the dissolution work. Realisation A/c Dr. To Partner’s Capital A/c 10. For realisation of any unrecorded assets including goodwill, if any Bank A/c Dr. To Realisation A/c 2022-23 226 Accountancy – Not-for-Profit Organisation and Partnership Accounts 11. For settlement of any unrecorded liability Realisation A/c Dr. To Bank A/c 12. For transfer of profit and loss on realisation (Cr. Blance) (a) In case of profit on realisation Realisation A/c Dr. To Partners’ Capital A/c (individually) A/c (b) In case of loss on realisation Partners’ Capital A/c (individually) Dr. (Dr. Blance) To Realisation A/c 13. For settlement of loan by a firm to a partner: Bank A/c Dr. To loan to partners A/c 14. For transfer of accumulated profits in the form of general reserve to partners’ capital accounts in their profit sharing ratio: General Reserve A/c Dr. To Partners’ Capital A/c (individually) 15. For transfer of fictitious assets, if any, to partners’ capital accounts in their profit sharing ratio: Partners’ Capital A/c (individually) Dr. To Fictitious Asset A/c 16. For payment of loans due to partners Partner’s Loan A/c Dr. To Bank A/c 17. For settlement of partners’ accounts If the partner’s capital account shows a debit balance after posting of rebount entries firms. He brings in the necessary cash for which the entry will be: Bank A/c Dr. To Partner’s Capital A/c The balance is paid to partners whose capital accounts show a credit balance and the following entry is recorded. Partners’ Capitals A/cs (individually) Dr. To Bank A/c It may be noted that the aggregate amount finally payable to the partners must equal to the amount available in bank and cash accounts. Thus, all accounts of a firm are closed in case of dissolution. 2022-23 Dissolution of Partnership Firm 227 Illustration 2 Sita, Rita and Meeta are partners sharing profit and losses in the ratio of 2:2:1 Their balance sheet as on March 31, 2017 is as follows: Balance Sheet of Sita, Rita and Meeta as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) General Reserve 2,500 Cash at bank 2,500 Creditors 2,000 Stock 2,500 Capitals: Furniture 1,000 Sita 5,000 Debtors 2,000 Rita 2,000 Plant and Machinery 4,500 Meeta 1,000 8,000 12,500 12,500 They decided to dissolve the business. The following amounts were realised: Plant and Machinery Rs.4,250, Stock Rs.3,500, Debtors Rs.1850, Furniture 750. Sita agreed to bear all realisation paid by the firm expenses. For the service Sita is paid Rs.60. Actual expenses on realisation paid by the firm amounted to Rs.450.Creditors paid 2% less. There was an unrecorded assets of Rs.250, which was taken over by Rita at Rs.200. Prepare the necessary accounts to close the books of the firm. Solution Books of Sita, Rita and Meeta D r. Realisation Account Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Creditors 2,000 Stock 2,500 Rita’s capital 200 Furniture 1,000 [Unrecorded assets] Debtors 2,000 Bank [assets realised]: Plant and Machinery 4,500 Plant and Machinery 4,250 Bank [Creditors] 1,960 Debtors 1,850 Sita’s capital 60 Stock 3,500 (realisation expenses] Furniture 750 10,350 Profit transferred to: Sita’s capital 212 Rita’s capital 212 Meeta’s capital 106 530 12,550 12,550 2022-23 228 Accountancy – Not-for-Profit Organisation and Partnership Accounts D r. Partner’s Capital Accounts Cr. Date Particulars J.F. Sita Rita Meeta Date Particulars J.F. Sita Rita Meeta 2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.) Mar. Bank 450 Mar. Balance b/d 5,000 2,000 1,000 31 Realisation (asset) 200 31 Reserve fund 1,000 1,000 500 Bank 5,822 3,012 1,606 Realisation [profit] 212 212 106 Realisation (expenses) 60 — — 6,272 3,212 1,606 6,272 3,212 1,606 D r. Bank Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 2017 (Rs.) 2017 (Rs.) Mar. Balance b/d 2,500 Mar. Realisation (Creditor) 1,960 31 Realisation 31 Sita’s Capital 450 (assets realised) 10,350 [expenses] Sita’s Capital 5,822 Rita’s Capital 3,012 Meeta’s capital 1,606 12,850 12,850 Illustration 3 Record journal entries at the time of dissolution of a partnership firm of Vibha, Shobha and Anubha in the following cases: a) Dissolution expenses amounted to Rs. 6,500. b) Dissolution expenses Rs. 7,800 were paid by Anubha. c) Vibha was appointed to look after the dissolution process for which she was given a remuneration of Rs. 12,000 d) Shobha was appointed to look after the dissolution work for which she was allowed a remuneration of Rs.15,000. She agreed to bear dissolution expenses. Actual dissolution expenses paid by her amounted to Rs. 11,800. e) Anubha was to look after the dissolution process for which she was allowed a remuneration of Rs. 12,000 she also agreed to bear dissolution expenses. Actual expenses Rs. 9,500 were paid by the firm. f) Anubha looked after the dissolution work for remuneration of Rs. 8,500 and agreed to bear dissolution expenses