Chapter # 15

Partnership – Dissolution /
Liquidation

Principles of Accounting – B.Com Part – I

Sameer Hussain

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Partnership – Dissolution / Liquidation
Chapter # 15

WHAT THE EXAMINER USUALLY ASK?

Liquidation Summary.
General Journal entries.
Partners’ Capital account and Cash account.

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 Partnership – Dissolution / Liquidation
Chapter # 15

Chapter # 15
PARTNERSHIP –
DISSOLUTION / LIQUIDATION
dissolution / liquidation of partnership
Liquidation of partnership means the termination of partnership. It means that the firm will not
operate further.
In liquidation process, all the assets (inventory and fixed assets) are sold for cash either
more than their book value or less than their book value.
The profit or loss arises, if any, from the sale of assets are recorded in the realization
account.
Then accounts receivable are collected from customer (equal to book value or less than
value) and payments are paid to the suppliers.
Again the differences, if any, are recorded in the realization account.
Goodwill of the firm are closed to the partners; account by debiting partners’ account
and credit the goodwill account.
Now the realization (profit or loss) is transferred to the partners’ capital account.
If partners’ capital account show negative balance after the distribution of realization, it
is necessary to know that the partner is solvent or insolvent.
If the partner is solvent, he/she can contribute cash from his private sources.
But if the partner is insolvent, he/she cannot contribute cash and his/her loss will have
to be distributed among the other partners.

steps of liquidation
Step # 1: Sale of all assets except cash.

Step # 2: Payment of liabilities, (if possible).

Step # 3: Distribution of gain or loss.

Check the negative capital balances of partners, (if any). Also check
Step # 4:
solvent or insolvent partner.

Step # 5: Distribution of remaining cash.

liquidation process
Entry to Record Sale of Other Assets on Loss:
Cash DR. (with sale proceed amount)
Realization DR. (with the amount of loss on sale of assets)
Other assets CR. (with amount of assets)
(To record the sale of other assets on loss)
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Entry to Record Cash Collected from Customers Less Than Actual Amount:
Cash DR. (with the amount received from customers)
Realization DR. (with the amount of loss on collection)
Accounts receivable CR. (with the amount of receivable)
(To record the cash collected from customers)
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Partnership – Dissolution / Liquidation
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Entry to Record Payment of Liability Less Than Actual Amount:

Accounts payable DR. (with the amount of liabilities)
Realization CR. (with amount of gain on payment)
Cash CR. (with the amount of payment)
(To record the payment of liability)
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Entry to Record Distribution of Goodwill:

Partner A’s capital DR. (with the share of partner)
Partner B’s capital DR. (with the share of partner)
Partner C’s capital DR. (with the share of partner)
Goodwill CR. (with the amount of goodwill)
(To record the distribution of goodwill)
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Entry to Record Distribution Loss on Realization:

Partner A’s capital DR. (with the share of partner)
Partner B’s capital DR. (with the share of partner)
Partner C’s capital DR. (with the share of partner)
Realization CR. (with amount of loss on realization)
(To record the distribution of loss on realization)
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Entry to Record Distribution Gain on Realization:

Realization DR. (with the amount of gain on realization)
Partner A’s capital CR. (with the share of partner)
Partner B’s capital CR. (with the share of partner)
Partner C’s capital DR. (with the share of partner)
(To record the distribution of gain on realization)
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Entry to Record Cash Contributed by Solvent Partner:

Cash DR. (with the amount contributed by partner)
Partner A’s capital CR. (with the amount contributed)
(To record the cash contributed by partner to meet capital deficiency)
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Entry to Record Capital Deficiency of Insolvent Partner Meet by Other

Partners:
Partner B’s capital DR. (with the share of partner)
Partner C’s capital DR. (with the share of partner)
Partner A’s capital CR. (with insolvent partner’s capital)
(To record the capital deficiency met by other partner)
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Entry to Record Distribution of Remaining Cash:

Partner B’s capital DR. (with the remaining capital amount)
Partner C’s capital DR. (with the remaining capital amount)
Cash CR. (with remaining cash amount)
(To record the distribution of remaining cash)
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 Partnership – Dissolution / Liquidation
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illustration # 1: (Simple Liquidation)

