What Is Dissolution Of Partnership?

Meaning:- When the relation between all the partners ofthe firm comes to an end, this is called dissolution ofthe firm.

Dissolution ofpartnership is different from thedissolution of firm. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution ofpartnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end. Modes of Dissolution:- A firm may be dissolved in any of the following ways:1. By Consent:- A partnership firm can be dissolved any time with the consent of all the partners whether thepartnership is at will or for a fixed duration. 2. By Agreement:- A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement. 3. Compulsory Dissolution:- In case, any of the following events take place then it becomes compulsory for the firm to (i) Insolvency of Partners:- In case all dissolute: the partners or all the partners except one become insolvent.

(ii) Unlawful Business:- In case the firm’s business become unlawful on the happening of a subsequent event. e.g. trading with alien country. 4. Dissolution on the happening of contingent event:- A firm may be dissolved on the happening of any of the following contingent event:-

(i) Expiry of Fixed Period:- If the firm is constituted for fixed period, then the firm is dissolves automatically. (ii) On achievement of specific task:- If the firm has been constituted for the achievement of specific task, on achievement (iii) (iv) Death Insolvency of of of that Partner:- Death Partner:- The of task, any of of any firm the of ceases partner the partner dissolves may to exist. the partnership. dissolve the firm.

insolvency

(v) Resignation of Partner:- Resignation by any of the partners dissolves the partnership.

5. Dissolution By Notice:- In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. 6. Dissolution by Court:- The court may order for the dissolution of the firm on the following grounds:(i) Insanity of Partner:- On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind.

(ii) Incapacity of Partner:- If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner.

(iii) Misconduct of Partner:- If any partner other than partner suing is responsible for any loss to the firm, then the court may order for the dissolution of the firm.

(iv) Constant breach of agreement by partner:- The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement and it becomes impossible to continue the business with such partner.

(v) Transfer of Interest:- When any of the partner other than the suing partner transfers whole of its share to the third party for permanently.

(vi) Continuous Losses:- The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm.

(vii) Just and Equitable:- The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners. Category: Business, Business & Finance, Business Law Print This Page

One Comment on “What Is Dissolution Of Partnership?”
g naveen babu wrote: A partner in a partnership firm signed on the partnership deed as an outgoing partner. But the remaining partnersrefused to sign. What is the way for the incoming partner to get it signed by them?

Dissolution Of Partnership
Apartnershipmay be dissolved by mutual consent, by expiration of predetermined time, by death of one of the partners, by insanity, by the bankruptcy of either partner, or by the court for any good cause, such as dishonesty of one partner against the rest, or incapacity caused by habitual drunkenness or conviction of any crime. A partner may withdraw at any time if no time for the continuation of the partnership is mentioned in the articles of agreement, but he must give due notice of his intention to the other partners.

If the time for the continuance of the partnership is mentioned, a partner can nevertheless withdraw at any time, but he is responsible to the firm fordamagescaused by the breach of his promise. If a partner dies the surviving partners alone have the right to settle up the business. To his heirs and legal representatives they need only to render an account of the business. Notice To Be Given Upon the dissolution of a partnership by mutual consent it should be indorsed on the articles of copartnership and a notice given in some prominent newspaper. Special notice should also be sent to each one of the creditors of the firm. Authority of Partners- As a general rule the whole firm and each member of it is bound by the acts and contracts of one partner, because in law the act or contract of one is regarded as the act of all. Each is regarded as the agent of all without any express authority being given. Thus,loans, purchases,sales,assignments, pledges, or mortgages effected by one partner on the partnership account, and with good faith in the third party, are binding on all the firm. So is also release by one a release; notice to one is notice to all; demand of one is demand of all. In matters, however, not connected with the partnership, but intended for his own personalinterests, the firm is not bound. Liability Of The Several Partners For thepaymentof partnership debts the property of the firm, both real and personal, as also that of each individual partner, is held responsible for amount of the unpaid partnership debt. Individual Debts Of Partners A partner having individual debts makes the firm liable for such debts for his interest in the firm after the firm debts are deducted, the firm liabilities always having precedence. Liabilities Of A New Partner A new partner entering a firm cannot be held for firm debts contracted previous to his admission. Sale Of Partner's Interest An assignment of interest by one partner must be assented to by the other partner or partners.

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Dissolution of partnership vs. Dissolution of firm. Dissolution of partnership and Dissolution of firm are two different terms. Dissolution of partnership means termination of existing partnership agreement and the formation of a new aggreement which can be due to any reason like admission of a new partner or death or retirement of an old partner. In the case of dissolution of partnership the remaining partners may agree to carry on the business under a new agreement. Whereas Dissolution

of Partnership firm means that the firm is closing down its business. In the case of dissolution of firm the Assets of the business are sold, Liabilities are paid off and the accounts of the partners are settled out of the remaining amount. Dissolution of partnership Partnership is dissolved in the following circumstances: 1) At the time of admission of a new partner; 2) On the retirement/death of an old partner; 3) At the time of change in profit sharing ratio among existing partners; 4) If any partner is declared insolvent; 5) On the expulsion of any partner; 6) On the expiry of the pariod of partnership. Thus this is clear from the above discussion that in the case of dissolution of the partnership the firm may continue under a new agreement whereas in the case of dissolution of partnership firm the business of the firm comes to an end.

PARTNERSHIP DISSOLUTION AGREEMENT By signing this agreement ("Agreement") the Partners of {name of Partnership and/or business), henceforth known as "Partnership" acknowledge and consent to dissolving said Partnership on the {date} of {month}, {year}.

The names of the Partners in this Partnership are as follows: {list of names of Partners}

The previously listed Partners undersign this Agreement and acknowledge and agree to the following provisions:

LIQUIDATING PARTNER. The Partners agree that {Name} will be named the "Liquidating Partner." As such, {Name} will be responsible for {details on what is expected from the Liquidating Partner, including determining liabilities and assets, distributing the assets,

dealing with taxes, etc.} . Partners may also mutually agree upon a separate representative to act on their behalf in this matter.

SELLING PARTNER. {If this is not a complete dissolution of the Partnership, and only one partner, or some of the partners, are leaving, here is where you enter information on who the selling partner is, who will be purchasing the selling partner's interest, what the cost of the interest is, etc.} .

INVENTORY. The Liquidating Partner, or other representative agreed upon by the Partners, will be responsible for determining the extent of the inventory, if any, of the Partnership. Liquidating Partner or representative will also be responsible for determining what will become of the inventory. Liquidating Partner has the right to sell and/or otherwise distribute the inventory, particularly if doing so will allow Partnership to diminish its liabilities and/or debts.

STATEMENT OF ACCOUNT. Liquidating Partner, or other representative, will provide all Partners with a Statement of Account for the Partnership. Said Statement will include a complete list of inventory, as well as any assets, liabilities, and/or debts belonging to the company. Statement of Account will become a matter of record in the Partnership's books, and Partners may access said books according to the rules listed in the original Partnership Agreement.

ALLOCATION OF LIABILITIES AND/OR DEBTS. Liquidating Partner, or other representative, shall determine, through the course of evaluating inventory and completing the Statement of Account, any liabilities and/or debts the Partnership has incurred. Liquidating Partner, or other representative, shall then use the appropriate means to rectify said liabilities and/or assets. If there is a provision in the original Partnership Agreement for this procedure, Liquidating Partner must follow that Agreement. If not, Liquidating Partner, by virtue of his/her position, has the right to take care of any liabilities and/or debts in the most efficient and positive manner possible for the Partnership.

DISTRIBUTION OF ASSETS. Liquidating Partner, or other representative, will distribute the assets, less any liabilities or debts, to the Partners in the manner established by the original Partnership Agreement. If no such provision was included in the Partnership Agreement, Partners must agree to a method for distribution. If no agreement is possible, Partners agree to take the matter to a third-party arbitrator for settlement.

TAX OBLIGATIONS. Liquidating Partner, or other representative, shall determine the tax obligations of the Partnership and/or the Partners. Liquidating Partner, or other representative, shall then prepare and file all required tax forms and/or returns.

RELEASE. Each Partner releases all other partners from any and all known claims, actions, and demands arising as a result of the Partnership. Release does not prevent a Partner from bringing suit under this Dissolution Agreement, should this Agreement not be fulfilled according to the rules set forth.

INDEMNIFICATION. Partners agree to indemnify and hold harmless the Liquidating Partner from claims, damages, or obligations of any kind with regard to his/her duties in liquidating this Partnership, unless claims or losses come as a result of the Liquidating Partner's breach of contract and/or unethical behavior.

DISPUTES. Should the Partners have any disputes with regard to this Agreement, {description of what will be done, such as seeking a third party arbitrator}.

SEVERABILITY. If one or more sections of this Agreement are declared invalid, those sections are null and void, but all other sections remain enforceable.

JURISDICTION. This Agreement is bound by the laws and regulations of the State of {State Name}.

By signing below, the Partners agree to dissolve {Name of Partnership} freely and willingly, according to the terms listed above.

Dissolving a Partnership

Ending a partnership
Any partner can, subject to any agreement that's in place, end the partnership and effectively bring the business to a close. Partnerships may be dissolved when:

   

the term of the partnership has expired one partner has given notice to the other partner(s) the partnership is now illegal e.g. one partner can no longer legally own a business there is a court order

 there is a death of a partner or the business has gone bankrupt. When a partnership is dissolved or a partner retires, according to the Partnership Act 1958 (s41), a notice must be placed in a Government Gazette and in at least one newspaper circulating in each district in which the business operates.
Watch out! If all the partner(s) are not in agreement about the dissolution the retiring partner may continue to be liable for debts and defaults if the business continues to be run by the remaining partner(s). A retiring partner should remove their name from the Register of Business names, and give notice within a month to Consumer Affairs Victoria (CAV) providing details of the end of ownership of the Business Name. It is a requirement under the Business Names Act 1962 that all persons who were the owners immediately before the end of ownership by the retiring owner sign the form. If the notice is not signed by the remaining partner(s), the retiring partner will continue to be at risk of being sued for debts and defaults of the remaining partner(s) after the dissolution. In the absence of a written agreement, S48 of the Partnership Act 1958 sets out the rules how the assets of the business are to be disposed of.

Ending a Limited Partnership
There is a different process for ending a limited partnership. To end a limited partnership you need to notify CAV using Form P6 (see External Links) within seven days of ending a limited partnership. There are three ways a limited partnership can end:

changing from being a Limited Partnership: a limited partnership can be ended only when it has no more limited partners. This means all limited partners take on unlimited liability or leave the partnership. It also requires all the partners to agree to change the business from being a limited partnership to a partnership in which all partners equally share in the management and liabilities of the business.

dissolving a Limited Partnership: subject to the terms of the partnership agreement, there are certain restrictions when dissolving a limited partnership. A limited partner cannot dissolve a limited partnership by issuing a notice on their own The general partner(s) or the other limited partner(s) cannot dissolve a limited partnership on the basis that the limited partner:

o o

has allowed their share of the partnership property to be used as collateral (charged for) debts outside of the partnership has died

o o o 

has become bankrupt has retired is a body corporate and has become dissolved.

winding up a Limited Partnership: When the partners agree to wind up a limited partnership, it

must be carried out by the general partners, unless a Court or Tribunal orders differently. For more information on dissolution of a Limited Partnership contact CAV (see External Links).

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D I S S O L U T I O N O F P A R T N E R S

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U N I T 3 D I S S O L U T I O N O F P A R T N E R S H I P

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 I N T R O D U C T I O N

W h e n t h e b u si n e ss of t h e f i r m i s c l ose d d o w n

a n d t h e r e l a t i on of p a r t n e r s c om e s t o a n e n d , t h e f i r m i s sa i d t o h a v e

b e e n d i ssol v e d . T h e r e i s a d i st i n c t i on b e t w e e n t h e d i ssol u t i on o f p a r t n

e r sh i p a n d d i ssol u t i on of f i r m . W h e n on e or m or e p a r t n e r s se v e r t h e i r c on

n e c t i on s w i t h t h e f i r m b u t t h e r e m a i n i n g p a r t n e r s c on t i n u e t o c a r r y

on b u si n e ss, i t i s t h e d i ssol u t i on o f p a r t n e r sh i p . B u t w h e n t h e r e i s a

c o m p l e t e b r e a k d ow n of r e l a t i on s a m on g a l l t h e p a r t n e r s a n d t h e b u si n e ss

i s c l ose d d ow n , i t i s t e r m e d a s d i ssol u t i on l f t h e f i r m , i n t h i s c h a p t

e r ; w e sh a l l d e a l w i t h a c c ou n t s of t h e r e l a t i on sh i p w h e n t h e f i r m i

s d i ssol v e d .  D I S S O L U T I O N O F P A R T N E R S H I P A N D F I R M :

A t t h i s st a g e , l

e t u s m a k e c l e a r t h e m e a n i n g of “D i ssol u t i on of f i r m ” a n d “D i ssol u t i on of P a

r t n e r sh i p ”. A c c or d i n g t o S e c t i on 3 9 o f t h e I n d i a n p a r t n e r sh i p A c t , “

T h e d i ssol u t i on o f P a r t n e r sh i p b e t w e e n a l l t h e p a r t n e r s of a f i r m i

s c a l l e d t h e d i ssol u t i on of f i r m . ” T h u s d i ssol u t i on of t h e f i r m m e a n s t h e c om

p l e t e a n d t ot a l c e ssa t i on o f l e g a l r e l a t i on s a m o n g st a l l p a r t n e r s i n d

i ssol u t i on of f i r m s, t h e b u si n e ss of p a r t n e r sh i p i s c l ose d a n d a f t e r p a y m e n t

o f a l l l i a b i l i t i e s, t h e c a p i t a l i s r e t u r n e d t o p a r t n e r s. B u t i n c a

s e of r e t i r e m e n t , d e a t h or i n sol v e n c y of a p a r t n e r , i f t h e r e m a i n i

n g p a r t n e r s c on t i n u e t h e ol d b u si n e ss of t h e f i r m , t h e r e i s d i ssol u t i on o

f p a r t n e r sh i p . I n t h i s c a s e t h e f i r m i s n ot d i ssol v e d b u t , on l y f i r

m i s r e c on s t i t u t e d , I n sh or t , d i ssol u t i on o f p a r t n e r sh i p d oe s n o t n e c e ssa

r i l y i n v ol v e t h e d i ssol u t i on o f f i r m b u t d i ssol u t i on of f i r m i s n e c e ssa r y

i n v ol v e s d i ssol u t i on of p a r t n e r sh i p .  C I R C U M S T A N C E S O F D I S S O L U T I O N :

T h e d i ssol u t i on of p a r t n e r sh i p t a k e s p l a c e u n d e r t h e f ol l ow i n g c i r c u m

st a n c e s . a ) W h e n t h e f i r m w a s c on st i t u t e d f or a f i x e d t e r m , on t h e e x p

i r y of t h a t t e r m . b ) O n t h e c o m p l e t i on of p a r t i c u l a r v e n t u r e , i f c on

st i t u t e d f or a p u r p ose . c ) O n t h e d e a t h o f a p a r t n e r . d ) O n t h e i n sol v e n

c y o f a p a r t n e r . e ) O n t h e r e t i r e m e n t of a p a r t n e r . A f i r m i s d i ssol v e

d u n d e r t h e f ol l ow i n g c i r c u m st a n c e s: ( 1 ) W h e n a l l t h e p a r t n e r s a g r e e t

o d i ssol v e t h e f i r m . ( 2 ) W h e n a l l t h e p a r t n e r s of a l l p a r t n e r s e x c e p t on e

a r e d e c l a r e d i n sol v e n t . ( 3 ) W h e n a l l b u si n e ss o f t h e f i r m b e c om e s u n l a w

f u l .

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T P A T E L ( 4 ) W h e n t h e p a r t n e r sh i p i s a t w i l l , on a n y p a r t n e r g i v i n g

n ot i c e i n w r i t i n g t o a l l t h e ot h e r p a r t n e r s o f h i s i n t e n t i on t o d i ssol v e

t h e f i r m . ( 5 ) W h e n t h e c ou r t or d e r s t h e d i ssol u t i on of t h e f i r m . U n d e r t

h e f ol l ow i n g c i r c u m st a n c e s, t h e c ou r t w i l l or d e r t h e d i ssol u t i on of t h e

f i r m . ( a ) W h e n a p a r t n e r b e c om e s o f u n sou n d m i n d . ( b ) W h e n a p a r t n e r h a

s b e c om e p e r m a n e n t l y i n c a p a b l e of p e r f or m i n g d u t i e s ( c ) W h e n a p a r t n e

r i s g u i l t y o f m i sc on d u c t w h i c h i s l i k e l y t o a f f e c t b u si n e ss . ( d ) W h e

n a p a r t n e r p e r si st e n t l y c om m i t s b r e a c h of p a r t n e r sh i p a g r e e m e n t ( e ) W h

e n a p a r t n e r h a s t r a n sf e r r e d w h ol e of h i s i n t e r e st i n t h e f i r m t o a

t h i r d p a r t y ( f ) W h e n t h e b u si n e ss c a n n ot b e c a r r i e d on e x c e p t a t a

l oss. ( g ) O n a n y ot h e r g r ou n d w h i c h a p p e a r s t o t h e c ou r t j u st a n d e q u i t a b

l e .  M O D E O F S E T T L E M E N T O F A C C O U N T S :

W h e n a f i r m i s d i ssol v e d , t h e

a ss e t s a r e sol d of f a n d o u t of t h e p r o c e e d s t h e l i a b i l i t i e s of t h e f i

r m a r e p a i d of f , t h e n t h e su r p l u s i s a p p l i e d i n p a y m e n t o f p a r t n e r

‟ s l oa n , i f a n y . F i n a l l y , t h e c a p i t a l of t h e p a r t n e r s i s r e t u r n e d .

