MEANING OF DISSOLUTION OF

PARTNERSHIP FIRM
Dissolution of partnership firm I means business of the firm is
discontinued, closed and the firm is wound up. As a result,
economic relation among partners ends. It is different from
dissolution of partnership which means change in relationship
among the partners but the firm continues.
When a firm is dissolved, the business of the firm terminates. All
the assets the firm are disposed off and all outsiders’ liabilities
and partners’ loan and partner capital are paid.
 Dissolution of Partnership
Dissolution of Partnership refers to terminal of old
partnership agreement (i.e., Partnership Deep) and a
reconstruction the firm.
It may take place on
• Change in profit sharing ratio among the existing partner:
•  Admission of a partner; and
•  Retirement of Death of partner.
It may or may not result into closing down of the business
as the remount partners may decide to carry on the
business under a new agreement.
 TYPES OF DISSOLUTION OF FIRMS
A Partnership firm can be dissolved in any the following ways:
(A)Without the intervention of the court:
(1) When all partners agree to dissolve the firm (Sec. 40);
(2) Compulsory Dissolution (Sec. 41)
(i) When all or except but one partner of the firm become insolvent
(ii) When business of the firm become unlawful.
(3) On the happening of any of the following events: (Sec. 42)
(i) On the insolvency of a partner.
(ii) On the fulfillment of the objective of the firm for which the for was formed.
(iii) On the expiry of the (period) for which the firm was formed.
(4) By Notice (Sec. 43): When the duration of the partnership firm is a fixed and it is at will of the partners. Any
partner by giving notice other partners can dissolve the firm.
(B) Dissolution by order of the court (Sec. 44):
A court on application by a partner may order the dissolution of the firm under the following circumstances:
(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 found quality of misconduct that may harm the partnership.
(4) When a partner consistently and deliberately commits breach of partnership agreement.
ACCOUNTING TREATMENT OF DISSOLUTION

On dissolution of a firm, the following accounts

are opened to close the books of the firm.
• · Realization Account;
• · Partner’s Loan Account;
• · Partner’s Capital Accounts; and
• · Cash or Bank Account.
 Preparation of Realisation Account
The following Journal Entries are passed :
A. For Closing Assets Accounts:
Realisation A/c Dr.
To sundry Assets A/c
(Being assets transferred to Realisation A/c)
Note :
1. Cash and Bank balance are not transferred to Realisation Account.
2. Assets (tangible and intangible) are transferred to Realisation Account to their Gross Value
3. Fictitious Asset such as Debit balance of Profit and Loss Account of Advertisement
Suspense’s Account etc. are not transferred to Realisation Account. These are directly debited
to partners’ capital accounts in their profit sharing ratio by passing the following entry.
Partner’s capital A/c Dr.
To Profit and Loss A/c
To Advertisement Suspense A/c
(Being Balance of losses transferred to capital accounts)
 Journal Entries (Realization Account)
Provision against assets such as Provision for Depreciation
of Provision for Bad & Doubtful debts etc. are transferred to
Realisation Account by passing a Separate entry:
Provision’s for Bad Debts A/c Dr.
Provision’s for Depreciation A/c Dr.
Investment Fluctuation Fund A/c Dr.
Machinery Replacement Reserve A/c Dr.
To Realisation A/c
(Being Provision & Reserves Against Assets transferred
to Realisation Account)
 Journal Entries (Realization Account)
B. ForClosing Liabilities Accounts:
Sundry Liabilities A/c Dr.
To Realisation A/c
(Being sundry liabilities transferred to Realisation A/c)
Note :
1. Only third parties liabilities/outsiders ‘liabilities are transferred to Realisation A/c
2. Balance of Partner’s Loan Accounts are not transferred to Realisation Account Separate accounts
are opened to settle such liabilities.
3. Undistributed profits and reserves are also not transferred to Realisation A/c. These are directly
credited to partners’ capital accounts in their profit sharing ratio by passing the following entry.
Profit and Loss A/c Dr.
General Reserves A/c Dr.
Reserve fund A/c Dr.
Contingency Reserve A/cDr.
To Partner’s Capital A/cs
(Being balance of undistributed profits transferred to capital accounts)
 Journal Entries (Realization Account)
4. Provident Fund is a liability on the firm towards employees and hence it is transferred to Realisation A/c.
5. If any liability is expected to arise against any found or reserve e.g., Workmen’s Compensation Fund, then an
amount equal to such liability is transferred to Realisation A/c balance, if any, distributed among the partners in
their profit-sharing ratio by passing the following entry.
Workmen’s Compensation Fund A/C Dr.
To Realisation A/c(Liability)
To Partners’ Capital A/cs(Balance, if any)
(Being liability against workmen’s compensation fund transferred to Realisation A/c and balance Distributed
among partners.
C. For Realisation of Assets (Whether recorded or unrecorded)
a. When assets are sold for cash
Cash/Bank A/c Dr.
To Realisation A/c
(Being assets sold for cash)
b. When assets are taken over by any partner.
Partner’s Capital A/c Dr.
To Realisation A/c
(Being assets taken over by any partner)
 Journal Entries (Realization Account)
c. When assets are taken over by any creditor in part of full payment his
dues :
I. In case of Full Settlement:
i. NO ENTRY is passed for the transfer of assets to the creditor.
ii. NO ENTRY is passed for the payment to creditor.
II. In case of Part Settlement:
i.NO ENTRY is passed for the transfer of assets to the creditor.
ii. The agreed amount of asset is deducted from the claims of it
creditors and the balance is paid to him.
Note :
1. The realized value of each asset must be given at the time of
dissolution.
 Journal Entries (Realization Account)
D. For Payment of Liabilities
a. When liabilities are paid in cash
Realisation A/c Dr.
To Cash/Bank A/c
(Being liabilities paid in cash)
b. When liabilities are taken over by any partner
Realisation A/c Dr.
To Partner’s Capital A/c
(Being liabilities taken over by a partner)
Note : If nothing is stated regarding the settlement of any outside
liability, then it should be assumen that the amount equal to book
value is paid.
 Journal Entries (Realization Account)
E. For Realisation Expenses
a. When expenses are paid by firm and borne by firm:
`Realisation A/c Dr.
To Cash/Bank A/c
(Being realization expenses paid in cash).
b. When expenses are paid by any partner and borne by firm
:
Realisation A/c Dr.
To Partner’s Capital A/c
(Being realization expenses paid by a partner).
 Journal Entries (Realization Account)
c. When expenses are paid by firm (on behalf of any partner) and born by an partner.
Partner’s Capital A/c Dr.
To Cash/Bank A/c
(Being realization expenses paid on behalf of partner).
e. When a partner is paid a fixed amount for bearing realization expenses then: Actual expenses
are not be considered;
ii. Realization A/c Dr. (With Fixed Amount)
To Partner’s Capital A/c
(Being realization expenses paid by a partner)
f. When expenses are paid by one partner and borne by another partner;
Partner’s Capital A/c Dr. (Who borne the expenses)
To Partner’s Capital A/c (Who pays the expenses)
(Being realization expenses paid by one partner and borne by another partner).
In case the realization expenses are borne by a partner, clear indication should be given regarding
the payment there of.
 Journal Entries (Realization Account)
F. For Closing Realisation Account
a. When Realization A/c Discloses profit (in case total of credit side
is more than the total of debit side)
Realisation A/c Dr.
To Partner’s Capital A/cs
(Being profit on realization transferred to partners’ capital A/cs)
b. When Realisation A/c discloses loss (in case total of debit side is
more than the total of credit side)
Partners’ Capital A/c Dr.
To Realisation A/c
(Being loss on realization transferred to partners capital A/cs)
 Realisation Account
Particulars (Rs.) Particulars (Rs.)