upto Rs. 6,000. Actual expenses paid by her were Rs. 7,600. g) Vibha was appointed to look after the dissolution work for which she was allowed a remuneration of Rs. 14,000. She agreed to take over investment 2022-23 Dissolution of Partnership Firm 229 of the book value of Rs. 13,000 towards payment of her remuneration. Investments have already been transferred to realisation Account. Book of Vibha, Shobha and Anubha Date Particulars L.F. Debit Credit 2017 Amount Amount (Rs.) (Rs.) (a) Realisation A/c Dr. 6,500 To Cash / Bank A/c 6,500 (Dissolution expense paid by the firm) (b) Realisation A/c Dr. 7,800 To Anubha's Capital A/c 7,800 (Dissolution Expenses paid by Anubha) (c) Realisation A/c Dr. 12,000 To Vibha's Capital A/c 12,000 (Remuneration given to Vibha) (d) Realisation A/c Dr. 15,000 To Shobha's Capital A/c 15,000 (Remuneration allowed to Shobha for looking after dissolution work) (e) (i) Realisation A/c Dr. 12,000 To Anubha's Capital A/c 12,000 (Remuneration allowed to Anubha) (ii) Anubha's Capital A/c Dr. 9,500 To Cash /Bank A/c 9,500 (Dissolution expenses paid by the firm and borne by Annubha) (f) (i) Realisation A/c Dr. 8,500 To Anubha's Capital A/c 8,500 (Remuneration payable to Anubha) (ii) Realisation A/c Dr. 1,600 To Anubha's Capital A/c 1,600 (Dissolution expenses paid by Anubha on behalf of the firm) (g) No Entry llustration 4 Nayana and Arushi were partners sharing profits equally Their Balance Sheet as on March 31, 2020 was as follows: 2022-23 230 Accountancy – Not-for-Profit Organisation and Partnership Accounts Balance Sheet of Nayana and Arushi as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Capitals: Bank 30,000 Nayana 1,00,000 Debtors 25,000 Arushi 50,000 1,50,000 Stock 35,000 Creditors 20,000 Furniture 40,000 Arushi’s current account 10,000 Machinery 60,000 Workmen Compensation Reserve 15,000 Nayana’s current account 10,000 Bank overdraft 5,000 2,00,000 2,00,000 The firm was dissolved on the above date: 1. Nayana took over 50% of the stock at 10% less on its book value, and the remaining stock was sold at a gain of 15%. Furniture and Machinery realised for Rs.30,000 and Rs.50,000 respectively; 2. There was an unrecorded investment which was sold for Rs. 34,000; 3. Debtors realised 90% only and Rs.1,200 were recovered for bad debts written-off last year; 4. There was an outstanding bill for repairs which had to be paid for Rs.2,000. Record necessary journal entries and prepare ledger accounts to close the books of the firm. Solution Books of Nayana and Arushi Journal Date Particulars L.F. Debit Credit 2017 Amount Amount (Rs.) (Rs.) Realisation A/c Dr. 1,60,000 To Debtors 25,000 To Stock A/c 35,000 To Furniture A/c 40,000 To Machinery A/c 60,000 (Assets transferred to Realisation Account) Creditors A/c Dr. 20,000 Bank overdraft A/c Dr. 5,000 To Realisation A/c 25,000 (Liabilities transferred to Realisation Account) Realisation A/c Dr. 27,000 To Bank A/c 27,000 (Creditors, Bank overdraft, Outstanding repair bill paid) 2022-23 Dissolution of Partnership Firm 231 Bank A/c Dr. 1,57,825 To Realisation A/c 1,57,825 (Assets sold and bad debts recovered) Nayana’s Current A/c Dr. 15,750 To Realisation A/c 15,750 (Half stock take over by Nayana at 10% less) Realisation A/c Dr. 15,575 To Nayana’s Current A/c 5,788 To Arushi’s Current A/c 5,787 (Realisation profit transferred to partner’s current account) Workman Compensation Reserve A/c Dr. 15,000 To Nayana’s Current A/c 7,500 To Arushi’s Current A/c 7,500 (Compensation fund transfered to partners’ Current account) Arushi Current A/c Dr. 23,287 To Arushi’s Capital A/c 23,287 (Current account balance transferred to Capital account) Nayana Capital A/c Dr. 12,462 To Nayana’s Current A/c 12,462 (Current account balance transferred to Capital account) Nayana’s Capital A/c Dr. 87,538 Arushi’s Capital A/c Dr. 73,287 To Bank A/c 1,60,825 (Final amounts due to partners paid) Realisation Account Dr. Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Creditors 20,000 Debtors 25,000 Bank overdraft 5,000 Stock 35,000 Bank: Furniture 40,000 Investment 34,000 Machinery 60,000 1,60,000 Furniture 30,000 Bank: Machinery 50,000 Creditors 20,000 Debtors (90%) 22,500 Bank overdraft 5,000 Stock : 20,125 Outstanding bill 2,000 27,000 Bad debts Profit transferred to : recovered 1,200 1,57,825 Nayana’s capital 5,788 Nayana’s capital Arushi’s capital 5,787 11,575 (stock taken over) 15,750 1,98,575 1,98,575 2022-23 232 Accountancy – Not-for-Profit Organisation and Partnership Accounts Partners’ Current Accounts Dr. Cr. Date Particulars J.F. Nayana Arushi Date Particulars J.F. Nayana Arushi 2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.) Balance b/d 10,000 Balance b/d 10,000 Realisation 15,750 Workmen 7,500 7,500 Arushi’s capital 23,287 Compensation Reserve Realisation (profit) 5,788 5,787 Nayana’s Capital 12,462 25,750 