1999 Regular & Private – BIEK
The balance sheet of Ahmed, Bashir and Rahim who shared profits and losses in the ratio of
5:3:2 is as follows on December 31, 1998:-
ASSETS EQUITIES
Cash 35,000 Accounts payable 20,000
Other assets 165,000 Ahmed Capital 70,000
Bashir Capital 60,000
Rahim Capital 50,000
200,000 200,000
On the same date they decided to liquidate their business.
REQUIRED
Give necessary journal entries in proper form and prepare partner’s capital accounts under each
of the following cases separately:-
(a) Other assets were sold for cash Rs.200,000.
(b) Other assets were sold for cash Rs.80,000.
Accounts payable were paid in full and the balance paid to partners in each case.

solution # 1:
Case (a):
________ PARTNERSHIP
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Cash 200,000
Realization 35,000
Other assets 165,000
(To record the sale of other assets in gain)
2 Accounts payable 20,000
Cash 20,000
(To record the payment of accounts payable)
3 Realization 35,000
Ahmed Capital (35,000 x 5/10) 17,500
Bashir Capital (35,000 x 3/10) 10,500
Rahim Capital (35,000 x 2/10) 7,000
(To record the distribution of gain among partners)
4 Ahmed Capital (70,000 + 17,500) 87,500
Bashir Capital (60,000 + 10,500) 70,500
Rahim capital (50,000 + 7,000) 57,000
Cash (35,000 + 200,000 – 20,000) 215,000
(To record the distribution of remaining cash)

GENERAL LEDGER
Ahmed Capital
4 Cash 87,500 Balance 70,000
3 Realization 17,500
87,500 87,500

Bashir Capital
4 Cash 70,500 Balance 60,000
3 Realization 10,500
70,500 70,500

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Partnership – Dissolution / Liquidation
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Rahim Capital
4 Cash 57,000 Balance 50,000
3 Realization 7,000
57,000 57,000
Case (b):
________ PARTNERSHIP
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Cash 80,000
Realization 85,000
Other assets 165,000
(To record the sale of other assets on loss)
2 Accounts payable 20,000
Cash 20,000
(To record the payment of accounts payable)
3 Ahmed Capital (85,000 x 5/10) 42,500
Bashir Capital (85,000 x 3/10) 25,500
Rahim Capital (85,000 x 2/10) 17,000
Realization 85,000
(To record the distribution of loss among partners)
4 Ahmed Capital (70,000 – 42,500) 27,500
Bashir Capital (60,000 – 25,500) 34,500
Rahim capital (50,000 – 17,000) 33,000
Cash (35,000 + 80,000 – 20,000) 95,000
(To record the distribution of remaining cash)

GENERAL LEDGER
Ahmed Capital
3 Realization 42,500 Balance 70,000
4 Cash 27,500
70,000 70,000

Bashir Capital
3 Realization 25,500 Balance 60,000
4 Cash 34,500
60,000 60,000

Rahim Capital
3 Realization 17,000 Balance 50,000
4 Cash 33,000
50,000 50,000

illustration # 2: (Liquidation when Partners are Solvent)

2003 Regular – BIEK
Adnan. Anwar and Azeem were partners, sharing profit and loss in the ration of 1:1:3. They
liquidate their business on Dec. 31, 2002. On that date their balance sheet showed as follows:
Assets Equities
Cash 40,000 A/c. Payable 10,000
Other assets 150,000 Adnan’s Capital 70,000
Anwar’s Capital 60,000
Azeem’s Capital 50,000

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Other assets were sold for Rs.50,000/- cash. They paid off all liabilities. Partners are solvent and
can contribute any amount to meet the deficiency from their private resources.
REQUIRED
Make entries in General Journal relating to liquidation and final settlement. Prepare partner’s
capital account.

solution # 2:
________ PARTNERSHIP
GENERAL JOURNAL
FOR THE PERIOD 31 DECEMBER 2002
Date Particulars P/R Debit Credit
1 Cash 50,000
Realization 100,000
Other assets 150,000
(To record the sale of other assets on loss)
2 Accounts payable 10,000
Cash 10,000
(To record the payment of accounts payable)
3 Adnan Capital (100,000 x 1/5) 20,000
Anwar Capital (100,000 x 1/5) 20,000
Azeem Capital (100,000 x 3/5) 60,000
Realization 100,000
(To record the distribution of loss among partners)
4 Cash 10,000
Azeem Capital (50,000 – 60,000) 10,000
(To record the capital deficiency met by Azeem)
5 Adnan Capital (70,000 – 20,000) 50,000
Anwar Capital (60,000 – 20,000) 40,000
Cash (40,000 + 50,000 – 10,000 + 10,000) 90,000
(To record the remaining cash distributed to
partners)