W h e n t h e r e i s a n a g r e e m e n t a m on g t h e p a r t n e r s a s t o t h e w a y i n w h i

c h t h e a c c ou n t s a r e t o b e se t t l e d , t h e a c c o u n t s sh ou l d b e se t t l e d a c c or

d i n g l y . I f t h e r e i s n o t su c h a g r e e m e n t , t h e p r ov i si on of s e c . 4 8 o f

t h e I n d i a n P a r t n e r sh i p A c t , 1 9 3 2 a p p l i e s. T h e sa i d p r ov i si on s a r e a s

f ol l ow s: I n s e t t l i n g t h e a c c ou n t s of a f i r m a f t e r d i ssol u t i on , t h e f ol l ow i n

g r u l e s sh a l l b e ob se r v e d , su b j e c t t o a g r e e m e n t b y t h e p a r t n e r s: a ) L osse s i

n c l u d i n g d e f i c i e n c i e s of c a p i t a l s h a l l b e p a i d f i r st ou t o f f p r o f i

t s, n e x t o u t of c a p i t a l a n d l a st l y , i f n e c e ssa r y b y t h e p a r t n e r s i

n d i v i d u a l l y i n t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e

p r o f i t s. b ) T h e a sse t s of t h e f i r m , i n c l u d i n g a n y s u m s c o n t r i b u t e d b y t

h e p a r t n e r s t o m a k e u p d e f i c i e n c i e s of c a p i t a l , sh a l l b e a p p l i e d i n

t h e f ol l ow i n g m a n n e r a n d or d e r : 1 ) I n t h e p a y i n g t h e d e b t s of t h e f

i r m t o t h i r d p a r t i e s. 2 ) I n p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s

d u e t o h i m f r om t h e f i r m f or a d v a n c e s a s d i st i n g u i sh e d f r om c a p i t a l . 3

) I n p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s d u e h i m on a c c ou n t of

c a p i t a l , a n d

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T E L 4 ) T h e r e si d u e , i f a n y , sh a l l b e d i v i d e d a m on g t h e p a r t n e r s i n

t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e p oi n t .  S T E P S T O

B E T A K E N O N D I S S O L U T I O N :

T h e a b o v e p r ov i si on s of t h e p a r t n e r sh i p

A c t su g g e st t h e f ol l ow i n g st e p s t o b e t a k e n o n d i ssol u t i on of t h e f i r m . 1 ) A

l l t h e a sse t s o f t h e f i r m , i n c l u d i n g g ood w i l l a r e sol d or d i sp ose d o f f i

n a n y o t h e r w a y ( E . g . a p a r t n e r m a y t a k e ov e r a n a sse t ) 2 ) T h e a m ou

n t so r e a l i z e d i s a p p l i e d i n p a y i n g of f t h i r d p a r t y l i a b i l i t i e s i n

t h e f i r st b a l a n c e . 3 ) I f a n y o n e or m or e p a r t n e r s h a v e a d v a n c e d l oa n

t o t h e f i r m i n a d d i t i on t o h i s c a p i t a l , t h e n t h e s e l oa n a r e r e p a i d

n e x t a f t e r r e p a y m e n t of t h i r d p a r t y l i a b i l i t i e s. 4 ) Now , p a r t n e r s w

i l l n e p a i d w h a t i s d u e t o t h e m o n c a p i t a l a c c ou n t s. I f t h e su r p l u

s i s n ot e n ou g h t o r e t u r n t h e f u l l a m ou n t of c a p i t a l , t h e n t h e p a r t n e

r a r e p a i d r a t a b l y 5 ) S u r p l u s, i f a n y , l e f t a f t e r r e t u r n i n g c a p i t

a l s i s p a i d t o t h e p a r t n e r s i n t h e i r p r o f i t sh a r i n g r a t i o. F irm de bt s a nd priva t

e D e bt s : T h e l i a b i l i t y of p a r t n e r s i s u n l i m i t e d , i n t h e se n s e t h a t

t h e p r i v a t e p r op e r t y o f t h e p a r t n e r s c a n a l so b e u t i l i z e d f or p a y m e

n t of r i m ‟ s d e b t s . B u t , a c c or d i n g t o p a r t n e r sh i p A c t , p r i v a t e p r op e

r t y o f a n y p a r t n e r m u st b e u t i l i z e d f i r st i n p a y m e n t o f p a r t n e r

‟ s p r i v a t e d e b t s . S i m i l a r l y , f i r m ‟ s a ss e t s a r e f i r st a p p l i e d i n p a y

m e n t of f i r m ‟ s d e b t s a n d i f t h e r e i s a n y su r p l u s, t h e n t h e sh a r e of

a p a r t n e r i n t h e sa i d s u r p l u s c a n b e u t i l i z e d i n p a y m e n t of t

h e p r i v a t e d e b t s .  E N T R I E S O N D I S S O L U T I O N R E L I Z A T I O N A C C O I N T :

O n d i ssol u t i on o f a f i r m , b ook s o f a c c o u n t a r e c l ose d . F or t h i s p u r p ose a l

l a sse t s of t h e f i r m a r e d i sp ose d o f f a n d l i a b i l i t i e s p a i d o f f . F or c l

osi n g t h e a c c ou n t o f a sse t s a n d l i a b i l i t i e s, t h e „ R e a l i z a t i on A c c ou n t ‟

i s op e n e d . A l l t h e a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o t h i s a c c ou n t

. I n c a se of a d m i ssi on or r e t i r e m e n t o f a p a r t n e r , P r o f i t a n d l oss a c c

ou n t i s o p e n e d t o r e c or d t h e i n c r e a se a n d d e c r e a se i n t h e v a l u e o f

a sse t a n d l i a b i l i t i e s. R e a l i z a t i on a c c ou n t i s n ot n e c e ssa r y i n t h i s c a

s e a s t h e b u si n e ss i s t o c on t i n u e a n d a sse t s a r e n ot t o b e d i sp ose d of f . T h e b

ook v a l u e s of a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o r e a l i z a t i on a c c ou n t

, a s t h e se a c c ou n t s a r e t o b e c l ose d . A sse t s h a v e d e b i t b a l a n c e s, h e n c e t

h e y a r e c r e d i t e d i n or d e r t o c l os e t h ose a c c ou n t

4 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L a n d a r e sh ow n on d e b i t si d e o f r e a l i z a t i on a c c ou n t . S i m i l a r l y , l i

a b i l i t i e s h a v e c r e d i t b a l a n c e s a n d t h e y a r e d e b i t e d t o c l ose t h e m a n

d a r e t r a n sf e r r e d t o t h e c r e d i t of r e a l i z a t i on a c c ou n t . E N T E R I E S O N

D I S S O L U T I O N T R A N S A C T I O N A / C T O B E D E B I T E D A / C T O B E C R E D I T E D 1 . C l osi n

g a c c ou n t of a sse t s 2 . C l osi n g a c c ou n t l i a b i l i t i e s 3 . O n sa l e o f a sse t s 4 . O n

p a y m e n t s o f l i a b i l i t i e s 5 . O n p a y m e n t o f d i ssol u t i on e x p . 6 . D i st r i b u t i n g

r e a l i z a t i on p r of i t 7 . O n p a y m e n t o f p a r t n e r ‟ s l oa n 8 . D i st r i b u t i n g G e n

e r a l R e s e r v e 9 . S e t t l i n g p a r t n e r s C a p . ( D r . ) 1 0 . R e t u r n i n g

c a p i t a l s t

o p a r t n e r s R e a l i z a t i on A / c D r L i a b i l i t i e s A / c D r C a sh / B a n k A / c D r R e a l

i z a t i on A / c D r R e a l i z a t i on A / c D r R e a l i z a t i on A / c D r P a r t n e r ‟ s l oa n A /

c D r G e n e r a l r e s e r v e A / c D r C a sh / B a n k A / c D r P a r t n e r ‟ s c a p i t a l A / c

D r A sse t s A / c C r . R e a l i z a t i on A / c C r . R e a l i z a t i on A / c C r . C a sh / B a n k A / c

C r . C a sh / b a n k A / c C r . P a r t n e r ‟ s C a p i t a l A / c C r . C a sh / B a n k A / c C r . P a r

t n e r ‟ s c a p i t a l A / c C r . P a r t n e r ‟ s c a p i t a l A / c C r . C a sh / B a n k A / c C r .

R e m e m b e r t h a t w h i l e sol v i n g t h e e x a m p l e . A l l t h e b a l a n c e g i v e n

i n t h e B / s m u st b e t r a n sf e r r e d t o f ol l ow i n g f ou r a c c o u n t s. 1 ) R e a l i z a t

i on a c c ou n t 2 ) P a r t n e r ‟ s c a p i t a l a c c o u n t 3 ) C a s h / B a n k A c c ou n t 4 ) P a r t n e r ‟ s L

oa n A / c ( i f a n y ) R E A L I Z A T I O N A C C O U N T

5 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L P A R T I C U L A R R s . P A R T I C U L A R R s . T o su n d r y a sse t s ( E n t r y n o. 1 ) … .

L a n d a n d b u i l d i n g … .

P l a n t a n d m a c h i n e r y … .

S t o c k … .

D e b t or s T o C a s h / B a n k

P a y m e n t of l i a

b i l i t i e s … .

( E n t r y n o 4 A ) … .

C r e d i t or s … .

B i l l s p a y a b l e … .

C on t i n g e n t l i a b i l i t i e s. T o p a r

t n e r ‟ s C a p i t a l A / c

L i a b i l i t i e s t a k e n o v e r

( e n t r y n o. 4 B ) T o c a sh A c c ou n t

D i ssol u t i on e x p s. … . .

( e n t r y n o 5 ) T o b a l a n c e b e i n g p r of i t t r a n sf e r r e d t o p a r t n e r ‟ s c a

p i t a l A / c

( E n t r y n o. 6 A ) … … … … . . … … … … … … … . … … … … … B y su n d r y l

i a b i l i t i e s ( e n t r y 2 ) C r e d i t or s … . B i l l s p a y a b l e … . B a n k d r a f t s … . B y C a s h / B

a n k S a l e s p r oc e e d s o f A sse t s ( E n t r y 4 ) L a n d a n d b u i l d i n g … . P l a n t a n d m a c

h i n e r y … . B y P a r t n e r s C a p i t a l A c c ou n t A sse t s t a k e n o v e r … . ( E n t r y No. 3 B ) B y

B a l a n c e b e i n g l oss t r a n sf or m e d t o p a r t n e r s c a p i t a l a c c ou n t ( e n t r y n o. 6 B

) . . . . . . . . . . . . . … … … … … . … … … … … . … … … … … … … … … … . . . . . . . . . . . . . . . . . . . . . . . . G e n e r a

l l y t h e e x p e n se s a r e p a i d b y t h e f i r m . T h e sa m e i s d e b i t e d t o r e a l i

z a t i on a c c o u n t a n d c r e d i t e d t o C a s h A c c ou n t 1 ) A t t i m e s, o n e of t h e

p a r t n e r s m a y a g r e e t o b e a r t h e e x p e n se s. I n su c h c a se , i f t h e f i r m

p a y s t h e e x p e n se s, i t sh ou l d b e d e b i t e d t o c a p i t a l a c c ou n t of t h e sa i

d p a r t n e r a n d n ot t o t h e r e a l i z a t i on a c c ou n t ; t h e c or r e sp on d i n g c r e d i

t b e i n g g i v e n t o c a s h A c c ou n t . 2 ) I f t h e p a r t n e r u n d e r t a k e s t o b e a r t

h e e x p e n se s . A n d w h e n h e p a y s t h e e x p e n se s, t h e r e sh ou l d b e n o e n t r y

i n t h e f i r m ‟ s b ook s. 3 ) I t m a y b e a g r e e d u p on a m on g t h e p a r t n e r s t h a t

on e of t h e m w i l l b e p a i d a f i x e d r e m u n e r a t i on f or a t t e n d i n g t o t h

e d i ssol u t i on w or k , b u t h e i s r e q u i r e d t o b e a r t h e d i ssol u t i on e x p e n se s.

I n su c h a c i r c u m st a n c e , t h e f i x e d r e m u n e r a t i on i s d e b i t e d t o R e a l i z a

t i on A c c ou n t a n d c r e d i t e d t o h i s C a p i t a l a c c ou n t . No e n t r y i s m a d e i n

t h e f i r m ‟ s b ook w h e n h e ( p a r t n e r ) p a y s t h e r e a l i z a t i on e x p e n se s.

V

DISSOLUTION OF PARTNERSHIP FIRM — Document Transcript

CIRCUMSTANCES OF DISSOLUTION: The dissolution of partnership takes place under the following circumstances. a) When the firm was constituted for a fixed term, on the expiry of that term. b) On the completion of particular venture, if constituted for a purpose. c) On the death of a partner. d) On the insolvency of a partner. e) On the retirement of a partner. A firm is dissolved under the following circumstances: (1) When all the partners agree to dissolve the firm. (2) When all the partners of all partners except one are declared insolvent. (3) When all business of the firm becomes unlawful. DISSOLUTION OF PARTNERSHIP AND FIRM: At this stage, let us make clear the meaning of “Dissolution of firm” and “Dissolution of Partnership”. According to Section 39 of the Indian partnership Act, “The dissolution of Partnership between all the partners of a firm is called the dissolution of firm.” Thus dissolution of the firm means the complete and total cessation of legal relations amongst all partners in dissolution of firms, the business of partnership is closed and after payment of all liabilities, the capital is returned to partners. But in case of retirement, death or insolvency of a partner, if the remaining partners continue the old business of the firm, there is dissolution of partnership. In this case the firm is not dissolved but, only firm is re-constituted, In short, dissolution of partnership does not necessarily involve the dissolution of firm but dissolution of firm is necessary involves dissolution of partnership.  INTRODUCTION When the business of the firm is closed down and the relation of partners comes to an end, the firm is said to have been dissolved. There is a distinction between the dissolution of partnership and dissolution of firm. When one or more partners sever their connections with the firm but the remaining partners continue to carry on business, it is the dissolution of partnership. But when there is a complete breakdown of relations among all the partners and the business is closed down, it is termed as dissolution lf the firm, in this chapter; we shall deal with accounts of the relationship when the firm is dissolved. 1. 1|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL UNIT 3 DISSOLUTION OF PARTNERSHIP FIRM

MODE OF SETTLEMENT OF ACCOUNTS: When a firm is dissolved, the assets are sold off and out of the proceeds the liabilities of the firm are paid off, then the surplus is applied in payment of partner‟s loan, if any. Finally, the capital of the partners is returned. When there is an agreement among the partners as to the way in which the accounts are to be settled, the accounts should be settled accordingly. If there is not such agreement, the provision of sec. 48 of the Indian Partnership Act, 1932 applies. The said provisions are as follows: In settling the accounts of a firm after dissolution, the following rules shall be observed, subject to agreement by the partners: a) Losses including deficiencies of capital shall be paid first out off profits, next out of capital and lastly, if necessary by the partners individually in the proportion in which they were entitled to share profits. b) The assets of the firm, including any sums contributed by the partners

to make up deficiencies of capital, shall be applied in the following manner and order: 1) In the paying the debts of the firm to third parties. 2) In paying to each partner ratably what is due to him from the firm for advances as distinguished from capital. 3) In paying to each partner ratably what is due him on account of capital, and2. 2|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL (4) When the partnership is at will, on any partner giving notice in writing to all the other partners of his intention to dissolve the firm. (5) When the court orders the dissolution of the firm. Under the following circumstances, the court will order the dissolution of the firm. (a) When a partner becomes of unsound mind. (b) When a partner has become permanently incapable of performing duties (c) When a partner is guilty of misconduct which is likely to affect business. (d) When a partner persistently commits breach of partnership agreement (e) When a partner has transferred whole of his interest in the firm to a third party (f) When the business cannot be carried on except at a loss. (g) On any other ground which appears to the court just and equitable.

STEPS TO BE TAKEN ON DISSOLUTION: The above provisions of the partnership Act suggest the following steps to be taken on dissolution of the firm. 1) All the assets of the firm, including goodwill are sold or disposed off in any other way (E.g. a partner may take over an asset) 2) The amount so realized is applied in paying off third party liabilities in the first balance. 3) If any one or more partners have advanced loan to the firm in addition to his3. 3|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL 4) The residue, if any, shall be divided among the partners in the proportion in which they were entitled to share point. ENTRIES ON DISSOLUTION RELIZATION ACCOINT: On dissolution of a firm, books of account are closed. For this purpose all assets of the firm are disposed off and liabilities paid off. For closing the account of assets and liabilities, the „Realization Account‟ is opened. All the assets and liabilities are transferred to this account. In case of admission or retirement of a partner, Profit and loss account is opened to record the increase and decrease in the value of asset and liabilities. Realization account is not necessary in this case as the business is to continue and assets are not to be disposed off. The book values of assets and liabilities are transferred to realization account, as these accounts are to be closed. Assets have debit balances, hence they are credited in order to close those accountcapital, then these loan are repaid next after repayment of third party liabilities. 4) Now, partners will ne paid what is due to them on capital accounts. If the surplus is not enough to return the full amount of capital, then the partner are paid ratably 5) Surplus, if any, left after returning capitals is paid to the partners in their profit sharing ratio. Firm debts and private Debts: The liability of partners is unlimited, in the sense that the private property of the partners can also be utilized for payment of rim‟s debts. But, according to partnership Act, private property of any partner must be utilized first in payment of partner‟s private debts. Similarly, firm‟s assets are first applied in payment of firm‟s debts and if there is any surplus, then the share of a partner in the said surplus can be utilized in payment of the private debts.

4. 4|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL and are shown on debit side of realization account. Similarly, liabilities have credit balances and they are debited to close them and are transferred to the credit of realization account. ENTERIES ON DISSOLUTION TRANSACTION A/C TO BE DEBITED A/C TO BE CREDITED 1. Closing account of assets Realization A/c Dr Assets A/c Cr. 2. Closing account liabilities Liabilities A/c Dr Realization A/c Cr. 3. On sale of assets Cash/Bank A/c Dr Realization A/c Cr. 4. On payments of liabilities Realization A/c Dr Cash/Bank A/c Cr. 5. On payment of dissolution Realization A/c Dr Cash/bank A/c Cr. exp. 6. Distributing realization profit Realization A/c Dr Partner‟s Capital A/c Cr. 7. On payment of partner‟s loan Partner‟s loan A/c Dr Cash/Bank A/c Cr. 8. Distributing

General Reserve General reserve A/c Dr Partner‟s capital A/c Cr. 9. Settling partners Cap.(Dr.) Cash/Bank A/c Dr Partner‟s capital A/c Cr. 10. Returning capitals to Partner‟s capital A/c Dr Cash/Bank A/c Cr. partners Remember that while solving the example. All the balance given in the B/s must be transferred to following four accounts. 1) Realization account 2) Partner‟s capital account 3) Cash/Bank Account 4) Partner‟s Loan A/c (if any) REALIZATION ACCOUNT

5. 5|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL PARTICULAR Rs. PARTICULAR Rs.To sundry assets (Entry no.1)…. By sundry liabilities Land and building …. (entry 2) Plant and machinery …. Creditors …. Stock …. Bills payable …. Debtors ………….. Bank drafts …. .............To Cash/Bank By Cash/Bank Payment of liabilities …. Sales proceeds of Assets (Entry no 4A) …. (Entry 4) Creditors …. Land and building …. Bills payable …. Plant and machinery …. ……………. Contingent liabilities. …………… By Partners Capital AccountTo partner‟s Capital A/c Assets taken over …. Liabilities taken over ……. (Entry No.3B) ……………. (entry no. 4B) By Balance being lossTo cash Account transformed to partners capital Dissolution exps. ….. account …………… (entry no 5) (entry no.6B)To balance being profittransferred to partner‟s capitalA/c (Entry no. 6A) …………… …………… ........................Generally the expenses are paid by the firm. The same is debited to realization account and credited toCash Account 1) At times, one of the partners may agree to bear the expenses. In such case, if the firm pays the expenses, it should be debited to capital account of the said partner and not to the realization account; the corresponding credit being given to cash Account. 2) If the partner undertakes to bear the expenses. And when he pays the expenses, there should be no entry in the firm‟s books. 3) It may be agreed upon among the partners that one of them will be paid a fixed remuneration for attending to the dissolution work, but he is required to bear the dissolution expenses. In such a circumstance, the fixed remuneration is debited to Realization Account and credited to his Capital account. No entry is made in the firm‟s book when he (partner) pays the realization expenses.