23,287 25,750 23,287 Partner’s Capital Accounts Dr. Cr. Date Particulars J.F. Nayana Arushi Date Particulars J.F. Nayana Arushi 2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.) Nayana’s current 12,462 Balance b/d 1,00,000 50,000 account Arushi’s 23,287 Bank 87,538 73,287 current account 1,00,000 73,287 1,00,000 73,287 Bank Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount (Rs.) (Rs.) Balance b/d 30,000 Realisation 27,000 Realisation 1,57,825 Nayana’s capital 87,538 Arushi’s capital 73,287 1,87,825 1,87,825 Test your Understanding – III Fill in the Correct Word(s): 1. All assets (except cash/bank and fictitious assets) are transferred to the ————— (Debit/Credit) side of ——————— Account (Realisation/Capital). 2. All ————— (internal/external) liabilities are transferred to the ————— (Debit/Credit) side of ——————acccount (Bank/Realisation). 3. Accumulated losses are transferred to ————— (Realisation/Capital Accounts) in —————— (equal ratio/profit sharing ratio). 4. If a liability is assumed by a partner, such Partner’s Capital Account is ––––––– ——— (debited/credited). 5. If a partner takes over an asset, such (Partner’s Capital Account) is ———————— (debited/credited). 6. No entry is required when a ——————— (partner/creditor) accepts a fixed asset in payment of his dues. 2022-23 Dissolution of Partnership Firm 233 7. When creditor accepts an asset whose value is much more than the amount due to him, he will ———————— (pay/not pay) the excess amount which will be credited ———————— Account. 8. When the firm has agreed to pay the partner a fixed amount for realisation work irrespective of the actual amount spent, such fixed amount is debited to (Realisation/Capital) Account and Credited to (Capital/Bank) Account. 9. Partner’s loan is —————— (transfered/not transfered) in the (Realisation Account). 10. Partner’s current accounts are transferred to respective ———————— Partners’ (Loan/Capital) Accounts. Illustration 5 Following is the Balance Sheet of Ashwani and Bharat on March 31, 2017. Balance Sheet Ashwani and Bharat as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Creditors 76,000 Cash at bank 17,000 Mrs.Ashwani’s loan 10,000 Stock 10,000 Mrs.Bharat loan 20,000 Investments 20,000 Investment fluctuation reserve 2,000 Debtors 40,000 General Reserve 20,000 Less: Provision Capitals: for doubtful debts 4,000 36,000 Ashwani 20,000 Buildings 70,000 Bharat 20,000 40,000 Goodwill 15,000 1,68,000 1,68,000 The firm was dissolved on that date. The following was agreed transactions took place. (i) Aswhani promised to pay Mrs. Ashwani’s loan and took away stock for Rs.8,000. (ii) Bharat took away half of the investment at 10% less. Debtors realised for Rs.38,000. Creditor’s were paid at less of Rs.380. Buildings realised for Rs.1,30,000, Goodwill Rs.12,000 and the remaining Investment were sold at Rs.9,000. An old typewriter not recorded in the books was taken over by Bharat for Rs. 600. Realisation expenses amounted to Rs. 2,000. Prepare Realisation Account, Partner’s Capital Account and Bank Account. Solution Books of Ashwani and Bharat Dr. Realisation Account Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Investment 20,000 Provision for doubtful debts 4,000 Debtors 40,000 Creditors 76,000 Buildings 70,000 Mrs. Ashwani loan 10,000 Stock 10,000 Mrs. Bharat loan 20,000 2022-23 234 Accountancy – Not-for-Profit Organisation and Partnership Accounts Goodwill 15,000 1,55,000 Investment fluctuation reserve 2,000 Ashwani’s Capital 10,000 Ashwani’s Capital[stock] 8,000 (Mrs.Ashwani’s loan} Bharat’s capital (Typewriter) 600 Bank (Mrs. Bharat’s loan) 20,000 Bharat’s capital (Investment) 9,000 Bank (creditors) 75,620 Bank: Bank (realisation expenses) 2,000 Investment 9,000 Profit transferred to: Debtors 38,000 Ashwani’s Capital 27,990 Buildings 1,30,000 Bharat’s Capital 27,990 55,980 Goodwill 12,000 1,89,000 3,18,600 3,18,600 Partner’s Capital Accounts Dr. Cr. Date Particulars J.F. Ashwani Bharat Date Particulars J.F. Ashwani Bharat 2017 (Rs,) (Rs,) 2017 (Rs,) (Rs,) Realisation Balance b/d 20,000 20,000 (stock) 8,000 — General reserve 10,000 10,000 Realisation Realisation 10,000 — [sale of typewriter] 600 [Mrs. Ashwini’s Realisation loan] [investment] 9,000 Realisation (profit) 27,990 27,990 Bank 59,990 48,390 67,990 57,990 67,990 57,990 Bank Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 2017 (Rs.) 2017 (Rs.) Balance b/d 17,000 Realisation [creditors] 75,620 Realisation 1,89,000 Realisation [expenses] 2,000 Realisation (Mrs.Bharat’s loan) 20,000 Ashwani’s capital 59,990 Bharat’s capital 48,390 2,06,000 2,06,000 Do it Yourself Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm. 1. For closure of assets accounts. 2. For closure of liabilities accounts. 3. For sale of assets. 