To sundry Assets A/c By Sundry Liabilities A/c

(Excluding cash or bank balance. Fictitious (Excluding Cr. Balance of P & L A/c,
assets. Dr. balance of P & Lac, Dr. balance of Reserves, Partners’ Capital/Current A/cs,
partner’s Capital/current A/cs, Loans to Loan from partner and Bank Overdraft)
partners) By provision on any Assets A/c
To Cash/Bank A/c (Such as provision for Depreciation,
(Amount paid for discharging Liabilities- Provision for Doubtful Debts, Joint Life
recorded and unrecorded) Policy Reserve etc.)
To Cash Bank A/c By Cash/Bank A/c
(Expenses on Realisation) (Amount received on realization of assets-
To Partner’s Capital A/cs recorded and unrecorded)
(Liabilities taken over by a Partner By Partners’ Capital A/c
commission payable to him or any expenses (Assets taken over by a partner recorded or
payable to him) unrecorded)
To Partner’ Capital A/cs By partners’ Capital A/cs
(For transferring profit on Realisation) (For transferring loss on Realisation)
 Partner’s Capital Account
Particulars (Rs.) Particulars (Rs.)
To Balance b\d By balance b/d
(Dr. Balance) (Cr. Balance)
To Profit and Loss A/c By General Reserve A/c
To Advertisement By Profit and Loss A/c
Suspense A/c By workmen’s
To Realisation A/c Compensation Fund
(Assets taken) By Realisation A/c
To Realisation A/c (Liabilities taken)
(Loss on Realisation ) By Realisation A/c
To Cash/Bank A/c (Profit on Realisation)
(Excess cash paid) By Cash/Bank A/c Cash
brought in
 Cash or Bank Account
Particulars (Rs.) Particulars (Rs.)

To Balance A/c By balance bid

(Cash in Hand or Cash at (Bank overdraft)
Bank) By Realisation A/c
To Realisation A/c (Liabilities Paid)
(Assets Realisation) By Realisation A/c
To Partner’ Capital A/cs (Realisation Expenses
(Cash brought in by Paid)
partner) By Partner’s Loan A/c
(Partner’s Loan Paid)
By Partner’s Capital
A/cs
(Excess cash paid to
partner)
Distinction between Revaluation and
Realisation Account
Basic of Difference Revaluation Account Realisation Account

Purpose It is prepared to show assets and It is prepared to ascertain profit

liabilities in the books at their or loss on sale of assets and
revised values repayment of liabilities

When to be It is prepared at the time of It is prepared at the time of

prepared change in profit sharing ratio dissolution of a firm
among the existing partner,
admission, retirement and death
of a partner

Preparation of This account may be prepared at a This account is prepared once

Account number of times during the life of during the life of a firm
a firm

Content This account records only those This account records all assets
assets and liabilities whose book (except cash, fic-tious assets
values have been changed etc.) and all outside liabilities

Result A Firm continues its business even A firm comes to an end after
after the preparation of preparation of realization
revaluation account. account