GOOD WILL ON DISSOLUTION: Treatment of goodwill is similar to that of other assets on dissolution 1) When goodwill appears in the B/s on the date of dissolution, it should be transferred to the debit side of realization account. Any Amount realized on sale of goodwill should then be credited of realization account like any other asset. If nothing is realized, from goodwill; naturally no entry is made in the realization Account for its realization. 2) If goodwill does not appear in the books, the question of transferring to the debit side of realization account does not arise. When some thing is realized on sale of unrecorded goodwill, it should be credited to Realization account which is ultimately transferred to the credit side of the partner‟s Capital Accounts. Thus, partners get the benefit of goodwill.6. 6|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL

1 | P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A T E L

U

N I T 3 D I S S O L U T I O N O F P A R T N E R S H I P F I R M
 I N T R O D U C T I O N

W h

e n t h e b u si n e ss of t h e f i r m i s c l ose d d o w n a n d t h e r e l a t i on of p a r t n e

r s c om e s t o a n e n d , t h e f i r m i s sa i d t o h a v e b e e n d i ssol v e d . T h e r e i s a

d i st i n c t i on b e t w e e n t h e d i ssol u t i on o f p a r t n e r sh i p a n d d i ssol u t i on of f i r

m . W h e n on e or m or e p a r t n e r s se v e r t h e i r c on n e c t i on s w i t h t h e f i r m b u t

t h e r e m a i n i n g p a r t n e r s c on t i n u e t o c a r r y on b u si n e ss, i t i s t h e d i ssol u

t i on o f p a r t n e r sh i p . B u t w h e n t h e r e i s a c o m p l e t e b r e a k d ow n of r e l a

t i on s a m on g a l l t h e p a r t n e r s a n d t h e b u si n e ss i s c l ose d d ow n , i t i s t e r m e

d a s d i ssol u t i on l f t h e f i r m , i n t h i s c h a p t e r ; w e sh a l l d e a l w i t h a

c c ou n t s of t h e r e l a t i on sh i p w h e n t h e f i r m i s d i ssol v e d .  D I S S O L U T I O N O F

P A R T N E R S H I P A N D F I R M :

A t t h i s st a g e , l e t u s m a k e c l e a r t h e m e a

n i n g of “D i ssol u t i on of f i r m ” a n d “D i ssol u t i on of P a r t n e r sh i p ”. A c c or d i n g t o S e c

t i on 3 9 o f t h e I n d i a n p a r t n e r sh i p A c t , “ T h e d i ssol u t i on o f P a r t n e r sh i

p b e t w e e n a l l t h e p a r t n e r s of a f i r m i s c a l l e d t h e d i ssol u t i on of f i

r m . ” T h u s d i ssol u t i on of t h e f i r m m

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P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L

U N I T 3 D I S S O L U T I O N O F P A R T N E R S H I P F I R M
 I N T R O D U C T I O N

W h e n t h e b u si n e ss of t h e f i r m i s c l ose d d o w n a n d t h e r e l a t i on of p

a r t n e r s c om e s t o a n e n d , t h e f i r m i s sa i d t o h a v e b e e n d i ssol v e d . T h e r e

i s a d i st i n c t i on b e t w e e n t h e d i ssol u t i on o f p a r t n e r sh i p a n d d i ssol u t i on of

f i r m . W h e n on e or m or e p a r t n e r s se v e r t h e i r c on n e c t i on s w i t h t h e f i r m

b u t t h e r e m a i n i n g p a r t n e r s c on t i n u e t o c a r r y on b u si n e ss, i t i s t h e

d i ssol u t i on o f p a r t n e r sh i p . B u t w h e n t h e r e i s a c o m p l e t e b r e a k d ow n of

r e l a t i on s a m on g a l l t h e p a r t n e r s a n d t h e b u si n e ss i s c l ose d d ow n , i t i s

t e r m e d a s d i ssol u t i on l f t h e f i r m , i n t h i s c h a p t e r ; w e sh a l l d e a l w

i t h a c c ou n t s of t h e r e l a t i on sh i p w h e n t h e f i r m i s d i ssol v e d .  D I S S O L U T I O N

O F P A R T N E R S H I P A N D F I R M :

A t t h i s st a g e , l e t u s m a k e c l e a r t h e

m e a n i n g of “D i ssol u t i on of f i r m ” a n d “D i ssol u t i on of P a r t n e r sh i p ”. A c c or d i n g t

o S e c t i on 3 9 o f t h e I n d i a n p a r t n e r sh i p A c t , “ T h e d i ssol u t i on o f P a r t n

e r sh i p b e t w e e n a l l t h e p a r t n e r s of a f i r m i s c a l l e d t h e d i ssol u t i on

of f i r m . ” T h u s d i ssol u t i on of t h e f i r m m e a n s t h e c om p l e t e a n d t ot a l c e ssa t i

on o f l e g a l r e l a t i on s a m o n g st a l l p a r t n e r s i n d i ssol u t i on of f i r m s, t h e b

u si n e ss of p a r t n e r sh i p i s c l ose d a n d a f t e r p a y m e n t o f a l l l i a b i l i t i e s,

t h e c a p i t a l i s r e t u r n e d t o p a r t n e r s. B u t i n c a s e of r e t i r e m e n t , d e a t

h or i n sol v e n c y of a p a r t n e r , i f t h e r e m a i n i n g p a r t n e r s c on t i n u e t

h e ol d b u si n e ss of t h e f i r m , t h e r e i s d i ssol u t i on o f p a r t n e r sh i p . I n t h i s

c a s e t h e f i r m i s n ot d i ssol v e d b u t , on l y f i r m i s r e c on s t i t u t e d , I

n sh or t , d i ssol u t i on o f p a r t n e r sh i p d oe s n o t n e c e ssa r i l y i n v ol v e t h e d i ssol u t

i on o f f i r m b u t d i ssol u t i on of f i r m i s n e c e ssa r y i n v ol v e s d i ssol u t i on of p a

r t n e r sh i p .  C I R C U M S T A N C E S O F D I S S O L U T I O N :

T h e d i ssol u t i on of p a r t n

e r sh i p t a k e s p l a c e u n d e r t h e f ol l ow i n g c i r c u m st a n c e s . a ) W h e n t h e f i r m

w a s c on st i t u t e d f or a f i x e d t e r m , on t h e e x p i r y of t h a t t e r m . b ) O n

t h e c o m p l e t i on of p a r t i c u l a r v e n t u r e , i f c on st i t u t e d f or a p u r p ose . c )

O n t h e d e a t h o f a p a r t n e r . d ) O n t h e i n sol v e n c y o f a p a r t n e r . e ) O n

t h e r e t i r e m e n t of a p a r t n e r . A f i r m i s d i ssol v e d u n d e r t h e f ol l ow i n g

c i r c u m st a n c e s: ( 1 ) W h e n a l l t h e p a r t n e r s a g r e e t o d i ssol v e t h e f i r m . ( 2 )

W h e n a l l t h e p a r t n e r s of a l l p a r t n e r s e x c e p t on e a r e d e c l a r e d i n sol v

e n t . ( 3 ) W h e n a l l b u si n e ss o f t h e f i r m b e c om e s u n l a w f u l .

2 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L ( 4 ) W h e n t h e p a r t n e r sh i p i s a t w i l l , on a n y p a r t n e r g i v i n g n ot i c

e i n w r i t i n g t o a l l t h e ot h e r p a r t n e r s o f h i s i n t e n t i on t o d i ssol v e t h e

f i r m . ( 5 ) W h e n t h e c ou r t or d e r s t h e d i ssol u t i on of t h e f i r m . U n d e r t h e f

ol l ow i n g c i r c u m st a n c e s, t h e c ou r t w i l l or d e r t h e d i ssol u t i on of t h e f i r m .

( a ) W h e n a p a r t n e r b e c om e s o f u n sou n d m i n d . ( b ) W h e n a p a r t n e r h a s b e c om

e p e r m a n e n t l y i n c a p a b l e of p e r f or m i n g d u t i e s ( c ) W h e n a p a r t n e r i s

g u i l t y o f m i sc on d u c t w h i c h i s l i k e l y t o a f f e c t b u si n e ss . ( d ) W h e n a

p a r t n e r p e r si st e n t l y c om m i t s b r e a c h of p a r t n e r sh i p a g r e e m e n t ( e ) W h e n a

p a r t n e r h a s t r a n sf e r r e d w h ol e of h i s i n t e r e st i n t h e f i r m t o a t h i

r d p a r t y ( f ) W h e n t h e b u si n e ss c a n n ot b e c a r r i e d on e x c e p t a t a l oss. ( g )

O n a n y ot h e r g r ou n d w h i c h a p p e a r s t o t h e c ou r t j u st a n d e q u i t a b l e .  M

O D E O F S E T T L E M E N T O F A C C O U N T S :

W h e n a f i r m i s d i ssol v e d , t h e a ss e

t s a r e sol d of f a n d o u t of t h e p r o c e e d s t h e l i a b i l i t i e s of t h e f i r m a

r e p a i d of f , t h e n t h e su r p l u s i s a p p l i e d i n p a y m e n t o f p a r t n e r ‟ s l

oa n , i f a n y . F i n a l l y , t h e c a p i t a l of t h e p a r t n e r s i s r e t u r n e d . W h e

n t h e r e i s a n a g r e e m e n t a m on g t h e p a r t n e r s a s t o t h e w a y i n w h i c h t

h e a c c ou n t s a r e t o b e se t t l e d , t h e a c c o u n t s sh ou l d b e se t t l e d a c c or d i n g l

y . I f t h e r e i s n o t su c h a g r e e m e n t , t h e p r ov i si on of s e c . 4 8 o f t h e

I n d i a n P a r t n e r sh i p A c t , 1 9 3 2 a p p l i e s. T h e sa i d p r ov i si on s a r e a s f ol l ow

s: I n s e t t l i n g t h e a c c ou n t s of a f i r m a f t e r d i ssol u t i on , t h e f ol l ow i n g r u

l e s sh a l l b e ob se r v e d , su b j e c t t o a g r e e m e n t b y t h e p a r t n e r s: a ) L osse s i n c l u

d i n g d e f i c i e n c i e s of c a p i t a l s h a l l b e p a i d f i r st ou t o f f p r o f i t s, n

e x t o u t of c a p i t a l a n d l a st l y , i f n e c e ssa r y b y t h e p a r t n e r s i n d i v

i d u a l l y i n t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e p r o f

i t s. b ) T h e a sse t s of t h e f i r m , i n c l u d i n g a n y s u m s c o n t r i b u t e d b y t h e

p a r t n e r s t o m a k e u p d e f i c i e n c i e s of c a p i t a l , sh a l l b e a p p l i e d i n t h e

f ol l ow i n g m a n n e r a n d or d e r : 1 ) I n t h e p a y i n g t h e d e b t s of t h e f i r m

t o t h i r d p a r t i e s. 2 ) I n p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s d u e

t o h i m f r om t h e f i r m f or a d v a n c e s a s d i st i n g u i sh e d f r om c a p i t a l . 3 ) I n

p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s d u e h i m on a c c ou n t of c a p i

t a l , a n d

3 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L 4 ) T h e r e si d u e , i f a n y , sh a l l b e d i v i d e d a m on g t h e p a r t n e r s i n

t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e p oi n t .  S T E P S T O

B E T A K E N O N D I S S O L U T I O N :

T h e a b o v e p r ov i si on s of t h e p a r t n e r sh i p

A c t su g g e st t h e f ol l ow i n g st e p s t o b e t a k e n o n d i ssol u t i on of t h e f i r m . 1 ) A

l l t h e a sse t s o f t h e f i r m , i n c l u d i n g g ood w i l l a r e sol d or d i sp ose d o f f i

n a n y o t h e r w a y ( E . g . a p a r t n e r m a y t a k e ov e r a n a sse t ) 2 ) T h e a m ou

n t so r e a l i z e d i s a p p l i e d i n p a y i n g of f t h i r d p a r t y l i a b i l i t i e s i n

t h e f i r st b a l a n c e . 3 ) I f a n y o n e or m or e p a r t n e r s h a v e a d v a n c e d l oa n

t o t h e f i r m i n a d d i t i on t o h i s c a p i t a l , t h e n t h e s e l oa n a r e r e p a i d

n e x t a f t e r r e p a y m e n t of t h i r d p a r t y l i a b i l i t i e s. 4 ) Now , p a r t n e r s w

i l l n e p a i d w h a t i s d u e t o t h e m o n c a p i t a l a c c ou n t s. I f t h e su r p l u

s i s n ot e n ou g h t o r e t u r n t h e f u l l a m ou n t of c a p i t a l , t h e n t h e p a r t n e

r a r e p a i d r a t a b l y 5 ) S u r p l u s, i f a n y , l e f t a f t e r r e t u r n i n g c a p i t

a l s i s p a i d t o t h e p a r t n e r s i n t h e i r p r o f i t sh a r i n g r a t i o. F irm de bt s a nd priva t

e D e bt s : T h e l i a b i l i t y of p a r t n e r s i s u n l i m i t e d , i n t h e se n s e t h a t

t h e p r i v a t e p r op e r t y o f t h e p a r t n e r s c a n a l so b e u t i l i z e d f or p a y m e

n t of r i m ‟ s d e b t s . B u t , a c c or d i n g t o p a r t n e r sh i p A c t , p r i v a t e p r op e

r t y o f a n y p a r t n e r m u st b e u t i l i z e d f i r st i n p a y m e n t o f p a r t n e r

‟ s p r i v a t e d e b t s . S i m i l a r l y , f i r m ‟ s a ss e t s a r e f i r st a p p l i e d i n p a y

m e n t of f i r m ‟ s d e b t s a n d i f t h e r e i s a n y su r p l u s, t h e n t h e sh a r e of

a p a r t n e r i n t h e sa i d s u r p l u s c a n b e u t i l i z e d i n p a y m e n t of t

h e p r i v a t e d e b t s .  E N T R I E S O N D I S S O L U T I O N R E L I Z A T I O N A C C O I N T :

O n d i ssol u t i on o f a f i r m , b ook s o f a c c o u n t a r e c l ose d . F or t h i s p u r p ose a l

l a sse t s of t h e f i r m a r e d i sp ose d o f f a n d l i a b i l i t i e s p a i d o f f . F or c l

osi n g t h e a c c ou n t o f a sse t s a n d l i a b i l i t i e s, t h e „ R e a l i z a t i on A c c ou n t ‟

i s op e n e d . A l l t h e a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o t h i s a c c ou n t

. I n c a se of a d m i ssi on or r e t i r e m e n t o f a p a r t n e r , P r o f i t a n d l oss a c c

ou n t i s o p e n e d t o r e c or d t h e i n c r e a se a n d d e c r e a se i n t h e v a l u e o f

a sse t a n d l i a b i l i t i e s. R e a l i z a t i on a c c ou n t i s n ot n e c e ssa r y i n t h i s c a

s e a s t h e b u si n e ss i s t o c on t i n u e a n d a sse t s a r e n ot t o b e d i sp ose d of f . T h e b

ook v a l u e s of a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o r e a l i z a t i on a c c ou n t

, a s t h e se a c c ou n t s a r e t o b e c l ose d . A sse t s h a v e d e b i t b a l a n c e s, h e n c e t

h e y a r e c r e d i t e d i n or d e r t o c l os e t h ose a c c ou n t

4 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L a n d a r e sh ow n on d e b i t si d e o f r e a l i z a t i on a c c ou n t . S i m i l a r l y , l i

a b i l i t i e s h a v e c r e d i t b a l a n c e s a n d t h e y a r e d e b i t e d t o c l ose t h e m a n

d a r e t r a n sf e r r e d t o t h e c r e d i t of r e a l i z a t i on a c c ou n t . E N T E R I E S O N

D I S S O L U T I O N T R A N S A C T I O N A / C T O B E D E B I T E D A / C T O B E C R E D I T E D 1 . C l osi n

g a c c ou n t of a sse t s 2 . C l osi n g a c c ou n t l i a b i l i t i e s 3 . O n sa l e o f a sse t s 4 . O n

p a y m e n t s o f l i a b i l i t i e s 5 . O n p a y m e n t o f d i ssol u t i on e x p . 6 . D i st r i b u t i n g

r e a l i z a t i on p r of i t 7 . O n p a y m e n t o f p a r t n e r ‟ s l oa n 8 . D i st r i b u t i n g G e n

e r a l R e s e r v e 9 . S e t t l i n g p a r t n e r s C a p . ( D r . ) 1 0 . R e t u r n i n g

c a p i t a l s t

o p a r t n e r s R e a l i z a t i on A / c D r L i a b i l i t i e s A / c D r C a sh / B a n k A / c D r R e a l

i z a t i on A / c D r R e a l i z a t i on A / c D r R e a l i z a t i on A / c D r P a r t n e r ‟ s l oa n A /

c D r G e n e r a l r e s e r v e A / c D r C a sh / B a n k A / c D r P a r t n e r ‟ s c a p i t a l A / c

D r A sse t s A / c C r . R e a l i z a t i on A / c C r . R e a l i z a t i on A / c C r . C a sh / B a n k A / c

C r . C a sh / b a n k A / c C r . P a r t n e r ‟ s C a p i t a l A / c C r . C a sh / B a n k A / c C r . P a r

t n e r ‟ s c a p i t a l A / c C r . P a r t n e r ‟ s c a p i t a l A / c C r . C a sh / B a n k A / c C r .

R e m e m b e r t h a t w h i l e sol v i n g t h e e x a m p l e . A l l t h e b a l a n c e g i v e n

i n t h e B / s m u st b e t r a n sf e r r e d t o f ol l ow i n g f ou r a c c o u n t s. 1 ) R e a l i z a t

i on a c c ou n t 2 ) P a r t n e r ‟ s c a p i t a l a c c o u n t 3 ) C a s h / B a n k A c c ou n t 4 ) P a r t n e r ‟ s L

oa n A / c ( i f a n y ) R E A L I Z A T I O N A C C O U N T

5 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L P A R T I C U L A R R s . P A R T I C U L A R R s . T o su n d r y a sse t s ( E n t r y n o. 1 ) … .

L a n d a n d b u i l d i n g … .

P l a n t a n d m a c h i n e r y … .

S t o c k … .

D e b t or s T o C a s h / B a n k

P a y m e n t of l i a

b i l i t i e s … .

( E n t r y n o 4 A ) … .

C r e d i t or s … .

B i l l s p a y a b l e … .

C on t i n g e n t l i a b i l i t i e s. T o p a r

t n e r ‟ s C a p i t a l A / c

L i a b i l i t i e s t a k e n o v e r

( e n t r y n o. 4 B ) T o c a sh A c c ou n t

D i ssol u t i on e x p s. … . .

( e n t r y n o 5 ) T o b a l a n c e b e i n g p r of i t t r a n sf e r r e d t o p a r t n e r ‟ s c a

p i t a l A / c

( E n t r y n o. 6 A ) … … … … . . … … … … … … … . … … … … … B y su n d r y l

i a b i l i t i e s ( e n t r y 2 ) C r e d i t or s … . B i l l s p a y a b l e … . B a n k d r a f t s … . B y C a s h / B

a n k S a l e s p r oc e e d s o f A sse t s ( E n t r y 4 ) L a n d a n d b u i l d i n g … . P l a n t a n d m a c

h i n e r y … . B y P a r t n e r s C a p i t a l A c c ou n t A sse t s t a k e n o v e r … . ( E n t r y No. 3 B ) B y

B a l a n c e b e i n g l oss t r a n sf or m e d t o p a r t n e r s c a p i t a l a c c ou n t ( e n t r y n o. 6 B

) . . . . . . . . . . . . . … … … … … . … … … … … . … … … … … … … … … … . . . . . . . . . . . . . . . . . . . . . . . . G e n e r a

l l y t h e e x p e n se s a r e p a i d b y t h e f i r m . T h e sa m e i s d e b i t e d t o r e a l i

z a t i on a c c o u n t a n d c r e d i t e d t o C a s h A c c ou n t 1 ) A t t i m e s, o n e of t h e

p a r t n e r s m a y a g r e e t o b e a r t h e e x p e n se s. I n su c h c a se , i f t h e f i r m

p a y s t h e e x p e n se s, i t sh ou l d b e d e b i t e d t o c a p i t a l a c c ou n t of t h e sa i

d p a r t n e r a n d n ot t o t h e r e a l i z a t i on a c c ou n t ; t h e c or r e sp on d i n g c r e d i

t b e i n g g i v e n t o c a s h A c c ou n t . 2 ) I f t h e p a r t n e r u n d e r t a k e s t o b e a r t

h e e x p e n se s . A n d w h e n h e p a y s t h e e x p e n se s, t h e r e sh ou l d b e n o e n t r y

i n t h e f i r m ‟ s b ook s. 3 ) I t m a y b e a g r e e d u p on a m on g t h e p a r t n e r s t h a t

on e of t h e m w i l l b e p a i d a f i x e d r e m u n e r a t i on f or a t t e n d i n g t o t h

e d i ssol u t i on w or k , b u t h e i s r e q u i r e d t o b e a r t h e d i ssol u t i on e x p e n se s.