4. For settlement of a creditor by transfer of fixed assets to him. 5. For expenses of realisation when actual expenses are paid by the partner on behalf of the firm. 6. When a partner discharges the liability of the firm. 7. For payment of partner’s loan. 8. For settlement of capital accounts. 2022-23 Dissolution of Partnership Firm 235 Illustration 6 Sonia, Rohit and Udit are partners sharing profits in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2017 was as follows: Balance Sheet of Sonia, Rohit and Udit as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Creditors 30,000 Buildings 2,00,000 Bills payable 30,000 Machinery 40,000 Bank loan 1,20,000 Stock 1,60,000 Sonia’s husband’s loan 1,30,000 Bills receivable 1,20,000 General reserve 80,000 Furniture 80,000 Capitals: Cash at bank 60,000 Sonia 70,000 Rohit 90,000 Udit 1,10,000 2,70,000 6,60,000 6,60,000 The firm was dissolved on that date. Close the books of the firm with following information: 1. Buildings realised for Rs.1,90,000, Bills receivable realised for Rs.1,10,000; Stock realised Rs.1,50,000; and Machinery sold for Rs.48,000 and furniture for Rs. 75,000, 2. Bank loan was settled for Rs.1,30,000. Creditors and Bills payable were settled at 10% discount, 3. Rohit paid the realisation expenses of Rs.10,000 for which he paid Rs.12,000 for completing the dissolution process. Prepare necessary ledger accounts. Solution Books of Sonia, Rohit and Udit Dr. Realisation Account Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Buildings 2,00,000 Creditors 30,000 Machinery 40,000 Bills payable 30,000 Stock 1,60,000 Bank loan 1,20,000 Bills receivable 1,20,000 Sonia’s husband’s loan 1,30,000 Furniture 80,000 6,00,000 Bank: Bank (Bank Loan) 1,30,000 Buildings 1,90,000 Bank Bills receivable 1,10,000 [creditors and Bills payable] 54,000 Stock 1,50,000 Bank [Sonia’s husbands loan] 1,30,000 Machinery 48,000 Rohit’s capital 12,000 Furniture 75,000 5,73,000 (reslisation expenses) Loss transferred to capital accounts: Sonia 21,500 Rohit 12,900 Udit 8,600 43,000 9,26,000 9,26,000 2022-23 236 Accountancy – Not-for-Profit Organisation and Partnership Accounts Partner’s Capital Accounts Dr. Cr. Date Particulars J.F. Sonia Rohit Udit Date Particulars J.F. Sonia Rohit Udit 2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.) Realisation 21,500 12,900 8,600 Balance b/d 70,000 90,000 1,10,000 (Loss) Realisation — 12,000 — Bank 88,500 1,13,100 1,17,400 (renumaration) General 40,000 24,000 16,000 reserve 1,10,000 1,26,000 1,26,000 1,10,000 1,26,000 1,26,000 Bank Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 2017 (Rs.) 2017 (Rs.) Balance b/d 60,000 Realisation [bank loan] 1,30,000 Realisation 5,73,000 Realisation 54,000 (assets realised) [creditors and bills payable] Realisation 1,30,000 (Sonia’s husband loan) Sonia’s capital 88,500 Rohit’s capital 1,13,100 Udit’s capital 1,17,400 6,33,000 6,33,000 Note: No entry has been recorded in firm’s books for the actual realisation expenses incurred by Rohit because he gets Rs. 12,000 as his remuneration which has been duly accounted for. Illustration 7 Romesh and Bhawan were in partnership sharing profit and losses as 3:2. Their Balance Sheet as on March 31, 2017, was as follows: Balance Sheet of Romesh and Bhawan as on March 31, 2014 Liabilities Amount Assets Amount (Rs.) (Rs.) Bank loan 60,000 Cash at bank 30,000 Creditors 80,000 Debtors 70,000 Bills payables 40,000 Stock 2,00,000 Bhawan loan 20,000 Investments 1,40,000 Capitals: Buildings 60,000 Romesh 1,00,000 Bhawan 2,00,000 3,00,000 5,00,000 5,00,000 2022-23 Dissolution of Partnership Firm 237 They decided to dissolve the firm. The following information is available: 1. Debtors were recovered 5% less. Stock was realised at books value and building was sold for Rs.51,000, 2. It is found that investment not recorded in the books amounted to Rs.10,000. The same were accepted by one creditor for this amount and other Creditors were paid at a discount of 10%. Bills payable were paid full, 3. Romesh took over some of the Investments at Rs.8,100 (book value less 10%). The remaining investment were taken over by Bhawan at 90% of the book value less Rs.900 discount, 4. Bhawan paid bank loan along with one year interest at 6% p.a, 5. An unrecorded liability of Rs.5,000 was paid. Close the books of the firm by preparing necessary ledger accounts. Solution Books of Romesh and Bhawan Realisation Account Dr. Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Bank loan 60,000 Debtors 70,000 Creditors 80,000 Stock 2,00,000 Bills payable 40,000 Investments 1,40,000 Romesh’s Capital (investment) 8,100 Buildings 60,000 4,70,000 Bhawan’s Capital (investment) 1,17,000 Bank (bills payable) 40,000 Bank: Bank (creditors) 63,000 Debtors 66,500 Bhawan’s capital 63,600 Stock 2,00,000 (loan with interest) Buildings 51,000 3,17,500 Bank (unrecorded liability) 5,000 Loss transferred to : Romesh capital 11,400 Bhawan capital 7,600 19,000 6,41,600 6,41,600 Partner’s Capital Accounts Dr. Cr. Date Particulars J.F. Romesh Bhawan Date Particulars J.F. Romesh Bhawan 2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.) Realisation 8,100 1,17,000 Balance b/d 1,00,000 2,00,000 [investment] Realisation 63,600 Realisation [bank loan] [loss] 11,400 7,600 Bank 80,500 1,39,000 1,00,000 2,63,600 1,00,000 2,63,600 2022-23 238 Accountancy – Not-for-Profit Organisation and Partnership Accounts Bank Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 2017 (Rs.) 2017 (Rs.) Balance b/d 30,000 Realisation[creditor] 63,000 Realisation 3,17,500 Realisation 5,000 (assets realised) [unrecorded liability] Bhawan loan 20,000 Realisation 40,000 (bills payable] Romesh‘s capital 80,500 Bhawan’s capital 1,39,000 3,47,500 3,47,500 Note: No entry has been made for acceptance of unrecorded investments by a creditor as part payment of his dues as per rules. Illustration 8 Sonu and Ashu sharing profits as 3:1 and they agree upon dissolution. The Balance Sheet as on March 31, 2017 is as under: Balance Sheet of Sonu and Ashu as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Loan 12,000 Cash at bank 15,000 Creditors 18,000 Stock 45,000 Capital Furniture 16,000 Sonu 1,10,000 Debtors 70,000 Ashu 68,000 1,78,000 Plant and Machinery 52,000 Loan to Ashu 10,000 2,08,000 2,08,000 Sonu took over plant and machinery at an agreed value of Rs.60,000. Stock and Furniture were sold for Rs.42,000 and Rs.13,900 respectively. Debtors were taken over by Ashu at Rs.69,000. Creditors were paid subject to discount of Rs.900. Sonu agrees to pay the loans. Realisation expenses were Rs.1,600. Prepare Realisation Account, Bank Account and Capital Accounts of the Partners. 2022-23 Dissolution of Partnership Firm 239 Solution Books of Sonu and Ashu Realisation Account Dr. Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Stock 45,000 Loan 12,000 Furniture 16,000 Creditors 18,000 Debtors 70,000 Sonu’s capital 60,000 Plant and Machinery 52,000 (plant& machinery) Bank (creditors) 17,100 Ashu’s capital (debtors) 69,000 Sonu’s capital (loan) 12,000 Bank: Bank (realisation expenses) 1,600 Stock 42,000 Profit transferred to : Furniture 13,900 55,900 Sonu’s capital 900 Ashu’s capital 300 1,200 2,14,900 2,14,900 Partners Capital Accounts Dr. Cr. Date Particulars J.F. Sonu Ashu Date Particulars J.F. Sonu Ashu 2017 (Rs.) (Rs.) 2017 (Rs.) (Rs.) Realisation 60,000 Balance b/d 1,10,000 68,000 [plantandmachinery] Realisation [loan] 12,000 Realisation 69,000 Realisation [profit] 900 300 [debtors] Bank 700 Bank 62,900 1,22,900 69,000 1,22,900 69,000 Bank Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 2017 (Rs.) 2017 (Rs.) Balance b/d 15,000 Realisation [creditor] 17,100 Realisation (assets 55,900 Realisation [expenses] 1,600 realised) Sonu’s capital 62,900 Loan to Ashu 10000 Ashu’s capital 700 81,600 81,600 Illustration 9 Anju, Manju and Sanju sharing profit in the ratio of 3:1:1 decided to dissolve their firm. On March 31, 2014 their position was as follows: 2022-23 240 Accountancy – Not-for-Profit Organisation and Partnership Accounts Balance Sheet Anju, Manju and Sanju as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Creditors 60,000 Cash at bank 55,000 Loan 15,000 Stock 83,000 Capitals: Furniture 12,000 Anju 2,75,000 Debtors 2,42,000 Manju 1,10,000 Less: Provision for Sanju 1,00,000 4,85,000 doubtful debts 12,000 2,30,000 Manju’s loan 20,000 Buildings 2,00,000 5,80,000 5,80,000 It is agreed that: 1. Anju takes over the Furniture at Rs.10,000 and Debtors amounting to Rs.2,00,000 at Rs.1,85,000. Anju also agrees to pay the creditors, 2. Manju is to take over Stock at book value and Buildings at book value less 10%, 3. Sanju is to take over remaining Debtors at 80% of book value and responsibility for the discharge of the loan, 4. The expenses of dissolution amounted to Rs.2,200. Prepare Realisation Account, Bank Account and Capital Accounts of the partners. Solution Books of Anju, Manju and Sanju D r. Realisation Account Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Stock 83,000 Provision for doubtful debts 12,000 Furniture 12,000 Creditors 60,000 Debtors 2,42,000 Loan 15,000 Buildings 2,00,000 5,37,000 Anju’s capital : Anju capital (creditors) 60,000 Furniture 10,000 Sanju capital (loan) 15,000 Debtors 1,85,000 1,95,000 Bank (realisation expenses) 2,200 Manju’s capital : Stock 83,000 Buildings 1,80,000 2,63,000 Sanju’s capital : (remaning debtors less 20% of book value) 33,600 Loss transferred to : Anju’s capital 21,360 Manju’s capital 7,120 Sanju’s capital 7,120 35,600 6,14,200 6,14,200 2022-23 Dissolution of Partnership Firm 241 D r. Partner’s Capital Accounts Cr. Date Particulars J.F. Anju Manju Sanju Date Particulars J.F. Anju Manju Sanju 2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.) Realisation (assets) 1,95,000 2,63,000 33,600 Balance b/d 2,75,000 