GENERAL LEDGER
Adnan Capital
3 Realization 20,000 Balance 70,000
5 Cash 50,000
70,000 70,000

Anwar Capital
3 Realization 20,000 Balance 60,000
5 Cash 40,000
60,000 60,000

Azeem Capital
3 Realization 60,000 Balance 50,000
4 Cash 10,000
60,000 60,000

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illustration # 3: (Liquidation when Partners are Insolvent)

1991 Regular & Private – BIEK
Salman, Kamran and Adnan were partners sharing profits and losses in the ratio 3:1:1
respectively. They liquidate their business on December 31, 1990. On that date their balance
sheet showed as follows:
Cash 12,000 Accounts payable 60,000
Other assets 180,000 Salman capital 80,000
Kamran capital 40,000
Adnan capital 12,000
192,000 192,000
Other assets were sold for Rs.80,000. Adnan is personally insolvent and cannot contribute any
amount to meet his deficiency. Liabilities and solvent partners account are settled out of
available cash.
REQUIRED
(a) Give necessary General Journal entries to give effect to the above transactions.
(b) Prepare Cash and Partner’s Capital Accounts and post the above journal entries to these
accounts.

solution # 3:
________ PARTNERSHIP
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Cash 80,000
Realization 100,000
Other assets 180,000
(To record the sale of other assets on loss)
2 Accounts payable 60,000
Cash 60,000
(To record the payment of liability)
3 Salman’s Capital (100,000 x 3/5) 60,000
Kamran’s Capital (100,000 x 1/5) 20,000
Adnan’s Capital (100,000 x 1/5) 20,000
Realization 100,000
(To record the distribution of loss among partners)
4 Salman’s Capital (8,000 x 3/4) 6,000
Kamran’s Capital (8,000 x 1/4) 2,000
Adnan’s Capital 8,000
(To record the distribution of Adnan’s Capital)
5 Salman’s Capital 14,000
Kamran’s Capital 18,000
Cash 32,000
(To record the distribution of cash to the partners)

GENERAL LEDGER

Cash
Balance 12,000 2 Accounts payable 60,000
1 Other assets 80,000 5 Partners’ Capital 32,000
92,000 92,000

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Salman’s Capital
3 Realization 60,000 Balance 80,000
4 Adnan’s Capital 6,000
5 Cash 14,000
80,000 80,000

Kamran’s Capital
3 Realization 20,000 Balance 40,000
4 Adnan’s Capital 2,000
5 Cash 18,000
40,000 40,000

Adnan’s Capital
3 Realization 20,000 Balance 12,000
4 Partners’ Capital 8,000
20,000 20,000

illustration # 4: (Liquidation with Liquidation Summary)

2009 Private – UOK
Irfan, Imran and Kamran are partners in a firm sharing profits and losses in the ratio of 2:3:1
respectively. They decided to dissolve the firm on January 1, 2010. On this date, the firm’s
position was as follows:
Cash Rs.140,000; Other assets ?; Acc. payable Rs.120,000; Irfan Capital Rs.240,000; Imran
Capital Rs.360,000; Kamran Capital Rs.120,000.
The other assets were sold for Rs.460,000, liabilities were paid in full. Remaining cash was
distributed among the partners.
REQUIRED
(i) Give necessary entries in the General Journal for the liquidation of firm.
(ii) Prepare liquidation summary.

solution # 4:
_______ PARTNERSHIP
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Cash 460,000
Realization 240,000
Other assets 700,000
(To record the sale of other assets on loss)
2 Accounts payable 120,000
Cash 120,000
(To record the payment of accounts payable)
3 Irfan Capital (240,000 x 2/6) 80,000
Imran Capital (240,000 x 3/6) 120,000
Kamran Capital 9240,000 x 1/6) 40,000
Realization 240,000
(To record the distribution of loss on realization)
4 Irfan Capital (240,000 – 80,000) 160,000
Imran Capital (360,000 – 120,000) 240,000
Kamran Capital 120,000 – 40,000) 80,000
Cash (140,000 + 460,000 – 120,000) 480,000
(To record the distribution of remaining cash)