I n su c h a c i r c u m st a n c e , t h e f i x e d r e m u n e r a t i on i s d e b i t e d t o R e a l i z a

t i on A c c ou n t a n d c r e d i t e d t o h i s C a p i t a l a c c ou n t . No e n t r y i s m a d e i n

t h e f i r m ‟ s b ook w h e n h e ( p a r t n e r ) p a y s t h e r e a l i z a t i on e x p e n se s.

6 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L  G O O D W I L L O N D I S S O L U T I O N :

T r e a t m e n t of g oo d w i l l i s si m i l a r t

o t h a t o f ot h e r a sse t s on d i ssol u t i on 1 ) W h e n g ood w i l l a p p e a r s i n t h e B / s on t

h e d a t e of d i ssol u t i on , i t sh ou l d b e t r a n s f e r r e d t o t h e d e b i t si d e of r

e a l i z a t i on a c c ou n t . A n y A m ou n t r e a l i z e d o n sa l e o f g ood w i l l sh ou l d t h e

n b e c r e d i t e d of r e a l i z a t i on a c c ou n t l i k e a n y ot h e r a sse t . I f n ot h i n

g i s r e a l i z e d , f r om g oo d w i l l ; n a t u r a l l y n o e n t r y i s m a d e i n t h e r e a

l i z a t i on A c c ou n t f or i t s r e a l i z a t i on . 2 ) I f g ood w i l l d oe s n o t a p p e a r i n t h

e b ook s, t h e q u e st i on o f t r a n s f e r r i n g t o t h e d e b i t si d e of r e a l i z a t i on

a c c ou n t d oe s n o t a r i se . W h e n som e t h i n g i s r e a l i z e d on s a l e of u n r e c or

d e d g ood w i l l , i t sh ou l d b e c r e d i t e d t o R e a l i z a t i on a c c ou n t w h i c h i s u

l t i m a t e l y t r a n sf e r r e d t o t h e c r e d i t si d e of t h e p a r t n e r ‟ s C a p i t a l

A c c ou n t s. T h u s, p a r t n e r s g e t t h e b e n e f i t o f g ood w i l l . ‹›
1

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DISSOLUTION OF PARTNERSHIP FIRM
by NIKET PATEL on Oct 02, 2011


THIS UNIT ALL CONTAINS IS DISSOLUTION OF PARTNERSHIP FIRM

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DISSOLUTION OF PARTNERSHIP FIRM — Document Transcript

DISSOLUTION OF PARTNERSHIP AND FIRM: At this stage, let us make clear the meaning of “Dissolution of firm” and “Dissolution of Partnership”. According to Section 39 of the Indian partnership Act, “The dissolution of Partnership between all the partners of a firm is called the dissolution of firm.” Thus dissolution of the firm means the complete and total cessation of legal relations amongst all partners in dissolution of firms, the business of partnership is closed and after payment of all INTRODUCTION When the business of the firm is closed down and the relation of partners comes to an end, the firm is said to have been dissolved. There is a distinction between the dissolution of partnership and dissolution of firm. When one or more partners sever their connections with the firm but the remaining partners continue to carry on business, it is the dissolution of partnership. But when there is a complete breakdown of relations among all the partners and the business is closed down, it is termed as dissolution lf the firm, in this chapter; we shall deal with accounts of the relationship when the firm is dissolved. 1. 1|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL UNIT 3 DISSOLUTION OF PARTNERSHIP FIRM CIRCUMSTANCES OF DISSOLUTION: The dissolution of partnership takes place under the following circumstances. a) When the firm was constituted for a fixed term, on the expiry of that term. b) On the completion of particular venture, if constituted for a purpose. c) On the death of a partner. d) On the insolvency of a partner. e) On the retirement of a partner. A firm is dissolved under the following circumstances: (1) When all the partners agree to dissolve the firm. (2) When all the partners of all partners except one are declared

insolvent. (3) When all business of the firm becomes unlawful.liabilities, the capital is returned to partners. But in case of retirement, death or insolvency of a partner, if the remaining partners continue the old business of the firm, there is dissolution of partnership. In this case the firm is not dissolved but, only firm is re-constituted, In short, dissolution of partnership does not necessarily involve the dissolution of firm but dissolution of firm is necessary involves dissolution of partnership.

MODE OF SETTLEMENT OF ACCOUNTS: When a firm is dissolved, the assets are sold off and out of the proceeds the liabilities of the firm are paid off, then the surplus is applied in payment of partner‟s loan, if any. Finally, the capital of the partners is returned. When there is an agreement among the partners as to the way in which the accounts are to be settled, the accounts should be settled accordingly. If there is not such agreement, the provision of sec. 48 of the Indian Partnership Act, 1932 applies. The said provisions are as follows: In settling the accounts of a firm after dissolution, the following rules shall be observed, subject to agreement by the partners: a) Losses including deficiencies of capital shall be paid first out off profits, next out of capital and lastly, if necessary by the partners individually in the proportion in which they were entitled to share profits. b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order: 1) In the paying the debts of the firm to third parties. 2) In paying to each partner ratably what is due to him from the firm for advances as distinguished from capital. 3) In paying to each partner ratably what is due him on account of capital, and2. 2|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL (4) When the partnership is at will, on any partner giving notice in writing to all the other partners of his intention to dissolve the firm. (5) When the court orders the dissolution of the firm. Under the following circumstances, the court will order the dissolution of the firm. (a) When a partner becomes of unsound mind. (b) When a partner has become permanently incapable of performing duties (c) When a partner is guilty of misconduct which is likely to affect business. (d) When a partner persistently commits breach of partnership agreement (e) When a partner has transferred whole of his interest in the firm to a third party (f) When the business cannot be carried on except at a loss. (g) On any other ground which appears to the court just and equitable.

ENTRIES ON DISSOLUTION RELIZATION ACCOINT: On dissolution of a firm, books of account are closed. For this purpose all assets of the firm are disposed off and liabilities paid off. For closing the account of assets and liabilities, the „Realization Account‟ is opened. All the assets and liabilities are transferred to this account. In case of admission or retirement of a partner, Profit and loss account is opened to record the increase and decrease in the value of asset and liabilities. Realization account is not necessary in this case as the business is to continue and assets are not to be disposed off. The book values of assets and liabilities are transferred to realization account, as these accounts are to be closed. Assets have debit balances, hence they are credited in order to close those account STEPS TO BE TAKEN ON DISSOLUTION: The above provisions of the partnership Act suggest the following steps to be taken on dissolution of the firm. 1) All the assets of the firm, including goodwill are sold or disposed off in any other way (E.g. a partner may take over an asset) 2) The amount so realized is applied in paying off third party liabilities in the first balance. 3) If any one or more partners have advanced loan to the firm in addition to his capital, then these loan are repaid next after repayment of third party liabilities. 4) Now, partners will ne paid what is due to them on capital accounts. If the surplus is not enough to return the full amount of capital, then the partner are paid ratably 5) Surplus, if any, left after returning capitals is paid to the partners in their profit sharing ratio. Firm debts and

private Debts: The liability of partners is unlimited, in the sense that the private property of the partners can also be utilized for payment of rim‟s debts. But, according to partnership Act, private property of any partner must be utilized first in payment of partner‟s private debts. Similarly, firm‟s assets are first applied in payment of firm‟s debts and if there is any surplus, then the share of a partner in the said surplus can be utilized in payment of the private debts. 3. 3|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL 4) The residue, if any, shall be divided among the partners in the proportion in which they were entitled to share point.

4. 4|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL and are shown on debit side of realization account. Similarly, liabilities have credit balances and they are debited to close them and are transferred to the credit of realization account. ENTERIES ON DISSOLUTION TRANSACTION A/C TO BE DEBITED A/C TO BE CREDITED 1. Closing account of assets Realization A/c Dr Assets A/c Cr. 2. Closing account liabilities Liabilities A/c Dr Realization A/c Cr. 3. On sale of assets Cash/Bank A/c Dr Realization A/c Cr. 4. On payments of liabilities Realization A/c Dr Cash/Bank A/c Cr. 5. On payment of dissolution Realization A/c Dr Cash/bank A/c Cr. exp. 6. Distributing realization profit Realization A/c Dr Partner‟s Capital A/c Cr. 7. On payment of partner‟s loan Partner‟s loan A/c Dr Cash/Bank A/c Cr. 8. Distributing General Reserve General reserve A/c Dr Partner‟s capital A/c Cr. 9. Settling partners Cap.(Dr.) Cash/Bank A/c Dr Partner‟s capital A/c Cr. 10. Returning capitals to Partner‟s capital A/c Dr Cash/Bank A/c Cr. partners Remember that while solving the example. All the balance given in the B/s must be transferred to following four accounts. 1) Realization account 2) Partner‟s capital account 3) Cash/Bank Account 4) Partner‟s Loan A/c (if any) REALIZATION ACCOUNT

5. 5|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL PARTICULAR Rs. PARTICULAR Rs.To sundry assets (Entry no.1)…. By sundry liabilities Land and building …. (entry 2) Plant and machinery …. Creditors …. Stock …. Bills payable …. Debtors ………….. Bank drafts …. .............To Cash/Bank By Cash/Bank Payment of liabilities …. Sales proceeds of Assets (Entry no 4A) …. (Entry 4) Creditors …. Land and building …. Bills payable …. Plant and machinery …. ……………. Contingent liabilities. …………… By Partners Capital AccountTo partner‟s Capital A/c Assets taken over …. Liabilities taken over ……. (Entry No.3B) ……………. (entry no. 4B) By Balance being lossTo cash Account transformed to partners capital Dissolution exps. ….. account …………… (entry no 5) (entry no.6B)To balance being profittransferred to partner‟s capitalA/c (Entry no. 6A) …………… …………… ........................Generally the expenses are paid by the firm. The same is debited to realization account and credited toCash Account 1) At times, one of the partners may agree to bear the expenses. In such case, if the firm pays the expenses, it should be debited to capital account of the said partner and not to the realization account; the corresponding credit being given to cash Account. 2) If the partner undertakes to bear the expenses. And when he pays the expenses, there should be no entry in the firm‟s books. 3) It may be agreed upon among the partners that one of them will be paid a fixed remuneration for attending to the dissolution work, but he is required to bear the dissolution expenses. In such a circumstance, the fixed remuneration is debited to Realization Account and credited to his Capital account. No entry is made in the firm‟s book when he (partner) pays the realization expenses.

GOOD WILL ON DISSOLUTION: Treatment of goodwill is similar to that of other assets on dissolution 1) When goodwill appears in the B/s on the date of dissolution, it should be transferred to the debit side of realization account. Any Amount realized on sale of goodwill should then be credited of realization account like any other asset. If nothing is realized, from

goodwill; naturally no entry is made in the realization Account for its realization. 2) If goodwill does not appear in the books, the question of transferring to the debit side of realization account does not arise. When some thing is realized on sale of unrecorded goodwill, it should be credited to Realization account which is ultimately transferred to the credit side of the partner‟s Capital Accounts. Thus, partners get the benefit of goodwill.6. 6|Page DISSOLUTION OF PARTNERSHIP NIKET PATEL
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T E L

U N I T 3 D I S S O L U T I O N O F P A R T N E R S H I P F I R M
 I N T R O D U C T I O N

W h e n t h e b u si n e ss of t h e f i r m i s c l ose d d o w n a n d t h e r e l a t i on of p

a r t n e r s c om e s t o a n e n d , t h e f i r m i s sa i d t o h a v e b e e n d i ssol v e d . T h e r e

i s a d i st i n c t i on b e t w e e n t h e d i ssol u t i on o f p a r t n e r sh i p a n d d i ssol u t i on of

f i r m . W h e n on e or m or e p a r t n e r s se v e r t h e i r c on n e c t i on s w i t h t h e f i r m

b u t t h e r e m a i n i n g p a r t n e r s c on t i n u e t o c a r r y on b u si n e ss, i t i s t h e

d i ssol u t i on o f p a r t n e r sh i p . B u t w h e n t h e r e i s a c o m p l e t e b r e a k d ow n of

r e l a t i on s a m on g a l l t h e p a r t n e r s a n d t h e b u si n e ss i s c l ose d d ow n , i t i s

t e r m e d a s d i ssol u t i on l f t h e f i r m , i n t h i s c h a p t e r ; w e sh a l l d e a l w

i t h a c c ou n t s of t h e r e l a t i on sh i p w h e n t h e f i r m i s d i ssol v e d .  D I S S O L U T I O N

O F P A R T N E R S H I P A N D F I R M :

A t t h i s st a g e , l e t u s m a k e c l e a r t h e

m e a n i n g of “D i ssol u t i on of f i r m ” a n d “D i ssol u t i on of P a r t n e r sh i p ”. A c c or d i n g t

o S e c t i on 3 9 o f t h e I n d i a n p a r t n e r sh i p A c t , “ T h e d i ssol u t i on o f P a r t n

e r sh i p b e t w e e n a l l t h e p a r t n e r s of a f i r m i s c a l l e d t h e d i ssol u t i on

of f i r m . ” T h u s d i ssol u t i on of t h e f i r m m e a n s t h e c om p l e t e a n d t ot a l c e ssa t i

on o f l e g a l r e l a t i on s a m o n g st a l l p a r t n e r s i n d i ssol u t i on of f i r m s, t h e b

u si n e ss of p a r t n e r sh i p i s c l ose d a n d a f t e r p a y m e n t o f a l l l i a b i l i t i e s,

t h e c a p i t a l i s r e t u r n e d t o p a r t n e r s. B u t i n c a s e of r e t i r e m e n t , d e a t

h or i n sol v e n c y of a p a r t n e r , i f t h e r e m a i n i n g p a r t n e r s c on t i n u e t

h e ol d b u si n e ss of t h e f i r m , t h e r e i s d i ssol u t i on o f p a r t n e r sh i p . I n t h i s

c a s e t h e f i r m i s n ot d i ssol v e d b u t , on l y f i r m i s r e c on s t i t u t e d , I

n sh or t , d i ssol u t i on o f p a r t n e r sh i p d oe s n o t n e c e ssa r i l y i n v ol v e t h e d i ssol u t

i on o f f i r m b u t d i ssol u t i on of f i r m i s n e c e ssa r y i n v ol v e s d i ssol u t i on of p a

r t n e r sh i p .  C I R C U M S T A N C E S O F D I S S O L U T I O N :

T h e d i ssol u t i on of p a r t n

e r sh i p t a k e s p l a c e u n d e r t h e f ol l ow i n g c i r c u m st a n c e s . a ) W h e n t h e f i r m

w a s c on st i t u t e d f or a f i x e d t e r m , on t h e e x p i r y of t h a t t e r m . b ) O n

t h e c o m p l e t i on of p a r t i c u l a r v e n t u r e , i f c on st i t u t e d f or a p u r p ose . c )

O n t h e d e a t h o f a p a r t n e r . d ) O n t h e i n sol v e n c y o f a p a r t n e r . e ) O n

t h e r e t i r e m e n t of a p a r t n e r . A f i r m i s d i ssol v e d u n d e r t h e f ol l ow i n g

c i r c u m st a n c e s: ( 1 ) W h e n a l l t h e p a r t n e r s a g r e e t o d i ssol v e t h e f i r m . ( 2 )

W h e n a l l t h e p a r t n e r s of a l l p a r t n e r s e x c e p t on e a r e d e c l a r e d i n sol v

e n t . ( 3 ) W h e n a l l b u si n e ss o f t h e f i r m b e c om e s u n l a w f u l .

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T E L ( 4 ) W h e n t h e p a r t n e r sh i p i s a t w i l l , on a n y p a r t n e r g i v i n g n ot i c

e i n w r i t i n g t o a l l t h e ot h e r p a r t n e r s o f h i s i n t e n t i on t o d i ssol v e t h e

f i r m . ( 5 ) W h e n t h e c ou r t or d e r s t h e d i ssol u t i on of t h e f i r m . U n d e r t h e f

ol l ow i n g c i r c u m st a n c e s, t h e c ou r t w i l l or d e r t h e d i ssol u t i on of t h e f i r m .

( a ) W h e n a p a r t n e r b e c om e s o f u n sou n d m i n d . ( b ) W h e n a p a r t n e r h a s b e c om

e p e r m a n e n t l y i n c a p a b l e of p e r f or m i n g d u t i e s ( c ) W h e n a p a r t n e r i s

g u i l t y o f m i sc on d u c t w h i c h i s l i k e l y t o a f f e c t b u si n e ss . ( d ) W h e n a

p a r t n e r p e r si st e n t l y c om m i t s b r e a c h of p a r t n e r sh i p a g r e e m e n t ( e ) W h e n a

p a r t n e r h a s t r a n sf e r r e d w h ol e of h i s i n t e r e st i n t h e f i r m t o a t h i

r d p a r t y ( f ) W h e n t h e b u si n e ss c a n n ot b e c a r r i e d on e x c e p t a t a l oss. ( g )

O n a n y ot h e r g r ou n d w h i c h a p p e a r s t o t h e c ou r t j u st a n d e q u i t a b l e .  M

O D E O F S E T T L E M E N T O F A C C O U N T S :

W h e n a f i r m i s d i ssol v e d , t h e a ss e

t s a r e sol d of f a n d o u t of t h e p r o c e e d s t h e l i a b i l i t i e s of t h e f i r m a

r e p a i d of f , t h e n t h e su r p l u s i s a p p l i e d i n p a y m e n t o f p a r t n e r ‟ s l

oa n , i f a n y . F i n a l l y , t h e c a p i t a l of t h e p a r t n e r s i s r e t u r n e d . W h e

n t h e r e i s a n a g r e e m e n t a m on g t h e p a r t n e r s a s t o t h e w a y i n w h i c h t

h e a c c ou n t s a r e t o b e se t t l e d , t h e a c c o u n t s sh ou l d b e se t t l e d a c c or d i n g l

y . I f t h e r e i s n o t su c h a g r e e m e n t , t h e p r ov i si on of s e c . 4 8 o f t h e

I n d i a n P a r t n e r sh i p A c t , 1 9 3 2 a p p l i e s. T h e sa i d p r ov i si on s a r e a s f ol l ow

s: I n s e t t l i n g t h e a c c ou n t s of a f i r m a f t e r d i ssol u t i on , t h e f ol l ow i n g r u

l e s sh a l l b e ob se r v e d , su b j e c t t o a g r e e m e n t b y t h e p a r t n e r s: a ) L osse s i n c l u

d i n g d e f i c i e n c i e s of c a p i t a l s h a l l b e p a i d f i r st ou t o f f p r o f i t s, n

e x t o u t of c a p i t a l a n d l a st l y , i f n e c e ssa r y b y t h e p a r t n e r s i n d i v

i d u a l l y i n t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e p r o f

i t s. b ) T h e a sse t s of t h e f i r m , i n c l u d i n g a n y s u m s c o n t r i b u t e d b y t h e

p a r t n e r s t o m a k e u p d e f i c i e n c i e s of c a p i t a l , sh a l l b e a p p l i e d i n t h e

f ol l ow i n g m a n n e r a n d or d e r : 1 ) I n t h e p a y i n g t h e d e b t s of t h e f i r m

t o t h i r d p a r t i e s. 2 ) I n p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s d u e

t o h i m f r om t h e f i r m f or a d v a n c e s a s d i st i n g u i sh e d f r om c a p i t a l . 3 ) I n

p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s d u e h i m on a c c ou n t of c a p i

t a l , a n d

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T E L 4 ) T h e r e si d u e , i f a n y , sh a l l b e d i v i d e d a m on g t h e p a r t n e r s i n

t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e p oi n t .  S T E P S T O