1,10,000 1,00,000 Realisation (loss) 21,360 7,120 7,120 Realisation 60,000 Bank 1,18,640 74,280 (creditors) Realisation 15,000 Manju loan 20,000 (loan) Bank 1,40,120 3,35,000 2,70,120 1,15,000 3,35,000 2,70,120 1,15,000 Alternatively, Manju's loan may be first paid through bank account then the amount payable by Manju on account of debit balance in her capital account. Rs. 16,0,120 can be corrected form her. Dr. Bank Account Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 2017 (Rs.) 2017 (Rs.) Balance b/d 55,000 Realisation (expenses) 2,200 Manju’s capital 1,40,120 Anju’s capital 1,18,640 Sanju’s capital 74,280 1,95,120 1,95,120 Illustration 10 Sumit, Amit and Vinit are partners sharing profit in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2017 was as follows: Balance Sheet of Sunit, Amit and Vinit as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Capitals: Machinery 80,000 Sumit 40,000 Investments 1,50,000 Amit 50,000 Stock 10,000 Vinit 60,000 1,50,000 Debtors 35,000 Profit and Loss 10,000 Cash at bank 15,000 Mrs. Amit’s loan 40,000 Sundry creditors 90,000 2,90,000 2,90,000 The firm was dissolved on that date. Amit took over his wife’s loan. One of the Creditors for Rs.2,600 was not claim the amount. Assets realised as follows: 1. Machinery was sold for Rs.70,000, 2. Investments with book value of Rs.1,00,000 were given to Creditors in full settlement of their account. The remaining Investments were taken over by Vinit at an agreed value of Rs.45,000, 2022-23 242 Accountancy – Not-for-Profit Organisation and Partnership Accounts 3. Stock was sold for Rs.11,000 and Debtors for Rs.3,000 proved to be bad, 4. Realisation expenses were Rs.1,500. Prepare ledger accounts to close the books of the firm. Solution Books of Amit, Sumit and Vinit Realisation Account Dr. Cr. Particulars Amount Particulars Amount (Rs.) (Rs.) Machinery 80,000 Sundry creditors 90,000 Investments 1,50,000 Mrs.Amit’s loan 40,000 Stock 10,000 Bank : Debtors 35,000 2,75,000 Machinery 70,000 Amit’s Capital (wife’s loan) 40,000 Stock 11,000 Bank (realisation expenses) 1,500 Debtors 32,000 1,13,000 Vinit’s capital (investment) 45,000 Loss transferred to : Amit’s capital 14,250 Sumit’s capital 8,550 Vinit’s capital 5,700 28,500 3,16,500 3,16,500 Dr. Partners Capital Accounts Cr. Date Particulars J.F. Amit Sumit Vinit Date Particulars J.F. Amit Sumit Vinit 2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.) Realisation 45,000 Balance b/d 40,000 50,000 60,000 Investment Realisation Realisation 14,250 8,550 5,700 (Mrs. Amit’s 40,000 (loss) loan) Bank 70,750 44,450 11,300 Profit and Loss 5,000 3,000 2,000 85,000 53,000 62,000 85,000 53,000 62,000 Bank Account Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount 2017 (Rs.) 2017 (Rs.) Balance b/d 15,000 Realisation (expenses) 1,500 Realisation 1,13,000 Amit’s capital 70,750 (assets realised) Sumit’s capital 44,450 Vinit’s capital 11,300 1,28,000 1,28,000 Note: No entry has been made for the investments taken over by the creditors as per rules. 2022-23 Dissolution of Partnership Firm 243 Illustration 11 Meena and Tina are partners in a firm and sharing profit as 3:2. They decided to dissolve their firm on March 31, 2017 when their Balance Sheet was a follows: Balance Sheet Meena and Tina as on March 31, 2017 Liabilities Amount (Rs.) Assets Amount (Rs.) Capital : Machinery 70,000 Meena 90,000 Investments 50,000 Tina 80,000 1,70,000 Stock 22,000 Sundry creditors 60,000 Sundry Debtors 1,03,000 Bills payable 20,000 Cash at bank 5,000 2,50,000 2,50,000 The assets and liabilities were disposed off as follows : (a) Machinery were given to creditors in full settlement of their account and Stock were given to bills payable in full settlement. (b) Investment were taken over by Tina at book value. Sundry debtors of book value Rs. 50,000 took over by Meena at 10% less and remaining debtors realised Rs. 51,000. (c) Realisation expenses amount to Rs. 2,000. Prepare necessary ledger accounts to close the book of the firm. Solution Books of Meena and Tina – Realisation Account Particulars Amount (Rs.) Particulars Amount (Rs.) Assets transferred : Sundry creditors 60,000 Machinery 70,000 Bills payable 20,000 Investments 50,000 Tina’s Capital (investment) 50,000 Stock 22,000 Meena’s Capital 45,000 Sundry debtors 1,03,000 2,45,000 Bank (Debtors) 51,000 Bank (realisation expenses) 2,000 Loss transferred to : Meena’s capital 12,600 Tena’s capital 8,400 21,000 2,47,000 2,47,000 Partner’s Capital Accounts Dr. Cr. Date Particulars Mena Tina Date Particulars Meena Tina (Rs.) (Rs.) ( Rs.) (Rs.) Realisation (investment) 50,000 Balance b/d 90,000 80,000 Realisation (debtors) 45,000 Realisation (loss) 12,600 8,400 Bank 32,400 21,600 90,000 80,000 90,000 80,000 2022-23 244 Accountancy – Not-for-Profit Organisation and Partnership Accounts Bank Account Dr. Cr. Particulars