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Partnership – Dissolution / Liquidation
Chapter # 15
_______ PARTNERSHIP
LIQUIDATION SUMMARY
FOR THE PERIOD ENDED 1 JANUARY 2010
Cash Other Accounts Irfan Imran Kamran
Assets Payable Capital Capital Capital
Balances 140,000 700,000 120,000 240,000 360,000 120,000
Sale of other assets 460,000 (700,000) --- (80,000) (120,000) (40,000)
Balances 600,000 --- 120,000 160,000 240,000 80,000
Payment of liabilities (120,000) --- (120,000) --- --- ---
Balances 480,000 --- --- 160,000 240,000 80,000
Distribution of cash (480,000) --- --- (160,000) (240,000) (80,000)
Balances --- --- --- --- --- ---

Computation of Other Assets:

Total liabilities 120,000
Add: Total Owner’s equity (240,000 + 360,000 + 120,000) 720,000
Total equity and liabilities 840,000
Less: Cash (140,000)
Other assets 700,000

illustration # 5: (Liquidation when Cash is not Equal to Capital Balances)

2000 Regular & Private – BIEK
Farooq and Ismail were equal partners. They liquidate their business. After all assets were sold
and liabilities of the firm paid off, there was cash balance of Rs.20,000. The capital balances of
partners before dividing profit or loss on realization were Farooq Rs.15,000 and Ismail
Rs.10,000.
REQUIRED
(a) Prepare Liquidation Summary.
(b) Give journal entries showing distribution of profit or loss on realization.
(c) Give journal entries to record the distribution of cash between partners.
(d) Give posting in the partner’s capital accounts reflecting the final settlement.

solution # 5:
________ PARTNERSHIP
LIQUIDATION SUMMARY
Cash Farooq Ismail
Capital Capital
Balances 20,000 15,000 10,000
Distribution of loss on realization (1:1) (2,500) (2,500)
Balances 20,000 12,500 7,500
Distribution of remaining cash (20,000) (12,500) (7,500)
--- --- ---

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________ PARTNERSHIP
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Farooq Capital 2,500
Ismail Capital 2,500
Realization 5,000
(To record the distribution of loss on realization)
2 Farooq Capital 12,500
Ismail Capital 7,500
Cash 20,000
(To record the distribution of remaining cash)

General Ledger

Farooq Capital
1 Realization 2,500 Balance 15,000
2 Cash 12,500
15,000 15,000

Ismail Capital
1 Realization 2,500 Balance 10,000
2 Cash 7,500
10,000 10,000

illustration # 6: (Liquidation with Different Assets)

2011 Private – BIEK
Akhter and Hafeez are partners sharing profit and losses I the ratio of 2:1 respectively. On
January 5th, 2011 they decided to dissolve their firm. On this date, their balance sheet showed as
follows:
Assets Equities
Cash Rs. 60,000/- Accounts payable Rs. 50,000/-
Merchandise inventory Rs. 40,000/- Notes payable Rs. 10,000/-
Supplies Rs. 50,000/- Akhter Capital Rs. 140,000/-
Fixed assets Rs. 150,000/- Hafeez Capital Rs. 100,000/-
The partners realized Rs.90,000 from the sales of assets (except cash) & paid the liabilities in
full.
REQUIRED
Make necessary entries in General Journal relating to the liquidation of the firm till final
settlement of accounts of the liabilities and payment of partners.

solution # 6:
________ PARTNERSHIP
GENERAL JOURNAL
Date Particulars P/R Debit Credit
1 Cash 90,000
Realization 150,000
Merchandise inventory 40,000
Supplies 50,000
Fixed assets 150,000
(To record the sale of other assets on loss)

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Date Particulars P/R Debit Credit
2 Accounts payable 50,000
Notes payable 10,000
Cash 60,000
(To record the payment of liabilities)
3 Akhter Capital (150,000 x 2/3) 100,000
Hafeez Capital (150,000 x 1/3) 50,000
Realization 150,000
(To record the distribution of loss on realization)
4 Akhter Capital (140,000 – 100,000) 40,000
Hafeez Capital (100,000 – 50,000) 50,000
Cash (60,000 + 90,000 – 60,000) 90,000
(To record the distribution of remaining cash)

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practice questions
Question # 1: 2006 Regular – UOK
The partners of ABC firm agreed to liquidate the partnership. The condensed balance sheet at
May 31 was as shown below:
The partners share profits and losses equally, and all partners are personally solvent:-
Balance Sheet
Cash 6,000 Accounts payable 160,000
Other assets 294,000 A Capital 60,000
B Capital 50,000
C Capital 30,000
300,000 300,000
Assumptions:
(i) Other assets are sold Rs.249,000 cash.
(ii) Other assets are sold for Rs.114,000 cash.
REQUIRED
(i) Prepare a liquidation summary under assumption (i).
(ii) Prepare journal entries to record liquidation under assumption (ii).