B E T A K E N O N D I S S O L U T I O N :

T h e a b o v e p r ov i si on s of t h e p a r t n e r sh i p

A c t su g g e st t h e f ol l ow i n g st e p s t o b e t a k e n o n d i ssol u t i on of t h e f i r m . 1 ) A

l l t h e a sse t s o f t h e f i r m , i n c l u d i n g g ood w i l l a r e sol d or d i sp ose d o f f i

n a n y o t h e r w a y ( E . g . a p a r t n e r m a y t a k e ov e r a n a sse t ) 2 ) T h e a m ou

n t so r e a l i z e d i s a p p l i e d i n p a y i n g of f t h i r d p a r t y l i a b i l i t i e s i n

t h e f i r st b a l a n c e . 3 ) I f a n y o n e or m or e p a r t n e r s h a v e a d v a n c e d l oa n

t o t h e f i r m i n a d d i t i on t o h i s c a p i t a l , t h e n t h e s e l oa n a r e r e p a i d

n e x t a f t e r r e p a y m e n t of t h i r d p a r t y l i a b i l i t i e s. 4 ) Now , p a r t n e r s w

i l l n e p a i d w h a t i s d u e t o t h e m o n c a p i t a l a c c ou n t s. I f t h e su r p l u

s i s n ot e n ou g h t o r e t u r n t h e f u l l a m ou n t of c a p i t a l , t h e n t h e p a r t n e

r a r e p a i d r a t a b l y 5 ) S u r p l u s, i f a n y , l e f t a f t e r r e t u r n i n g c a p i t

a l s i s p a i d t o t h e p a r t n e r s i n t h e i r p r o f i t sh a r i n g r a t i o. F irm de bt s a nd priva t

e D e bt s : T h e l i a b i l i t y of p a r t n e r s i s u n l i m i t e d , i n t h e se n s e t h a t

t h e p r i v a t e p r op e r t y o f t h e p a r t n e r s c a n a l so b e u t i l i z e d f or p a y m e

n t of r i m ‟ s d e b t s . B u t , a c c or d i n g t o p a r t n e r sh i p A c t , p r i v a t e p r op e

r t y o f a n y p a r t n e r m u st b e u t i l i z e d f i r st i n p a y m e n t o f p a r t n e r

‟ s p r i v a t e d e b t s . S i m i l a r l y , f i r m ‟ s a ss e t s a r e f i r st a p p l i e d i n p a y

m e n t of f i r m ‟ s d e b t s a n d i f t h e r e i s a n y su r p l u s, t h e n t h e sh a r e of

a p a r t n e r i n t h e sa i d s u r p l u s c a n b e u t i l i z e d i n p a y m e n t of t

h e p r i v a t e d e b t s .  E N T R I E S O N D I S S O L U T I O N R E L I Z A T I O N A C C O I N T :

O n d i ssol u t i on o f a f i r m , b ook s o f a c c o u n t a r e c l ose d . F or t h i s p u r p ose a l

l a sse t s of t h e f i r m a r e d i sp ose d o f f a n d l i a b i l i t i e s p a i d o f f . F or c l

osi n g t h e a c c ou n t o f a sse t s a n d l i a b i l i t i e s, t h e „ R e a l i z a t i on A c c ou n t ‟

i s op e n e d . A l l t h e a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o t h i s a c c ou n t

. I n c a se of a d m i ssi on or r e t i r e m e n t o f a p a r t n e r , P r o f i t a n d l oss a c c

ou n t i s o p e n e d t o r e c or d t h e i n c r e a se a n d d e c r e a se i n t h e v a l u e o f

a sse t a n d l i a b i l i t i e s. R e a l i z a t i on a c c ou n t i s n ot n e c e ssa r y i n t h i s c a

s e a s t h e b u si n e ss i s t o c on t i n u e a n d a sse t s a r e n ot t o b e d i sp ose d of f . T h e b

ook v a l u e s of a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o r e a l i z a t i on a c c ou n t

, a s t h e se a c c ou n t s a r e t o b e c l ose d . A sse t s h a v e d e b i t b a l a n c e s, h e n c e t

h e y a r e c r e d i t e d i n or d e r t o c l os e t h ose a c c ou n t

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T E L a n d a r e sh ow n on d e b i t si d e o f r e a l i z a t i on a c c ou n t . S i m i l a r l y , l i

a b i l i t i e s h a v e c r e d i t b a l a n c e s a n d t h e y a r e d e b i t e d t o c l ose t h e m a n

d a r e t r a n sf e r r e d t o t h e c r e d i t of r e a l i z a t i on a c c ou n t . E N T E R I E S O N

D I S S O L U T I O N T R A N S A C T I O N A / C T O B E D E B I T E D A / C T O B E C R E D I T E D 1 . C l osi n

g a c c ou n t of a sse t s 2 . C l osi n g a c c ou n t l i a b i l i t i e s 3 . O n sa l e o f a sse t s 4 . O n

p a y m e n t s o f l i a b i l i t i e s 5 . O n p a y m e n t o f d i ssol u t i on e x p . 6 . D i st r i b u t i n g

r e a l i z a t i on p r of i t 7 . O n p a y m e n t o f p a r t n e r ‟ s l oa n 8 . D i st r i b u t i n g G e n

e r a l R e s e r v e 9 . S e t t l i n g p a r t n e r s C a p . ( D r . ) 1 0 . R e t u r n i n g

c a p i t a l s t

o p a r t n e r s R e a l i z a t i on A / c D r L i a b i l i t i e s A / c D r C a sh / B a n k A / c D r R e a l

i z a t i on A / c D r R e a l i z a t i on A / c D r R e a l i z a t i on A / c D r P a r t n e r ‟ s l oa n A /

c D r G e n e r a l r e s e r v e A / c D r C a sh / B a n k A / c D r P a r t n e r ‟ s c a p i t a l A / c

D r A sse t s A / c C r . R e a l i z a t i on A / c C r . R e a l i z a t i on A / c C r . C a sh / B a n k A / c

C r . C a sh / b a n k A / c C r . P a r t n e r ‟ s C a p i t a l A / c C r . C a sh / B a n k A / c C r . P a r

t n e r ‟ s c a p i t a l A / c C r . P a r t n e r ‟ s c a p i t a l A / c C r . C a sh / B a n k A / c C r .

R e m e m b e r t h a t w h i l e sol v i n g t h e e x a m p l e . A l l t h e b a l a n c e g i v e n

i n t h e B / s m u st b e t r a n sf e r r e d t o f ol l ow i n g f ou r a c c o u n t s. 1 ) R e a l i z a t

i on a c c ou n t 2 ) P a r t n e r ‟ s c a p i t a l a c c o u n t 3 ) C a s h / B a n k A c c ou n t 4 ) P a r t n e r ‟ s L

oa n A / c ( i f a n y ) R E A L I Z A T I O N A C C O U N T

5 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L P A R T I C U L A R R s . P A R T I C U L A R R s . T o su n d r y a sse t s ( E n t r y n o. 1 ) … .

L a n d a n d b u i l d i n g … .

P l a n t a n d m a c h i n e r y … .

S t o c k … .

D e b t or s T o C a s h / B a n k

P a y m e n t of l i a

b i l i t i e s … .

( E n t r y n o 4 A ) … .

C r e d i t or s … .

B i l l s p a y a b l e … .

C on t i n g e n t l i a b i l i t i e s. T o p a r

t n e r ‟ s C a p i t a l A / c

L i a b i l i t i e s t a k e n o v e r

( e n t r y n o. 4 B ) T o c a sh A c c ou n t

D i ssol u t i on e x p s. … . .

( e n t r y n o 5 ) T o b a l a n c e b e i n g p r of i t t r a n sf e r r e d t o p a r t n e r ‟ s c a

p i t a l A / c

( E n t r y n o. 6 A ) … … … … . . … … … … … … … . … … … … … B y su n d r y l

i a b i l i t i e s ( e n t r y 2 ) C r e d i t or s … . B i l l s p a y a b l e … . B a n k d r a f t s … . B y C a s h / B

a n k S a l e s p r oc e e d s o f A sse t s ( E n t r y 4 ) L a n d a n d b u i l d i n g … . P l a n t a n d m a c

h i n e r y … . B y P a r t n e r s C a p i t a l A c c ou n t A sse t s t a k e n o v e r … . ( E n t r y No. 3 B ) B y

B a l a n c e b e i n g l oss t r a n sf or m e d t o p a r t n e r s c a p i t a l a c c ou n t ( e n t r y n o. 6 B

) . . . . . . . . . . . . . … … … … … . … … … … … . … … … … … … … … … … . . . . . . . . . . . . . . . . . . . . . . . . G e n e r a

l l y t h e e x p e n se s a r e p a i d b y t h e f i r m . T h e sa m e i s d e b i t e d t o r e a l i

z a t i on a c c o u n t a n d c r e d i t e d t o C a s h A c c ou n t 1 ) A t t i m e s, o n e of t h e

p a r t n e r s m a y a g r e e t o b e a r t h e e x p e n se s. I n su c h c a se , i f t h e f i r m

p a y s t h e e x p e n se s, i t sh ou l d b e d e b i t e d t o c a p i t a l a c c ou n t of t h e sa i

d p a r t n e r a n d n ot t o t h e r e a l i z a t i on a c c ou n t ; t h e c or r e sp on d i n g c r e d i

t b e i n g g i v e n t o c a s h A c c ou n t . 2 ) I f t h e p a r t n e r u n d e r t a k e s t o b e a r t

h e e x p e n se s . A n d w h e n h e p a y s t h e e x p e n se s, t h e r e sh ou l d b e n o e n t r y

i n t h e f i r m ‟ s b ook s. 3 ) I t m a y b e a g r e e d u p on a m on g t h e p a r t n e r s t h a t

on e of t h e m w i l l b e p a i d a f i x e d r e m u n e r a t i on f or a t t e n d i n g t o t h

e d i ssol u t i on w or k , b u t h e i s r e q u i r e d t o b e a r t h e d i ssol u t i on e x p e n se s.

I n su c h a c i r c u m st a n c e , t h e f i x e d r e m u n e r a t i on i s d e b i t e d t o R e a l i z a

t i on A c c ou n t a n d c r e d i t e d t o h i s C a p i t a l a c c ou n t . No e n t r y i s m a d e i n

t h e f i r m ‟ s b ook w h e n h e ( p a r t n e r ) p a y s t h e r e a l i z a t i on e x p e n se s.

6 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L  G O O D W I L L O N D I S S O L U T I O N :

T r e a t m e n t of g oo d w i l l i s si m i l a r t

o t h a t o f ot h e r a sse t s on d i ssol u t i on 1 ) W h e n g ood w i l l a p p e a r s i n t h e B / s on t

h e d a t e of d i ssol u t i on , i t sh ou l d b e t r a n s f e r r e d t o t h e d e b i t si d e of r

e a l i z a t i on a c c ou n t . A n y A m ou n t r e a l i z e d o n sa l e o f g ood w i l l sh ou l d t h e

n b e c r e d i t e d of r e a l i z a t i on a c c ou n t l i k e a n y ot h e r a sse t . I f n ot h i n

g i s r e a l i z e d , f r om g oo d w i l l ; n a t u r a l l y n o e n t r y i s m a d e i n t h e r e a

l i z a t i on A c c ou n t f or i t s r e a l i z a t i on . 2 ) I f g ood w i l l d oe s n o t a p p e a r i n t h

e b ook s, t h e q u e st i on o f t r a n s f e r r i n g t o t h e d e b i t si d e of r e a l i z a t i on

a c c ou n t d oe s n o t a r i se . W h e n som e t h i n g i s r e a l i z e d on s a l e of u n r e c or

d e d g ood w i l l , i t sh ou l d b e c r e d i t e d t o R e a l i z a t i on a c c ou n t w h i c h i s u

l t i m a t e l y t r a n sf e r r e d t o t h e c r e d i t si d e of t h e p a r t n e r ‟ s C a p i t a l

A c c ou n t s. T h u s, p a r t n e r s g e t t h e b e n e f i t o f g ood w i l l . ‹›
1

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1 | P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K

E T P A T E L

U N I T 3 D I S S O L U T I O N O F P A R T N E R S H I P F I R M
 I N T R O D U C

T I O N

W h e n t h e b u si n e ss of t h e f i r m i s c l ose d d o w n a n d t h e r e l a t i

on of p a r t n e r s c om e s t o a n e n d , t h e f i r m i s sa i d t o h a v e b e e n d i ssol v e d . T

h e r e i s a d i st i n c t i on b e t w e e n t h e d i ssol u t i on o f p a r t n e r sh i p a n d d i ssol u

t i on of f i r m . W h e n on e or m or e p a r t n e r s se v e r t h e i r c on n e c t i on s w i t h t h e

f i r m b u t t h e r e m a i n i n g p a r t n e r s c on t i n u e t o c a r r y on b u si n e ss, i t i s

t h e d i ssol u t i on o f p a r t n e r sh i p . B u t w h e n t h e r e i s a c o m p l e t e b r e a k d

ow n of r e l a t i on s a m on g a l l t h e p a r t n e r s a n d t h e b u si n e ss i s c l ose d d ow n , i

t i s t e r m e d a s d i ssol u t i on l f t h e f i r m , i n t h i s c h a p t e r ; w e sh a l l d e

a l w i t h a c c ou n t s of t h e r e l a t i on sh i p w h e n t h e f i r m i s d i ssol v e d .  D I S S O L

U T I O N O F P A R T N E R S H I P A N D F I R M :

A t t h i s st a g e , l e t u s m a k e c l e a

r t h e m e a n i n g of “D i ssol u t i on of f i r m ” a n d “D i ssol u t i on of P a r t n e r sh i p ”. A c c or d

i n g t o S e c t i on 3 9 o f t h e I n d i a n p a r t n e r sh i p A c t , “ T h e d i ssol u t i on o f

P a r t n e r sh i p b e t w e e n a l l t h e p a r t n e r s of a f i r m i s c a l l e d t h e d i

ssol u t i on of f i r m . ” T h u s d i ssol u t i on of t h e f i r m m e a n s t h e c om p l e t e a n d t ot a l

c e ssa t i on o f l e g a l r e l a t i on s a m o n g st a l l p a r t n e r s i n d i ssol u t i on of f i r m s,

t h e b u si n e ss of p a r t n e r sh i p i s c l ose d a n d a f t e r p a y m e n t o f a l l l i a b i l

i t i e s, t h e c a p i t a l i s r e t u r n e d t o p a r t n e r s. B u t i n c a s e of r e t i r e m e n t

, d e a t h or i n sol v e n c y of a p a r t n e r , i f t h e r e m a i n i n g p a r t n e r s c on t

i n u e t h e ol d b u si n e ss of t h e f i r m , t h e r e i s d i ssol u t i on o f p a r t n e r sh i p . I

n t h i s c a s e t h e f i r m i s n ot d i ssol v e d b u t , on l y f i r m i s r e c on s t i t u

t e d , I n sh or t , d i ssol u t i on o f p a r t n e r sh i p d oe s n o t n e c e ssa r i l y i n v ol v e t h e

d i ssol u t i on o f f i r m b u t d i ssol u t i on of f i r m i s n e c e ssa r y i n v ol v e s d i ssol u t i

on of p a r t n e r sh i p .  C I R C U M S T A N C E S O F D I S S O L U T I O N :

T h e d i ssol u t i on of

p a r t n e r sh i p t a k e s p l a c e u n d e r t h e f ol l ow i n g c i r c u m st a n c e s . a ) W h e n t h

e f i r m w a s c on st i t u t e d f or a f i x e d t e r m , on t h e e x p i r y of t h a t t e r m

. b ) O n t h e c o m p l e t i on of p a r t i c u l a r v e n t u r e , i f c on st i t u t e d f or a p u

r p ose . c ) O n t h e d e a t h o f a p a r t n e r . d ) O n t h e i n sol v e n c y o f a p a r t n e r

. e ) O n t h e r e t i r e m e n t of a p a r t n e r . A f i r m i s d i ssol v e d u n d e r t h e f ol l

ow i n g c i r c u m st a n c e s: ( 1 ) W h e n a l l t h e p a r t n e r s a g r e e t o d i ssol v e t h e f i r m

. ( 2 ) W h e n a l l t h e p a r t n e r s of a l l p a r t n e r s e x c e p t on e a r e d e c l a r e d

i n sol v e n t . ( 3 ) W h e n a l l b u si n e ss o f t h e f i r m b e c om e s u n l a w f u l .

2 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L ( 4 ) W h e n t h e p a r t n e r sh i p i s a t w i l l , on a n y p a r t n e r g i v i n g n ot i c

e i n w r i t i n g t o a l l t h e ot h e r p a r t n e r s o f h i s i n t e n t i on t o d i ssol v e t h e

f i r m . ( 5 ) W h e n t h e c ou r t or d e r s t h e d i ssol u t i on of t h e f i r m . U n d e r t h e f

ol l ow i n g c i r c u m st a n c e s, t h e c ou r t w i l l or d e r t h e d i ssol u t i on of t h e f i r m .