Amount (Rs.) Particulars Amount (Rs.) Balance b/d 5,000 Realisation (expenses) 2,000 Realisation (assets realised) 51,000 Mena’s capital 32,400 Tina’s capital 21,600 56,000 56,000 Terms Introduced in the Chapter 1. Dissolution of Partnership 4. Compulsory Dissolution 2. Dissolution of Partnership 5. Dissolution by Notice Firm 6. Realisation Expenses 3. Partnership at Will 7. Realisation Account Summary 1. Dissolution of Partnership Firm : The dissolution of a firm implies the discontinuance of partnership business and termination of economic relations between the partners. In the case of a dissolution of a firm, the firm closes its business altogether and realises all its assets and pays all its liabilities. The payment is made to the creditors first out of the assets realised and, if necessary, next out of the contributions made by the partners in their profit sharing ratio. When all accounts are settled and the final payment is made to the partners for the amounts due to them, the books of the firm are closed. 2. Dissolution of Partnership : A partnership gets terminated in case of admission, retirement death, etc. of a partner. This does not necessarily involve dissolution of the firm. 3. Realisation Account : The Realisation Account is prepared to record the transactions relating to sale and realisation of assets and settlement of creditors. Any profit or loss arising act of this process is shared by partners’ in their profit sharing ratio. Partners’ accounts are also settled and the Cash or Bank account is closed. Questions for Practice Short Answer Questions 1. State the difference between dissolution of partnership and dissolution of partnership firm. 2. State the accounting treatment at the time of dissolution of a firm for: i. Unrecorded assets ii. Unrecorded liabilities 3. On dissolution, how will you deal with partner’s loan if it appears on the (a) assets side of the balance sheet, (b) liabilities side of balance sheet. 2022-23 Dissolution of Partnership Firm 245 4. Distinguish between firm’s debts and partner’s private debts. 5. State the order of settlement of accounts on dissolution. 6. On what account realisation account differs from revaluation account. Long Answer Questions 1. Explain the process dissolution of partnership firm? 2. What is a Realisation Account? 3. Reproduce the format of Realisation Account. 4. How deficiency of crditors is paid off at the time of dissolution of firm. Numerical Questions 1. Journalise the following transactions regarding realisation expenses : [a] Realisation expenses amounted to Rs.2,500. [b] Realisation expenses amounting to Rs.3,000 were paid by Ashok, one of the partners. [c] Realisation expenses Rs.2,300 borne by Tarun, personally. [d] Amit, a partner was appointed to realise the assets, at a cost of Rs.4,000. The actual amount of realisation expenses amounted to Rs.3,000. 2. Record necessary journal entries in the following cases: [a] Creditors worth Rs.85,000 accepted Rs.40,000 as cash and Investment worth Rs.43,000, in full settlement of their claim. [b] Creditors were Rs.16,000. They accepted Machinery valued at Rs.18,000 in settlement of their claim. [c] Creditors were Rs.90,000. They accepted Buildings valued Rs.1,20,000 and paid cash to the firm Rs.30,000. 3. There was an old computer which was written-off in the books of accounts in the pervious year. The same has been taken over by a partner Nitin for Rs.3,000. Journalise the transaction when the firm has been dissolved. 4. What journal entries will be recorded for the following transactions on the dissolution of a firm: [a] Payment of unrecorded liabilities of Rs.3,200. [b] Stock worth Rs.7,500 is taken over by a partner Rohit. [c] Profit on Realisation amounting to Rs.18,000 is to be distributed between the partners Ashish and Tarun in the ratio of 5:7. [d] An unrecorded asset realised Rs.5,500. 5. Give journal entries for the following transactions : 1. To record the realisation of various assets and liabilities, 2. A Firm has a Stock of Rs. 1,60,000. Aziz, a partner took over 50% of the Stock at a discount of 20%, 3. Remaining Stock was sold at a profit of 30% on cost, 4. Land and Buildging (book value Rs. 1,60,000) sold for Rs. 3,00,000 through a broker who charged 2%, commission on the deal, 5. Plant and Machinery (book value Rs. 60,000) was handed over to a Creditor at an agreed valuation of 10% less than the book value, 6. Investment whose face value was Rs. 4,000 was realised at 50%. 2022-23 246 Accountancy – Not-for-Profit Organisation and Partnership Accounts 6. How will you deal with the realisation expenses of the firm of Rashim and Bindiya in the following cases: 1. Realisation expenses amount to Rs. 1,00,000, 2. Realisation expenses amounting to Rs. 30,000 are paid by Rashim, a partner. 