Question # 2: 2007 Private – UOK

Aziz, Bilal and Chand were partners sharing profits and losses equally. They decided to liquidate
their business. Prior to liquidation, the balance sheet of the firm showed as under:
BALANCE SHEET
ASSETS EQUITIES
Cash 50,000 A/c. payable 300,000
A/c. receivable 200,000 Aziz Capital 200,000
Merchandise 150,000 Bilal Capital 170,000
Furniture 300,000 Chand Capital 30,000
The accounts receivable realized Rs.170,000; merchandise was sold for Rs.210,000 and
furniture was sold for Rs.150,000. All partners are solvent and can contribute any amount
towards their deficiency, if any.
REQUIRED
(1) Give in General Journal entries relating to the liquidation of the firm till final settlement
of the accounts of the liabilities and payment to partners.
(2) Set up cash account and partners’ capital accounts and show all posting therein.

Question # 3: 2004 Regular – UOK

Azam, Akram and Anwar were partners in a firm. They shared profits and losses in the ratio of
2:2:1. On June 30, 2003, they decided to liquidate the firm. Before the liquidation, the balance
sheet of the firm was as under:
BALANCE SHEET
AS ON JUNE 30, 2003
ASSETS EQUITIES
Cash 40,000 Notes payable 7,500
Other assets 110,000 Accounts payable 30,000
Azam – Capital 50,000
Akram – Capital 50,000
Anwar – Capital 12,500
150,000 150,000
The other assets were sold for Rs.3,000. Anwar was personally insolvent.
REQUIRED
(i) Prepare a liquidation summary.
(ii) Give journal entries to record the liquidation process.

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Question # 4: 2008 Private – UOK
On December 31, 2007, the following balance sheet of M/s. Shireen, Sumaira & Shabana
partners, who share profit and losses in the ratio of 1:2:3 respectively:
ASSETS EQUITIES
Cash 50,000 Accounts payable 70,000
A/c. receivable 60,000 Notes payable Nil
Mrds. Inventory 75,000 Capital – Shireen 90,000
Equipment 30,000 Capital – Sumaira 60,000
Furniture 15,000 Capital – Shabana 10,000
230,000 230,000
On this date they liquidate their business. Collected Rs.50,000 from the accounts receivable in
full settlement. Assets other than cash & furniture were sold out for cash Rs.133,000. The
furniture was taken over by Shireen at agreed market value of Rs.12,000. The creditors were
paid Rs.65,000 in full settlement.
REQUIRED
Give all necessary entries in the General Journal of the firm to record the above process of
liquidation assuming Shabana to be personally insolvent.

Question # 5: 2001 Regular & Private – UOK

PEE and Company balance sheet November 30, 2001:
Cash 30,000 Liabilities 60,000
Other assets 150,000 Pee, Capital 50,000
Tee, Capital 40,000
Cee, Capital 30,000
180,000 180,000
Pee, Tee and Cee share profit and loss in 3:2:1 ratio respectively. At November 30, they liquidate
their partnership business. Other assets are sold for Rs.24,000. Liabilities are paid in full. Cee is
personally solvent; Pee and Tee are both personally insolvent.
REQUIRED
(i) Determine and distribute loss or gain on realization and also capital deficiency, if any.
(ii) Prepare a liquidation summary.
(iii) Give all necessary entries in general journal to record the liquidation proceedings.

Question # 6: 2011 Regular – UOK

Ansari and Wilayat were partners sharing profits in the ratio of 3:2. On the date of dissolution,
their capitals: Ansari Rs.76,500; Wilayat Rs.43,000. The amount payable to creditors was
Rs.275,000. The balance of cash was Rs.7,600. The other assets realized Rs.254,300. The
expenses on dissolution were Rs.15,400. All partners were solvent.
REQUIRED
Prepare General Journal entries for the above transactions.

Question # 7: 2009 Regular – UOK

The IMKO Partnership is being liquidated. After all liabilities have been paid and all assets sold,
the following balances of the partners’ capital accounts are as follows:
Imran Rs.530,000 credit balance; Muneer Rs.160,000 debit balance; and Kamran Rs.420,000
credit balance. The partners share profit and losses as follows:
Imran 30%. Muneer 60% and Kamran 10%.
REQUIRED
If all assets are sold out and all liabilities are paid, estimate the cash and its distribution in
General Journal. Muneer is personally insolvent and nothing can be recovered from him. Show
necessary computations also.

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