( a ) W h e n a p a r t n e r b e c om e s o f u n sou n d m i n d . ( b ) W h e n a p a r t n e r h a s b e c om

e p e r m a n e n t l y i n c a p a b l e of p e r f or m i n g d u t i e s ( c ) W h e n a p a r t n e r i s

g u i l t y o f m i sc on d u c t w h i c h i s l i k e l y t o a f f e c t b u si n e ss . ( d ) W h e n a

p a r t n e r p e r si st e n t l y c om m i t s b r e a c h of p a r t n e r sh i p a g r e e m e n t ( e ) W h e n a

p a r t n e r h a s t r a n sf e r r e d w h ol e of h i s i n t e r e st i n t h e f i r m t o a t h i

r d p a r t y ( f ) W h e n t h e b u si n e ss c a n n ot b e c a r r i e d on e x c e p t a t a l oss. ( g )

O n a n y ot h e r g r ou n d w h i c h a p p e a r s t o t h e c ou r t j u st a n d e q u i t a b l e .  M

O D E O F S E T T L E M E N T O F A C C O U N T S :

W h e n a f i r m i s d i ssol v e d , t h e a ss e

t s a r e sol d of f a n d o u t of t h e p r o c e e d s t h e l i a b i l i t i e s of t h e f i r m a

r e p a i d of f , t h e n t h e su r p l u s i s a p p l i e d i n p a y m e n t o f p a r t n e r ‟ s l

oa n , i f a n y . F i n a l l y , t h e c a p i t a l of t h e p a r t n e r s i s r e t u r n e d . W h e

n t h e r e i s a n a g r e e m e n t a m on g t h e p a r t n e r s a s t o t h e w a y i n w h i c h t

h e a c c ou n t s a r e t o b e se t t l e d , t h e a c c o u n t s sh ou l d b e se t t l e d a c c or d i n g l

y . I f t h e r e i s n o t su c h a g r e e m e n t , t h e p r ov i si on of s e c . 4 8 o f t h e

I n d i a n P a r t n e r sh i p A c t , 1 9 3 2 a p p l i e s. T h e sa i d p r ov i si on s a r e a s f ol l ow

s: I n s e t t l i n g t h e a c c ou n t s of a f i r m a f t e r d i ssol u t i on , t h e f ol l ow i n g r u

l e s sh a l l b e ob se r v e d , su b j e c t t o a g r e e m e n t b y t h e p a r t n e r s: a ) L osse s i n c l u

d i n g d e f i c i e n c i e s of c a p i t a l s h a l l b e p a i d f i r st ou t o f f p r o f i t s, n

e x t o u t of c a p i t a l a n d l a st l y , i f n e c e ssa r y b y t h e p a r t n e r s i n d i v

i d u a l l y i n t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e p r o f

i t s. b ) T h e a sse t s of t h e f i r m , i n c l u d i n g a n y s u m s c o n t r i b u t e d b y t h e

p a r t n e r s t o m a k e u p d e f i c i e n c i e s of c a p i t a l , sh a l l b e a p p l i e d i n t h e

f ol l ow i n g m a n n e r a n d or d e r : 1 ) I n t h e p a y i n g t h e d e b t s of t h e f i r m

t o t h i r d p a r t i e s. 2 ) I n p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s d u e

t o h i m f r om t h e f i r m f or a d v a n c e s a s d i st i n g u i sh e d f r om c a p i t a l . 3 ) I n

p a y i n g t o e a c h p a r t n e r r a t a b l y w h a t i s d u e h i m on a c c ou n t of c a p i

t a l , a n d

3 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L 4 ) T h e r e si d u e , i f a n y , sh a l l b e d i v i d e d a m on g t h e p a r t n e r s i n

t h e p r op or t i on i n w h i c h t h e y w e r e e n t i t l e d t o sh a r e p oi n t .  S T E P S T O

B E T A K E N O N D I S S O L U T I O N :

T h e a b o v e p r ov i si on s of t h e p a r t n e r sh i p

A c t su g g e st t h e f ol l ow i n g st e p s t o b e t a k e n o n d i ssol u t i on of t h e f i r m . 1 ) A

l l t h e a sse t s o f t h e f i r m , i n c l u d i n g g ood w i l l a r e sol d or d i sp ose d o f f i

n a n y o t h e r w a y ( E . g . a p a r t n e r m a y t a k e ov e r a n a sse t ) 2 ) T h e a m ou

n t so r e a l i z e d i s a p p l i e d i n p a y i n g of f t h i r d p a r t y l i a b i l i t i e s i n

t h e f i r st b a l a n c e . 3 ) I f a n y o n e or m or e p a r t n e r s h a v e a d v a n c e d l oa n

t o t h e f i r m i n a d d i t i on t o h i s c a p i t a l , t h e n t h e s e l oa n a r e r e p a i d

n e x t a f t e r r e p a y m e n t of t h i r d p a r t y l i a b i l i t i e s. 4 ) Now , p a r t n e r s w

i l l n e p a i d w h a t i s d u e t o t h e m o n c a p i t a l a c c ou n t s. I f t h e su r p l u

s i s n ot e n ou g h t o r e t u r n t h e f u l l a m ou n t of c a p i t a l , t h e n t h e p a r t n e

r a r e p a i d r a t a b l y 5 ) S u r p l u s, i f a n y , l e f t a f t e r r e t u r n i n g c a p i t

a l s i s p a i d t o t h e p a r t n e r s i n t h e i r p r o f i t sh a r i n g r a t i o. F irm de bt s a nd priva t

e D e bt s : T h e l i a b i l i t y of p a r t n e r s i s u n l i m i t e d , i n t h e se n s e t h a t

t h e p r i v a t e p r op e r t y o f t h e p a r t n e r s c a n a l so b e u t i l i z e d f or p a y m e

n t of r i m ‟ s d e b t s . B u t , a c c or d i n g t o p a r t n e r sh i p A c t , p r i v a t e p r op e

r t y o f a n y p a r t n e r m u st b e u t i l i z e d f i r st i n p a y m e n t o f p a r t n e r

‟ s p r i v a t e d e b t s . S i m i l a r l y , f i r m ‟ s a ss e t s a r e f i r st a p p l i e d i n p a y

m e n t of f i r m ‟ s d e b t s a n d i f t h e r e i s a n y su r p l u s, t h e n t h e sh a r e of

a p a r t n e r i n t h e sa i d s u r p l u s c a n b e u t i l i z e d i n p a y m e n t of t

h e p r i v a t e d e b t s .  E N T R I E S O N D I S S O L U T I O N R E L I Z A T I O N A C C O I N T :

O n d i ssol u t i on o f a f i r m , b ook s o f a c c o u n t a r e c l ose d . F or t h i s p u r p ose a l

l a sse t s of t h e f i r m a r e d i sp ose d o f f a n d l i a b i l i t i e s p a i d o f f . F or c l

osi n g t h e a c c ou n t o f a sse t s a n d l i a b i l i t i e s, t h e „ R e a l i z a t i on A c c ou n t ‟

i s op e n e d . A l l t h e a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o t h i s a c c ou n t

. I n c a se of a d m i ssi on or r e t i r e m e n t o f a p a r t n e r , P r o f i t a n d l oss a c c

ou n t i s o p e n e d t o r e c or d t h e i n c r e a se a n d d e c r e a se i n t h e v a l u e o f

a sse t a n d l i a b i l i t i e s. R e a l i z a t i on a c c ou n t i s n ot n e c e ssa r y i n t h i s c a

s e a s t h e b u si n e ss i s t o c on t i n u e a n d a sse t s a r e n ot t o b e d i sp ose d of f . T h e b

ook v a l u e s of a sse t s a n d l i a b i l i t i e s a r e t r a n sf e r r e d t o r e a l i z a t i on a c c ou n t

, a s t h e se a c c ou n t s a r e t o b e c l ose d . A sse t s h a v e d e b i t b a l a n c e s, h e n c e t

h e y a r e c r e d i t e d i n or d e r t o c l os e t h ose a c c ou n t

4 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L a n d a r e sh ow n on d e b i t si d e o f r e a l i z a t i on a c c ou n t . S i m i l a r l y , l i

a b i l i t i e s h a v e c r e d i t b a l a n c e s a n d t h e y a r e d e b i t e d t o c l ose t h e m a n

d a r e t r a n sf e r r e d t o t h e c r e d i t of r e a l i z a t i on a c c ou n t . E N T E R I E S O N

D I S S O L U T I O N T R A N S A C T I O N A / C T O B E D E B I T E D A / C T O B E C R E D I T E D 1 . C l osi n

g a c c ou n t of a sse t s 2 . C l osi n g a c c ou n t l i a b i l i t i e s 3 . O n sa l e o f a sse t s 4 . O n

p a y m e n t s o f l i a b i l i t i e s 5 . O n p a y m e n t o f d i ssol u t i on e x p . 6 . D i st r i b u t i n g

r e a l i z a t i on p r of i t 7 . O n p a y m e n t o f p a r t n e r ‟ s l oa n 8 . D i st r i b u t i n g G e n

e r a l R e s e r v e 9 . S e t t l i n g p a r t n e r s C a p . ( D r . ) 1 0 . R e t u r n i n g

c a p i t a l s t

o p a r t n e r s R e a l i z a t i on A / c D r L i a b i l i t i e s A / c D r C a sh / B a n k A / c D r R e a l

i z a t i on A / c D r R e a l i z a t i on A / c D r R e a l i z a t i on A / c D r P a r t n e r ‟ s l oa n A /

c D r G e n e r a l r e s e r v e A / c D r C a sh / B a n k A / c D r P a r t n e r ‟ s c a p i t a l A / c

D r A sse t s A / c C r . R e a l i z a t i on A / c C r . R e a l i z a t i on A / c C r . C a sh / B a n k A / c

C r . C a sh / b a n k A / c C r . P a r t n e r ‟ s C a p i t a l A / c C r . C a sh / B a n k A / c C r . P a r

t n e r ‟ s c a p i t a l A / c C r . P a r t n e r ‟ s c a p i t a l A / c C r . C a sh / B a n k A / c C r .

R e m e m b e r t h a t w h i l e sol v i n g t h e e x a m p l e . A l l t h e b a l a n c e g i v e n

i n t h e B / s m u st b e t r a n sf e r r e d t o f ol l ow i n g f ou r a c c o u n t s. 1 ) R e a l i z a t

i on a c c ou n t 2 ) P a r t n e r ‟ s c a p i t a l a c c o u n t 3 ) C a s h / B a n k A c c ou n t 4 ) P a r t n e r ‟ s L

oa n A / c ( i f a n y ) R E A L I Z A T I O N A C C O U N T

5 |

P a g e

D I S S O L U T I O N O F P A R T N E R S H I P

N I K E T P A

T E L P A R T I C U L A R R s . P A R T I C U L A R R s . T o su n d r y a sse t s ( E n t r y n o. 1 ) … .

L a n d a n d b u i l d i n g … .

P l a n t a n d m a c h i n e r y … .

S t o c k … .

D e b t or s T o C a s h / B a n k

P a y m e n t of l i a

b i l i t i e s … .

( E n t r y n o 4 A ) … .

C r e d i t or s … .

B i l l s p a y a b l e … .

C on t i n g e n t l i a b i l i t i e s. T o p a r

t n e r ‟ s C a p i t a l A / c

L i a b i l i t i e s t a k e n o v e r

( e n t r y n o. 4 B ) T o c a sh A c c ou n t

D i ssol u t i on e x p s. … . .

( e n t r y n o 5 ) T o b a l a n c e b e i n g p r of i t t r a n sf e r r e d t o p a r t n e r ‟ s c a

p i t a l A / c

( E n t r y n o. 6 A ) … … … … . . … … … … … … … . … … … … … B y su n d r y l

i a b i l i t i e s ( e n t r y 2 ) C r e d i t or s … . B i l l s p a y a b l e … . B a n k d r a f t s … . B y C a s h / B

a n k S a l e s p r oc e e d s o f A sse t s ( E n t r y 4 ) L a n d a n d b u i l d i n g … . P l a n t a n d m a c

h i n e r y … . B y P a r t n e r s C a p i t a l A c c ou n t A sse t s t a k e n o v e r … . ( E n t r y No. 3 B ) B y

B a l a n c e b e i n g l oss t r a n sf or m e d t o p a r t n e r s c a p i t a l a c c ou n t ( e n t r y n o. 6 B

) . . . . . . . . . . . . . … … … … … . … … … … … . … … … … … … … … … … . . . . . . . . . . . . . . . . . . . . . . . . G e n e r a

l l y t h e e x p e n se s a r e p a i d b y t h e f i r m . T h e sa m e i s d e b i t e d t o r e a l i

z a t i on a c c o u n t a n d c r e d i t e d t o C a s h A c c ou n t 1 ) A t t i m e s, o n e of t h e

p a r t n e r s m a y a g r e e t o b e a r t h e e x p e n se s. I n su c h c a se , i f t h e f i r m

p a y s t h e e x p e n se s, i t sh ou l d b e d e b i t e d t o c a p i t a l a c c ou n t of t h e sa i

d p a r t n e r a n d n ot t o t h e r e a l i z a t i on a c c ou n t ; t h e c or r e sp on d i n g c r e d i

t b e i n g g i v e n t o c a s h A c c ou n t . 2 ) I f t h e p a r t n e r u n d e r

t a k e s t o b e

a r t h e e x p e n se s irm

de bt s a nd priva t e D e bt s : . A n d w h e n h e p a y s t h e e x p e n se

s, t h e r e sh ou l d b e n o e n t r y i n t h e f i r m ‟ s b ook s. 3 ) I t m a y b e a g r e e d u p

on a m on g t h e p a r t n e r s t h a t on e of t h e m w i l l b e p a i d a f i x e d r e m u n e

r a t i on f or a t t e n d i n g t o t h e d i ssol u t i on w or k , b u t h e i s r e q u i r e d t o b e a

r t h e d i ssol u t i on e x p e n se s. I n su c h a c i r c u m st a n c e , t h e f i x e d r e m u n e r a

t i on i s d e b i t e d t o R e a l i z a t i on A c c ou n t a n d c r e d i t e d t o h i s C a p i t a l a c

c ou n t . No e n t r y i s m a d e i n t h e f i r m ‟ s b ook w h e n h e ( p a r t n e r ) p a y s t h e

r e a l i z a t i on e x p e n se s.

Partnership accounting
From Wikipedia, the free encyclopedia

Companies law

Company

Business

Business entities

 

Sole proprietorship

Partnership (General, Limited, Limited liability)

 

Corporation Cooperative

European Union / EEA

EEIG

SCE

SE

SPE

UK / Ireland / Commonwealth

 

Community interest company

Limited company (by guarantee, by shares,Proprietary, Public)

Unlimited company United States

Benefit corporation

C corporation

LLC

Series LLC

LLLP

   

S corporation

Delaware corporation Delaware statutory trust Massachusetts business trust

Nevada corporation Additional entities

AB

AG

ANS

A/S

AS

 

GmbH K.K.

N.V.

Oy

S.A.

more Doctrines

   

Business judgment rule Corporate governance De facto corporation and corporation by estoppel Internal affairs doctrine

  

Limited liability

Piercing the corporate veil Rochdale Principles

Ultra vires Related areas

Civil procedure

Contract

V

T

E

When two or more individuals engage in an enterprise as co-owners, the organization is known as a partnership. This form of organization is popular among personal service enterprises, as well as in the legal

and public accounting professions. The important features of and accounting procedures for partnerships are discussed and illustrated below.
Contents
[hide]

                 

1 Accounting for Initial Investments 2 Capital Interest 3 Capital account 4 Compensation for Services and Capital 5 Guaranteed Payments 6 Allocation of Net Income 7 Closing Process 8 Statements for Partnerships 9 Admitting a new partner 10 Allocation of ownership interest 11 Partnership bonus 12 Withdrawal of Partner 13 Purchasing of Partner's Interest 14 Death of a Partner 15 Liquidation of a Partnership 16 Schedule M-1 17 Schedule K-1 18 References

[edit]Accounting

for Initial Investments

Because ownership rights in a partnership are divided among two or more partners, separatecapital and drawing accounts are maintained for each partner. Investment of cash If a partner invested cash in a partnership, the Cash account of the partnership is debited, and the partner's capital account is credited for the invested amount. Investment of assets other than cash If a partner invested an asset other than cash, an asset account is debited, and the partner's capital account is credited for the market value of the asset. If a certain amount of money is owed for the asset, the partnership

may assume liability. In that case an asset account is debited, and the partner's capital account is credited for the difference between the market value of the asset invested and liabilities assumed.

[edit]Capital

Interest

A capital interest is an interest that would give the holder a share of the proceeds in either of the following situations:

 

The owner withdraws from the partnership. The partnership liquidates.

The mere right to share in earnings and profits is not a capital interest in the partnership. This determination generally is made at the time of receipt of the partnership interest.

[edit]Capital

account

Capital account of each partner represents his equity in the partnership. Capital account of a partner is increased in the following situations:

   

The owner made additional investments during the year. The owner received guaranteed payments from the partnership. Partnership earned profits, and a share of profits was allocated to the partner. The increase in the capital will record in credit side of the capital account.

Salary and interest allowances are guaranteed payments, discussed later. Capital account of a partner is decreased when the owner makes withdrawals of cash or property

[edit]Compensation

for Services and Capital

The partnership agreement may specify that partners should be compensated for services they provide to the partnership and for capital invested by partners. For example, one partner contributed more of the assets, and works full time in the partnership, while the other partner contributed a smaller amount of assets and does not provide as much services to the partnership. Compensation for services is provided in the form of salary allowance. Compensation for capital is provided in the form of interest allowance. Amount of compensation is added to the capital account of the partner. To illustrate, assume that a partner received $500 as an interest allowance. The amount is included in the net income/loss distribution entry when the books are closed to the capital accounts at year end:

Debit Credit

Partner A, Capital

$500

Income Summary $500

As a result, the above entry Income Summary, which is a temporary equity closing account used for year-end, is reduced by $500, and the capital account is increased by the same amount. When the partner makes a cash withdrawal of moneys he received as an allowance, it is treated as a withdrawal, or drawing.

Debit Credit

Partner A, Drawing $500

Cash

$500

As a result, Drawing account increased by $500, and the Cash account of the partnership is reduced by the same account. At the end of the accounting period the drawing account is closed to the capital account of the partner. The capital account will be reduced by the amount of drawing made by the partner during the accounting period.

[edit]Guaranteed

Payments

Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Compensation for services and capital are guaranteed payments. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Guaranteed payments are not subject to income tax withholding.

The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses. They are also listed on Schedules K and K-1 of the partnership return. The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his distributive share of the partnership's other ordinary income.

[edit]Allocation

of Net Income

Revenues - Expenses = Net income If total revenues exceed total expenses of the period, the excess is the net income of the partnership for the period. If expenses exceed revenues of the period, the excess is a net loss of the partnership for the period. Management fees, Salary and interest allowances are guaranteed payments. The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses. If partners pay themselves high salaries, net income will be low, but it does not matter for tax purposes. Partner compensation and allocated net income are considered ordinary income for tax purposes and as such are reported on the form 1040. It does not matter whether or not a partner withdrew any amount of money from his capital account. It's the net income, allocated to the partner, and his compensation from the partnership that are taxed, not the amount withdrawn. Net income or loss is allocated to the partners in accordance with the partnership agreement. In the absence of any agreement between partners, profits and losses must be shared equally regardless of the ratio of the partners' investments. If the partnership agreement specifies how profits are to be shared, losses must be shared on the same basis as profits. Net income does not includes gains or losses from the partnership investment.

[edit]Closing

Process

Closing process at the end of the accounting period includes closing of all temporary accounts by making the following entries.

  

Close all revenues accounts to Income Summary. Close all expenses accounts to Income Summary. Close Income Summary by allocating each partner's share of net income or loss to the individual capital account.

Close each partner's drawing account to the individual capital accounts.

To illustrate, assume that there are two equal partners, Partner A and Partner B. The partnership agreement specifies that after providing for salary and interest allowances the remaining income is divided equally.

Assume also that net income of the partnership was $100,000 and the two partners received allowances as indicated in the table below. The allocation of net income would be reported on the income statement as shown. Net Income $100,000

Partner A Partner B

Total

Allocation of net income 60,000

40,000

100,000

Salary allowances

30,000

20,000

50,000

Interest allowances

20,000

10,000

30,000

Remaining income

10,000

10,000

20,000

Net Income of the partnership is calculated by subtracting total expenses from total revenues. After that salary and interest allowances are subtracted from Net Income, and the result is Remaining Income, which is divided equally in accordance with the partnership agreement. At the end of the accounting period each partner's allocated share is closed to his capital account. Based on the net income allocation shown above, the closing entry is:

Debit

Credit

Income Summary $100,000

Partner A, Capital

$60,000

Partner B, Capital

$40,000

[edit]Statements

for Partnerships

The allocation of net income and its impact on the partners' capital balances must be disclosed in the financial statements. All three financial statements are affected: the income statement, statement of owners (partners') equity, and balance sheet. In addition, the statement of partners' equity reflects the equity of each partner and summarizes the allocation of net income for the year. Statement of Partners' Equity Statement of partners' equity starts with capital balances at the beginning of the accounting period, and reflects additional investments, made by the partners during the year, net income for the period, and withdrawals. Additional investments and allocated net income increase capital accounts of the partners. All kind of allowances, like salary allowances and capital allowances, are treated as withdrawals. Withdrawals reduce capital accounts. The end result is capital balances of the partners at the end of the accounting period. A sample statement of partners' equity is shown below.