3. Realisation expenses are to be borne by Rashim and he will be paid Rs. 70,000 as remuneration for completing the dissolution process. The actual expenses incurred by Rashim were Rs. 1,20,000. 7. The book value of assets (other than cash and bank) transferred to Realisation Account is Rs. 1,00,000. 50% of the assets are taken over by a partner Atul, at a discount of 20%; 40% of the remaining assets are sold at a profit of 30% on cost; 5% of the balance being obsolete, realised nothing and remaining assets are handed over to a Creditor, in full settlement of his claim. You are required to record the journal entries for realisation of assets. 8. Record necessary journal entries to realise the following unrecorded assets and liabilities in the books of Paras and Priya: 1. There was an old furniture in the firm which had been written-off completely in the books. This was sold for Rs. 3,000, 2. Ashish, an old customer whose account for Rs. 1,000 was written-off as bad in the previous year, paid 60%, of the amount, 3. Paras agreed to takeover the firm’s goodwill (not recorded in the books of the firm), at a valuation of Rs. 30,000, 4. There was an old typewriter which had been written-off completely from the books. It was estimated to realise Rs. 400. It was taken away by Priya at an estimated price less 25%, 5. There were 100 shares of Rs. 10 each in Star Limited acquired at a cost of Rs. 2,000 which had been written-off completely from the books. These shares are valued @ Rs. 6 each and divided among the partners in their profit sharing ratio. 9. All partners wish to dissolve the firm. Yastin, a partner wants that her loan of Rs. 2,00,000 must be paid off before the payment of capitals to the partners. But, Amart, another partner wants that the capitals must be paid before the payment of Yastin’s loan. You are required to settle the conflict giving reasons. 10. What journal entries would be recorded for the following transactions on the dissolution of a firm of Arti and Karim after various assets (other than cash) on the third party liabilities have been transferred to Reliasation account. 1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000. 2. There was unrecorded Bike of Rs. 40,000 which was taken over by Mr. Karim. 3. The firm paid Rs. 40,000 as compensation to employees. 4. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%. 5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4. 2022-23 Dissolution of Partnership Firm 247 11. Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2017 was as follows: Balance Sheet of Rose and Lily as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Creditors 40,000 Cash 16,000 Lily’s loan 32,000 Debtors 80,000 Profit and Loss 50,000 Less: Provision for Capitals: doubtful debts 3,600 76,400 Lily 1,60,000 Inventory 1,09,600 Rose 2,40,000 Bills receivable 40,000 Buildings 2,80,000 5,22,000 5,22,000 Rose and Lily decided to dissolve the firm on the above date. Assets (except bills receivables) realised Rs. 4,84,000. Creditors agreed to take Rs. 38,000. Cost of realisation was Rs. 2,400. There was a Motor Cycle in the firm which was bought out of the firm’s money, was not shown in the books of the firm. It was now sold for Rs. 10,000. There was a contingent liability in respect of outstanding electric bill of Rs. 5,000 which was paid Bill Receivable taken over by Rose at Rs. 33,000. Show Realisation Account, Partners Capital Acount, Loan Account and Cash Account. (Ans : Realisation Profit Rs. 15,600, Total of Cash Account Rs. 5,10,000, Lily’s capital Rs. 1,99,360, Rose capital Rs. 2,33,240). 12. Shilpa, Meena and Nanda decided to dissolve their partnership on March 31,2017. Their profit sharing ratio was 3:2:1 and their Balance Sheet was as under: Balance Sheet of Shilpa, Meena and Nanda as on March 31, 2017 Liabilities Amount Assets Amount (Rs.) (Rs.) Capitals: Land 81,000 Shilpa 80,000 Stock 56,760 Meena 40,000 Debtors 18,600 Bank loan 20,000 Nanda’s capital 23,000 Creditors 37,000 Cash 10,840 Provision for doubtful debts 1,200 General reserve 12,000 1,90,200 1,90,200 2022-23 248 Accountancy – Not-for-Profit Organisation and Partnership Accounts The stock of value of Rs. 41,660 are taken over by Shilpa for Rs. 35,000 and she agreed to discharge bank loan. The remaining stock was sold at Rs. 14,000 and debtors amounting to Rs. 10,000 realised Rs. 8,000. land is sold for Rs. 1,10,000. The remaining debtors realised 50% at their book value. Cost of realisation amounted to Rs. 1,200. There was a typewriter not recorded in the books worth Rs. 6,000 which were taken over by one of the Creditors at this value. Prepare Realisation Account. (Ans : Profit on Realisation Rs. 20,940). 13. Surjit and Rahi were sharing profits (losses) in the ratio of 3:2, their Balance Sheet as on March 31, 2017 is as follows: Balance Sheet of Surjit and Rahi as on March 31, 2017 Liabilities Amount Assets Amount (Rs.)