Partner A Partner B

Total

Capital, Jan. 1, 2008

$40,000

$30,000

$70,000

Additional Investments

$10,000

$20,000

$30,000

Capital plus investments $50,000

$50,000

$100,000

Net Income for the year $60,000

$40,000

$100,000

Balance

$110,000 $90,000

$200,000

Withdrawals

$30,000

$20,000

$50,000

Capital, Dec. 31, 2008

$80,000

$70,000

$150,000

Equity section of the balance sheet

The partners' equity section of the balance sheet reports the equity of each partner, as illustrated below.

Partner A, Capital

$80,000

Partner B, Capital

$70,000

Total partners' equity [edit]Admitting

$150,000

a new partner

A new partner may be admitted by agreement among the existing partners. When this happens, the old partnership is dissolved and a new partnership is created, with a new partnership agreement. A new partner may buy into the business in three ways:

  

by purchasing an interest directly from existing partners by making an investment in the business, or by contributing assets from an existing business.

Assume that Partner A and Partner B admit Partner C as a new partner, when Partner A and Partner B have capital interests $30,000 and $20,000, respectively. Partner C pays, say, $15,000 to Partner A for one-third of his interest, and $15,000 to Partner B for one-half of his interest. These payments go to the partners directly, not to the business. The following entry is made by the partnership.

Debit Credit

Partner A, Capital 10,000

Partner B, Capital 10,000

Partner C, Capital

20,000

The extra $5,000 Partner C paid to each of the partners, represents profit to them, but it has no effect on the partnership's financial statements.

Now, assume instead that Partner C invested $30,000 cash in the new partnership. In this case, the following entry would be made to admit Partner C.

Debit Credit

Cash

30,000

Partner C, Capital

30,000

Finally, let's assume that Partner C had been operating his own business, which was then taken over by the new partnership. In this case the balance sheet for the new partner's business would serve as a basis for preparing the opening entry. The assets listed in the balance sheet are taken over, the liabilities are assumed, and the new partner's capital account is credited for the difference.

[edit]Allocation
Equal partners.

of ownership interest

Example 1. Assume that a sole proprietor agreed to admit a single equal partner for a certain amount of money. The sole proprietor, Partner A, will give the new partner, Partner B, an equal share in the partnership. 100% interest of the sole proprietor will be divided in half, so that each of the two partners will have 50% interest in the partnership. In effect, Partner A sold 50% of his equity to Partner B. Example 2. Assume that Partner A and Partner B have 50% interest each, and they agreed to admit Partner C and give him an equal share of ownership. Each of the three partners will have 33.3% interest in the partnership. Interests of Partner A and Partner B will be reduced from 50% each to 33.3% each. In effect, each of the two partners sold 16.7% of his equity to Partner C. Example 3. Assume there are three equal partners, who have 33.3% interest each, and they agreed to admit a fourth equal partner. Each of the four partners will have 25% interest in the partnership. Interests of the three partners will be reduced from 33.3% each to 25% each. In effect, each of the three partners sold 8.3% of his equity to the new partner. In either case, all partners must agree to the specific way to realign their partnership interests as a result of admitting a new partner. Unequal partners.

Example 1. Assume there are two unequal partners in the partnership. Partner A owns 60% equity, Partner B owns 40% equity, and they agreed to admit a third partner. Partner C has several options to join the partnership.

  

He can buy equity from Partner A. He can buy equity from Partner B. He can buy equity from Partner A and Partner B.

Partner A and Partner B may both agree to sell 50% of their equity to Partner C. In that case, Partner A will have 30% interest, Partner B will have 20%, and Partner C will own (30% + 20%) 50% interest in the partnership. Partner A and Partner B may both agree to sell 25% of their equity to Partner C. In that case, Partner 3 will own (15% + 10%) 25% interest in the partnership. Partner A may decide to sell 25% of his equity to partner C. Partner B may decide to sell 50% of his equity to partner C. Partner C will own (15% + 20%) 35% of the partnership equity. Example 2. Assume now that there are three partners. Partner A owns 50% interest, Partner B owns 30% interest, and Partner C owns 20% interest. Collectively, they own 100% interest in the partnership. They agreed to admit a fourth partner, Partner D. As in the previous case, Partner D has a number of options. He can buy shares of interest from one of the partners, or from more than one partner. Assume that the three partners agreed to sell 20% of interest in the partnership to the new partner. There are more than one way to realign partnership interests. Equal percentage reduction. The three partners may agree to reduce their equity by equal percentage. In order to sell 20% equity to new partner, each of the partners has to sell (20% : 3) 6.7% of his equity to the new partner. Equal proportion reduction. The three partners may chose equal proportion reduction instead of equal percentage reduction. Had there been only one partner, who owned 100% interest, selling 20% interest would reduce ownership interest of the original owner by 20%. The same approach can be used to buy equity from each of the partners. Each of the existing partners may agree to sell 20% of his equity to the new partner. The result for the new partner will be the same as if a single owner sold him 20% interest. This table illustrates realignment of ownership interests before and after admitting the new partner.

Before

After

Partner A 50%

(50% * 80%) 40%

Partner B 30%

(30% * 80%) 24%

Partner C 20%

(20% * 80%) 16%

Partner D 0%

20%

To summarize, there does not exist any standard way to admit a new partner. A new partner can be admitted only by agreement among the existing partners. When this happens, the old partnership is dissolved and a new partnership is created, with a new partnership agreement.

[edit]Partnership

bonus

Bonus paid to the partnership . A new partner may pay a bonus in order to join the partnership. Bonus is the difference between the amount contributed to the partnership and equity received in return. Assume that Partner A and Partner B have balances $10,000 each on their capital accounts. The partners agree to admit Partner C to the partnership for $16,000. In return, Partner C will receive one-third equity in the partnership. The following table illustrates calculation of the bonus.

Equity of Partner A

$10,000

Equity of Partner B

$10,000

Contribution of Partner C

$16,000

Total equity after admitting Partner C $36,000

Equity percentage of Partner C

33.3%

Equity of Partner C

$12,000

Contribution of Partner C

$16,000

Minus equity of Partner C

$12,000

Bonus paid to "A & B Partnership"

$4,000

In this case, Partner C paid $4,000 bonus to join the partnership. The amount of any bonus paid to the partnership is distributed among the partners. The following table illustrates the distribution of the bonus.

Debit

Credit

Cash

$16,000

Partner C, Capital

$12,000

Partner A, Capital

$2,000

Partner B, Capital

$2,000

Bonus paid to a partner. Assume now that Partner A and Partner B have balances $10,000 each on their capital accounts. The partners agree to admit Partner C to the partnership for $7,000. In return, Partner C will receive one-third equity in the partnership. Why would the existing partners allow a new partner to buy an equal share of equity with smaller contribution? It might be because the new partner brings something very valuable to the partnership. It might be special skills.

The following table illustrates calculation of the bonus.

Equity of Partner A

$10,000

Equity of Partner B

$10,000

Contribution of Partner C

$7,000

Total equity after admitting Partner C $27,000

Equity percentage of Partner C

33.3%

Equity of Partner C

$9,000

Contribution of Partner C

$7,000

Minus equity of Partner C

$9,000

Bonus paid to Partner C

$2,000

In this case, Partner C received $2,000 bonus to join the partnership. The amount of the bonus paid by the partnership is distributed among the partners according to the partnership agreement. The following table illustrates the distribution of the bonus. Debit to Cash increases the account, while debit to a capital account of a partner decreases the account.

Debit Credit

Cash

$7,000

Partner C, Capital

$9,000

Partner A, Capital $1,000

Partner B, Capital $1,000

In an equal partnership bonus paid to a new partner is distributed equally among the partners. In an unequal partnership bonus is distributed according to the partnership agreement. Assume that Partner A is a 75% partner, and Partner B is a 25% partner. Partner C was admitted to the partnership. He paid $5,000 cash. In return, he received $9,000 equity in the partnership. A $4,000 ($9,000 $5,000) bonus paid to Partner C would be distributed as follows: Partner A will pay ($4,000 * 75%) $3,000. His capital account will be debited $3,000. Partner B will pay ($4,000 * 25%) $1,000. His capital account will be debited $1,000.

Debit

Credit

Cash

$5,000

Partner C, Capital

$9,000

Partner A, Capital $3,000 ($4,000 * 75%)

Partner B, Capital $1,000 ($4,000 * 25%) [edit]Withdrawal

of Partner

By agreement, a partner may retire and be permitted to withdraw assets equal to, less than, or greater than the amount of his interest in the partnership. The book value of a partner's interest is shown by the credit balance of the partner's capital account. The balance is computed after all profits or losses have been allocated in accordance with the partnership agreement, and the books closed. If a retiring partner withdraws cash or other assets equal to the credit balance of his capital account, the transaction will have no effect on the capital of the remaining partners.

To illustrate, assume that several years after the formation of "A,B, & C" partnership Partner C decided to retire. The partners agreed to the withdrawal of cash equal to the amount of Partner C's equity in the assets of the partnership. Assume that the partners' capital accounts had credit balances as follows:

  

Partner A $60,000 Partner B $40,000 Partner C $30,000

If Partner C withdraws $30,000 in cash, the entry on the books is as follows:

Debit Credit

Partner C, Capital 30,000

Cash

30,000

If a retiring partner agrees to withdraw less than the amount in his capital account, the transaction will increase the capital accounts of the remaining partners. For example, if Partner C withdraws only $20,000 in settlement of the interest, the difference between Partner C's equity in the assets of the partnership and the amount of cash withdrawn is $10,000 ($30,000 - $20,000). This difference is divided between the remaining partners on the basis stated in the partnership agreement. Assume that the partnership agreement specifies that in such a case the difference is divided according to the ratio of their capital interests after allocating net income and closing their drawing accounts. On this basis, Partner A's capital account is credited for $6,000 and Partner B's is credited for $4,000. The entry in the books of the partnership is as follows:

Debit Credit

Partner C, Capital 30,000

Cash

20,000

Partner A, Capital

6,000

Partner B, Capital

4,000

If a retiring partner withdraws more than the amount in his capital account, the transaction will decrease the capital accounts of the remaining partners. The excess of the amount withdrawn over retiring partner's equity in the partnership is divided between the remaining partners on the basis stated in the partnership agreement.

[edit]Purchasing

of Partner's Interest

When a partner retires from the business, the partner's interest may be purchased directly by one or more of the remaining partners or by an outside party. If the retiring partner's interest is sold to one of the remaining partners, the retiring partner's equity is merely transferred to the other partner. For example, assume that Partner C's equity is sold to Partner B. The entry for the transaction on the books of the partnership is as follows:

Debit Credit

Partner C, Capital 30,000

Partner B, Capital

30,000

The amount paid to Partner C by Partner B is a personal transaction and has no effect on the above entry. Any gain or loss resulting from the transaction is a personal gain or loss of the withdrawing partner and not of the business. If the retiring partner's interest is purchased by an outside party, the retiring partner's equity is transferred to the capital account of the new partner, Partner D.

Debit Credit

Partner C, Capital 30,000

Partner D, Capital

30,000

The amount paid to Partner C by Partner D is also a personal transaction and has no effect on the above entry.

[edit]Death

of a Partner

The death of a partner dissolves the partnership. On the date of death, the accounts are closed and the net income for the year to date is allocated to the partners' capital accounts. Most agreements call for an audit and revaluation of the assets at this time. The balance of the deceased partner's capital account is then transferred to a liability account with the deceased's estate. The surviving partners may continue the business or liquidate. If the business continues, the procedures for settling with the estate are the same as those described earlier for the withdrawal of a partner.

[edit]Liquidation

of a Partnership

Liquidation of a partnership generally means that the assets are sold, liabilities are paid, and the remaining cash or other assets are distributed to the partners. When normal operations are discontinued, adjusting and closing entries are made. Thus, only the assets, liabilities and partners' equity accounts remain open. If noncash assets are sold for more than their book value, a gain on the sale is recognized. The gain is allocated to the partners' capital accounts according to the partnership agreement. If noncash assets are sold for less than their book value, a loss on the sale is recognized. The loss is allocated to the partners' capital accounts according to the partnership agreement. As the assets are sold, the cash is applied first to the claims of creditors. Once all liabilities are paid, the remaining cash and other assets are distributed to the partners according to their ownership interests as indicated by their capital accounts.

An association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally. The legal definition of a partnership is generally stated as "an association of two or more persons to carry on as co-owners a business for profit" (Revised Uniform Partnership Act § 101 [1994]). Early English mercantile courts recognized a business form known as the societas. The societasprovided for an accounting between its business partners, an agency relationship between partners in which individual partners could legally bind the partnership, and individual partner liability for the partnership's debts and obligations. As the regular English courts gradually recognized the societas, the business form

eventually developed into the common-law partnership. England enacted its Partner-ship Act in 1890, and legal experts in the United States drafted a Uniform Partnership Act (UPA) in 1914. Every state has adopted some form of the UPA as its partnership statute; some states, however, have made revisions to the UPA or have adopted the Revised Uniform Partnership Act (RUPA), which legal scholars issued in 1994. The authors of the initial UPA debated whether in theory a partnership should be treated as an aggregate of individual partners or as a corporate-like entity separate from its partners. The UPA generally opted for the aggregate theory in which individual partners ("an association") comprised the partnership. Under an aggregate theory, partners are co-owners of the business; the partnership is not a distinct legal entity. This led to the creation of a new property interest known as a "tenancy in partnership," a legal construct by which each partner co-owned partnership property. An aggregate approach nevertheless led to confusion as to whether a partnership could be sued or whether it could sue on its own behalf. Some courts took a technical approach to the aggregate theory and did not allow a partnership to sue on its own behalf. In addition, some courts would not allow a suit to go forward against a partnership unless the claimant named each partner in the complaint or added each partner as an "indispensable party." The RUPA generally adopted the entity approach, which treats the partnership as a separate legal entity that may own property and sue on its own behalf. The RUPA nevertheless treats the partnership in some instances as an aggregate of co-owners; for example, it retains the joint liability of partners for partnership obligations. As a practical matter, therefore, the present-day partnership has both aggregate and entity attributes. The partnership, for instance, is considered an association of co-owners for tax purposes, and each co-owner is taxed on his or her proportional share of the partnership profits.

Formation
The formation of a partnership requires a voluntary "association" of persons who "coown" the business and intend to conduct the business for profit. Persons can form a partnership by written or oral agreement, and a partnership agreement often governs the partners' relations to each other and to the partnership. The term person generally includes individuals, corporations, and other partnerships and business associations. Accordingly, some partner-ships may contain individuals as well as large corporations. Family members may also form and operate a partnership, but courts generally look closely at the structure of a family business before recognizing it as a partnership for the benefit of the firm's creditors. Certain conduct may lead to the creation of an implied partnership. Generally, if a person receives a portion of the profits from a business enterprise, the receipt of the profits is evidence of a partnership. If, however, a person receives a share of profits as repayment of a debt, wages, rent, or an Annuity, such transactions are considered "protected relationships" and do not lead to a legal inference that a partnership exists.

Relationship of Partners to Each Other
Each partner has a right to share in the profits of the partnership. Unless the partnership agreement states otherwise, partners share profits equally. Moreover, partners must contribute equally to partnership losses unless a partnership agreement provides for another arrangement. In some jurisdictions a partner is entitled to the return of her or his capital contributions. In jurisdictions that have adopted the RUPA, however, the partner is not entitled to such a return. In addition to sharing in the profits, each partner also has a right to participate equally in the management of the partnership. In many partnerships a majority vote resolves disputes relating to management of the

partnership. Nevertheless, some decisions, such as admitting a new partner or expelling a partner, require the partners' unanimous consent. Each partner owes a fiduciary duty to the partnership and to copartners. This duty requires that a partner deal with copartners in Good Faith, and it also requires a partner to account to copartners for any benefit that he or she receives while engaged in partnership business. If a partner generates profits for the part-nership, for example, that partner must hold the profits as a trustee for the partnership. Each partner also has a duty of loyalty to the partnership. Unless copartners consent, a partner's duty of loyalty restricts the partner from using partnership property for personal benefit and restricts the partner from competing with the partnership, engaging in self-dealing, or usurping partnership opportunities.

Relationship of Partners to Third Persons
A partner is an agent of the partnership. When a partner has the apparent or actual authority and acts on behalf of the business, the partner binds the partnership and each of the partners for the resulting obligations. Similarly, a partner's admission concerning the partnership's affairs is considered an admission of the partnership. A partner may only bind the partnership, however, if the partner has the authority to do so and undertakes transactions while conducting the usual partnership business. If a third person, however, knows that the partner is not authorized to act on behalf of the partnership, the partnership is generally not liable for the partner's unauthorized acts. Moreover, a partnership is not responsible for a partner's wrongful acts or omissions committed after the dissolution of the partnership or after the dissociation of the partner. A partner who is new to the partnership is not liable for the obligations of the partnership that occurred prior to the partner's admission.

Liability
Generally, each partner is jointly liable with the partnership for the obligations of the partnership. In many states each partner is jointly and severally liable for the wrongful acts or omissions of a copartner. Although a partner may be sued individually for all the damages associated with a wrongful act, partnership agreements generally provide for indemnification of the partner for the portion of damages in excess of her or his own proportional share. Some states that have adopted the RUPA provide that a partner is jointly and severally liable for the debts and obligations of the partnership. Nevertheless, before a partnership's creditor can levy a judgment against an individual partner, certain conditions must be met, including the return of an unsatisfied writ of execution against the partnership. A partner may also agree that the creditor need not exhaust partnership assets before proceeding to collect against that partner. Finally, a court may allow a partnership creditor to proceed against an individual partner in an attempt to satisfy the partnership's obligations.

Partnership Property
A partner may contribute Personal Property to the partnership, but the contributed property becomes partnership property unless some other arrangement has been negotiated. Similarly, if the partnership purchases property with partnership assets, such property is presumed to be partnership property and is held in the partnership's name. The partnership may convey or transfer the property but only in the name of the partnership. Without the consent of all the partners, individual partners may not sell or assign partnership property.

In some jurisdictions the partnership property is considered personal property that each partner owns as a "tenant in partnership," but other jurisdictions expressly state that the partnership may own property. The tenant in partnership concept, which is the approach contained in the UPA, is the result of adopting an aggregate approach to partnerships. Because the aggregate theory is that the partnership is not a separate entity, it was thought that the partnership could not own property but that the individual partners must actually own it. This approach has led to considerable confusion, and the RUPA has expressly stated that the partnership may own partnership property.

Partnership Interests
A partner's interest in a partnership is considered personal property that may be assigned to other persons. If assigned, however, the person receiving the assigned interest does not become a partner. Rather, the assignee only receives the economic rights of the partner, such as the right to receive partnership profits. In addition, an assignment of the partner's interest does not give the assignee any right to participate in the management of the partnership. Such a right is a separate interest and remains with the partner.

Partnership Books
Generally, a partnership maintains separate books of account, which typically include records of the partnership's financial transactions and each partner's capital contributions. The books must be kept at the partnership's principal place of business, and each partner must have access to the books and be allowed to inspect and copy them upon demand. If a partnership denies a partner access to the books, he or she usually has a right to obtain an Injunction from a court to compel the partnership to allow him or her to inspect and copy the books.

Partnership Accounting
Under certain circumstances a partner has a right to demand an accounting of the partnership's affairs. The partnership agreement, if any, usually sets forth a partner's right to a predissolution accounting. State law also generally allows for an accounting if copartners exclude a partner from the partnership business or if copartners wrongfully possess partnership property. In a court action for an accounting, the partners must provide a report of the partnership business and detail any transactions dealing with partnership property. In addition, the partners who bring a court action for an accounting may examine whether any partners have breached their duties to copartners or the partnership.

Taxation
One of the primary reasons to form a partnership is to obtain its favorable tax treatment. Because partnerships are generally considered an association of co-owners, each of the partners is taxed on her or his proportional share of partnership profits. Such taxation is considered "pass-through" taxation in which only the indimvidual partners are taxed. Although a partnership is required to file annual tax returns, it is not taxed as a separate entity. Rather, the profits of the partnership "pass through" to the individual partners, who must then pay individual taxes on such income.

Dissolution
A dissolution of a partnership generally occurs when one of the partners ceases to be a partner in the firm. Dissolution is distinct from the termination of a partnership and the "winding up" of partnership

business. Although the term dissolution implies termination, dissolution is actually the beginning of the process that ultimately terminates a partnership. It is, in essence, a change in the relationship between the partners. Accordingly, if a partner resigns or if a partnership expels a partner, the partnership is considered legally dissolved. Other causes of dissolution are the Bankruptcy or death of a partner, an agreement of all partners to dissolve, or an event that makes the partnership business illegal. For instance, if a partnership operates a gambling casino and gambling subsequently becomes illegal, the partnership will be considered legally dissolved. In addition, a partner may withdraw from the partnership and thereby cause a dissolution. If, however, the partner withdraws in violation of a partnership agreement, the partner may be liable for damages as a result of the untimely or unauthorized withdrawal. After dissolution, the remaining partners may carry on the partnership business, but the partnership is legally a new and different partnership. A partnership agreement may provide for a partner to leave the partnership without dissolving the partnership but only if the departing partner's interests are bought by the continuing partnership. Nevertheless, unless the partnership agreement states otherwise, dissolution begins the process whereby the partnership's business will ultimately be wound up and terminated.

Dissociation
Under the RUPA, events that would otherwise cause dissolution are instead classified as the dissociation of a partner. The causes of dissociation are generally the same as those of dis-solution. Thus, dissociation occurs upon receipt of a notice from a partner to withdraw, by expulsion of a partner, or by bankruptcy-related events such as the bankruptcy of a partner. Dissociation does not immediately lead to the winding down of the partnership business. Instead, if the partnership carries on the business and does not dissolve, it must buy back the former partner's interest. If, however, the partnership is dissolved under the RUPA, then its affairs must be wound up and terminated.

Winding Up
Winding up refers to the procedure followed for distributing or liquidating any remaining partnership assets after dissolution. Winding up also provides a priority-based method for discharging the obligations of the partnership, such as making payments to non-partner creditors or to remaining partners. Only partners who have not wrongfully caused dissolution or have not wrongfully dissociated may participate in winding up the partnership's affairs. State partnership statutes set the procedure to be used to wind up partnership business. In addition, the partnership agreement may alter the order of payment and the method of liquidating the assets of the partnership. Generally, however, the liquidators of a partnership pay non-partner creditors first, followed by partners who are also creditors of the partnership. If any assets remain after satisfying these obligations, then partners who have contributed capital to the partnership are entitled to their capital contributions. Any remaining assets are then divided among the remaining partners in accordance with their respective share of partnership profits. Under the RUPA, creditors are paid first, including any partners who are also creditors. Any excess funds are then distributed according to the partnership's distribution of profits and losses. If profits or losses result from a liquidation, such profits and losses are charged to the partners' capital accounts. Accordingly, if a partner has a negative balance upon winding up the partnership, that partner must pay the amount necessary to bring his or her account to zero.

Limited Partnerships
A limited partnership is similar in many respects to a general partnership, with one essential difference. Unlike a general partnership, a limited partnership has one or more partners who cannot participate in the management and control of the partnership's business. A partner who has such limited participation is considered a "limited partner" and does not generally incur personal liability for the partnership's obligations. Generally, the extent of liability for a limited partner is the limited partner's capital contributions to the partnership. For this reason, limited partnerships are often used to provide capital to a partnership through the capital contributions of its limited partners. Limited partnerships are frequently used in real estate and entertainment-related transactions. The limited partnership did not exist at Common Law. Like a general partnership, however, a limited partnership may govern its affairs according to a limited partnership agreement. Such an agreement, however, will be subject to applicable state law. States have for the most part relied on the Uniform Limited Partnership Act in adopting their limited partnership legislation. The Uniform Limited Partnership Act was revised in 1976 and 1985. Accordingly, a few states have retained the old uniform act, and other states have relied on either revision to the uniform act or on both revisions to the uniform act. A limited partnership must have one or more general partners who manage the business and who are personally liable for partnership debts. Although one partner may be both a limited and a general partner, at all times there must be at least two different partners in a limited partnership. A limited partner may lose protection against personal liability if she or he participates in the management and control of the partnership, contributes services to the partnership, acts as a general partner, or knowingly allows her or his name to be used in partnership business. However, "safe harbors" exist in which a limited partner will not be found to have participated in the "control" of the partnership business. Safe harbors include consulting with the general partner with respect to partnership business, being a contractor or employee of a general partner, or winding up the limited partnership. If a limited partner is engaged solely in one of the activities defined as a safe harbor, then he or she is not considered a general partner with the accompanying potential liability. Except where a conflict exists, the law of general partnerships applies equally to limited partnerships. Unlike general partnerships, however, limited partnerships must file a certificate with the appropriate state authority to form and carry on as a limited partnership. Generally, a certificate of limited partnership includes the limited partnership's name, the character of the limited partnership's business, and the names and addresses of general partners and limited partners. In addition, and because the limited partnership has a set term of duration, the certificate must state the date on which the limited partnership will dissolve. The contents of the certificate, however, will vary from state to state, depending on which uniform limited partnership act the state has adopted.

Further readings
Gow, Niel. 2000. A Practical Treatise on the Law of Partnership. Buffalo, N.Y.: W.S. Hein. Gregory, William A. 2001. The Law of Agency and Partnership. 3d ed. St. Paul, Minn.: West Group. Hamilton, Robert W., and Jonathan R. Macey. 2003. Cases and Materials on Corporations, Including Partnerships and Limited Liability Companies. 8th ed. St. Paul, Minn.: West Group. Hynes, J. Dennis. 2001. Agency, Partnership, and the LLC in a Nutshell. 2d ed. St. Paul, Minn.: West Group. Moye, John E., ed. 1999. The Law of Business Organizations. 5th ed. Albany, N.Y.: West Legal Studies.

Partnerships, LLCs, and LLPs: Uniform Acts, Taxation, Drafting, Securities, and Bankruptcy. 12th ed. Vol. 1. 1996. Philadelphia: American Law Institute–American Bar Association Committee on Continuing Professional Education.

Cross-references
Joint and Several Liability; Limited Liability Partnership.
West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

partnership n. a business enterprise entered into for profit which is owned by more than one person
each of which is a "partner." A partnership may be created by a formal written agreement, but may be based on an oral agreement or just a handshake. Each partner invests a certain amount (money, assets and/or effort) which establishes an agreed-upon percentage of ownership, is responsible for all the debts and contracts of the partnership even though another partner created the debt or entered into the contract, has a share in management decisions, and shares in profits and losses according to the percentage of the total investment. Often a partnership agreement may provide for certain division of management, shares of investment, profit, and/or rights to buy out a partner upon leaving the partnership or death. Each partner owes the other partners a duty of full disclosure of information which affects the business and cannot commandeer for himself/herself business opportunities which rightfully belong to the partnership. A partnership which does business under a trade name must file with the county or state a certificate of "doing business under a fictitious name" which gives notice to the public of the names of partners and the business address. A "limited partnership" limits the responsibility for debts beyond the investment to the managing "general partners." The investing "limited partners" cannot participate in management and are limited to specific percentages of profit. A partnership differs from a "joint venture," which involves more than one investor for only a specific short-term project and prompt division of profits. Partnerships are traditionally the most fragile of business arrangements and are often dissolved and subject to disputes. But several million exist in the United States and, ironically, they are the favorite business entity for law firms

Partnership » A Form of Business Organisation

Partnership is a form of business organisation. A business and its ownership are independent concepts. The idea that the actu business and the form of organisation that is owning it are different would help you in creating an understanding on the difference accounting for partnership firms and other forms of business organizations. The same business may be owned by a "sole proprietor" "partnership firm", a "co-operative society", a "company" or any other form of business organisation.

Ascertaining the profit or loss is an idea related to the business. How the profit made is dealt with is an idea related to the form business organisation. Thus the process of profit ascertainment (final accounting) for a business would be the same whatever may the form of business organisation.

» What's the difference?

The way the profits made by an organisation are shared is what is different from organisation to organisation. Taking a hypotheti case of a business owned by different types of business organisations, the process of ascertaining profits would be more or less t same but the process of dealing with profits made would be different from one form of business organisation to another.

The have an understanding on the difference in accounting where the same business is conducted by two different forms of busine organisations, let us consider an example of a business being conducted by a sole proprietor "Mr. Narayanan" and another case of t same business being run by a partnership firm "M/S Mani and Murthy" who share the profits of the firm between them in the ratio 1 :

Final Accounting » Business Owned by a Sole Proprietor
Final Accounting
Trial Balance of M/s Wearall Textlies as on 31st March 2006 Debit Amount (in Rs) Credit Amount (in Rs)
1,00,000 15,000 25,000 1,50,000 25,000 3,20,000 50,000 3,000 1,51,000 45,000 38,000

Particulars

L/F

Capital Opening Stock Closing Stock Purchases Rent Paid Sales Wages Commission Received Assets Debtors Creditors

– – – – – – – – – –

Total Dr
Particulars To To To To Opening Stock Purchases Wages Gross Profit Amount (in Rs)

4,61,000

4,61,000

Trading and Profit and Loss a/c
Amount (in Rs)
15,000 1,50,000 50,000 1,30,000 3,45,000

Cr
Amount (in Rs) Amount (in Rs)
3,20,000 25,000

Particulars By Sales By Closing Stock

3,45,000

To Rent To Net Profit

25,000 1,08,000 1,33,000

By Gross Profit By Commission Received

1,30,000 3,000 1,33,000

Dr
Particulars Amount (in Rs)

Capital a/c
Amount (in Rs) Particulars By Balance b/d By Net Profit Amount (in Rs)

Cr
Amount (in Rs)
1,00,000 1,08,000 2,08,000

To Balance c/d

2,08,000

2,08,000

By Balance b/d

2,08,000

• Recording Gross Profit and Net Profit

Should the posting relating to gross profit and net profit read "To P & L a/c" and "To Capital a/c" respectively. How is it that it sho "Gross Profit" and "Net Profit"

Explanation

Hide/Show

Final Accounting » Business Owned by the Partnership Firm

Assuming all other data to be the same and the capital of Rs. 1,00,000 is owned by the two partners Mani and Murthy as Rs. 30,000 and Rs. 70,000 respectively.

Trial Balance of M/s Wearall Textlies as on 31st March 2006 Debit Amount (in Rs) Credit Amount (in Rs)
70,000 30,000 15,000 25,000 1,50,000 25,000 3,20,000 50,000

Particulars

L/F

Mani's Capital Murthy's Capital Opening Stock Closing Stock Purchases Rent Paid Sales Wages

– – – – – – – –

Commission Received Assets Debtors Creditors

– – –

3,000 1,51,000 45,000 38,000

Total

4,61,000

4,61,000

The Trading and profit and loss account would be the same ⇒ Net Profit = Rs. 1,08,000.

Dr
Particulars To To To To Opening Stock Purchases Wages Gross Profit Amount (in Rs)

Trading and Profit and Loss a/c
Amount (in Rs)
15,000 1,50,000 50,000 1,30,000 3,45,000

Cr
Amount (in Rs) Amount (in Rs)
3,20,000 25,000

Particulars By Sales By Closing Stock

3,45,000

To Rent To Net Profit c/d

25,000 1,08,000 1,33,000

By Gross Profit By Commission Received

1,30,000 3,000 1,33,000

To Net Profit (Mani) To Net Profit (Murty)

36,000 72,000 1,08,000

By Net Profit b/d

1,08,000

1,08,000

• Distribution of Profits among Partners
Partners profit sharing ratio ⇒ Mani : Murthy = 1 : 2 1 = 3 : 3 2

Partners share of profits = Firms profit × Profit sharing proportion

Mani's Share

=

Rs. 1,08,000 × 1

=

Rs. 36,000

3

2 Murthy's Share = Rs. 1,08,000 × 3 = Rs. 72,000

Rs. 72,000

Dr
Particulars To Balance c/d

Partners Capital a/c's
Mani (in Rs)
1,06,000

C
Murthy (in Rs)
1,02,000

Particulars By Balance b/d By Net Profit

Mani (in Rs)
70,000 36,000 1,06,000

Murthy (in Rs)
30,000 72,000 1,02,000 1,02,000

1,06,000

1,02,000

By Balance b/d

1,06,000

The difference that you can notice is that the profit of Rs. 1,08,000 instead of getting into the account representing a single own (capital account) is distributed among all the owners i.e. their respective capital accounts.

Is that all the difference !!!

Settlement of Accounts on Dissolution

At the time of dissolution of the partnership the main question that arises is the settlement of accounts of the various parties like creditors, bank loans, partners' loans, partners' capital accounts. This issue has been dealt in detail by the section 48, 49 and 55 of the Partnership Act. The account of all these parties will be settled as under: 1) If there is any Loss or Deficiency of capital it would be first paid out of the profits of the firm and then out of the Capital of the partners and if still any balance remains it would be realised from the Partners privately in their profit sharing ratio.

2) The amount realised from the sale of the assets of the firm, debtors and the amount contributed by the partners if any would be applied in the following manner: a) Outside liabilities would be paid first which includes Creditors, Bills payables, Outstanding expenses, Bank Loans or outsiders' Loans (including the loans provided by the relatives of the partners), Employees Compensations or provident funds etc. b) Thereafter the Loans advanced by Partners to the firm will be paid off. c) Thirdly the Partners' Capital accounts will be settled. d) The balance left if any will be distributed among the partners in their profit sharing ratio.

Rakesh and Mukesh were very good friends. They were running a business as a partnerhsip firm. They were very successful. People were jealous of their relations. But one day people came to know that they have closed the business. Some dispute had arisen between the two on a trivial issue. Similarly, firm may come to an end because of dispute among the partners or firm running losses for last few years or because of order of the court and so on. We can say that the partnership firm is dissolved. In this lesson, you will learn about the accounting treatment in case of dissolution of partnership firm. OBJECTIVES After going through this lesson, you will be able to: l state the meaning of dissolution of partnership firm; l distinguish between dissolution of partnership and dissolution of partnership firm: l explain the Realisation account and disposal of assets and payment of liabilities; l illustrate the treatment of unrecorded assets and liabilities;

l prepare partners’ capital accounts and bank and/or cash account. 21.1 DISSOLUTION OF PARTNERSHIP AND DISSOLUTION OF PARTNERSHIP FIRM The term dissolution means coming to an end or discontinuation. The dissolution of the firm implies a complete breakdown of the partnership 21 DISSOLUTION OF A PARTNERSHIP FIRM ACCOUNTANCY MODULE - 4 Notes Partnership Accounts 216MODULE - 4 Partnership Accounts Notes 217 Dissoloution of a Partnership Firm ACCOUNTANCY relation among all the partners. Dissolution of the partnership (owing to retirement, death or insolvency of a partner), merely involves change in the relation of the partners but it does not end the firm; the partnership would certainly come to an end but the firm, the reconstituted one might continue under the same name. So the dissoluton of the partnership may or may not include the dissolution of the firm but the dissoluton of the firm necessarily means the dissoluton of the partnership. On dissolution of the firm, the

business of the firm ceases to exist since its affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the partners. The dissolution of partnership among all partners of a firm is called dissolution of the firm. (i) Dissolution by Agreement : A firm is dissolved in case l all the partners give consent or l as per the terms partnership agreement . (ii) Compulsory dissolution : A firm is dissolved compulsorily in the following cases l When all the partners or all excepting one partner becomes insolvent or of unsound mind. l When the business becomes unlawful. l When all the partners excepting one decide to retire from the firm. l When all the partners or all excepting one partner die. l A firm is also dissolved compulsorily if the partnership deed includes any provision regarding the happening of the following events (a) expiry of the period for which the firm was formed, (b) completion of the specific venture or project for which the firm was formed. (iii) Dissolution by notice : In case of a partnership at will, the firm may be dissolved if any one of the partner gives a notice in writing to the other partners. (iv) Dissolution by Court : A court may order a partnership firm to be dissolved in the following cases:

(a) When a partner becomes of unsound mind (b) When a partner becomes permanently incapable of performing his/her duties as a partner,ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 218 (c) When partner deliberately and consistently commits breach of agreements relating to the management of the firm; (d) when a partner’s conduct is likely to adversely affect the business of the firm; (e) when a partner transfers his/her interest in the firm to a third party; (g) When the court regards dissolution to be just and equitable. Distinction Between Dissolution of Partnership and Dissolution of Partnership Firm You have already studied that on the occasion of admission, retirement and death existing partnership comes to an end, but the business of the firm continues under a new agreement. When a firm decides to wind up its business operations under any of the circumstances mentioned, it stands dissolved. Dissolution of a partnership firm is different from the dissolution of a partnership. Dissolution of a firm means that the firm closes its business and comes to an end. While dissolution of a partnership means termination of old partnership agreement and a reconstitution of firm due to admission,

retirement and death of a partner. In dissolution of a partnership the remaining partners may agree to carry on the business under a new agreement. INTEXT QUESTIONS 21.1 Fill in the blanks with the appropriate word/words: 1. A partnership firm comes to an end when the activities of the firm become ........................ 2. When a firm decides to close its business, it is said to be ........................ 3. Dissolution of a ........................ is different from dissolution of ........................ 4. The firm is compulsorily ........................ when all the partners or all excepting one partner die. 5. The firm is dissolved by ........................ when a partner becomes of unsound mind. 6. The firm is dissolved by ........................ when all the partners give their consent.MODULE - 4 Partnership Accounts Notes 219 Dissoloution of a Partnership Firm ACCOUNTANCY 21.4 TREATEMENT OF ASSETS AND LIABILITIES Treatement of assets and liabilities When the partners decide to discontinue the business of the firm, it becomes necessary to settle its accounts. For this purpose, it disposes off all its assets

(except cash and bank balances) for satisfying all the claims against it. For this purpose a separate account called ‘Realisation Account’ is opened. Realisaiton is an account in which assets excluding cash in hand and bank are transferred at their book value and all external liabilities are transferred at their book It also shows what amount were realised on the sale of assets and which liabilities were discharged at what amount. In order to record the disposal of assets and discharge of liabilities, the following journal entries are recorded: 1. For Transfer of Assets Assets account is closed by transferring it to the Realisation Account at its Book Value. Realisation A/c Dr. To Assets A/c (Individually) (Transfer of assets) It is to be noted that the following items on the assets side of the Balance Sheet are not transferred to the Realisation Account : (a) (i) Undistributed loss (i.e. Debit Balance of Profits and Loss account) (ii) Fictitious assets or deferred revenue expenditures such as preliminary expenses . All the above items are closed by transferring them to the partners’ Capital Account in their profit sharing ratio. The Journal entry is made: Partner’s capital A/c Dr. (Individually) To Profit & Loss A/c To Fictitious Assets A/c

(Transfer of loss and fictitious Assets) (b) Cash in hand, and Cash at Bank, will be the opening balance of the Cash/Bank account; (c) Provisions and reserves against assets should be closed by crediting the Realisation Account.ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 220 The Journal entry is made : Provision for Doubtful Debts A/c Dr. Provision for Depreciation A/c Dr. Any other Provision A/c Dr. To Realisation A/c (Transfer of provision on assets) 2. For Transfer of Liabilities The accounts of various external liabilities are closed by transferring them to the Realisation Account. The loan given to the firm by a partner’s wife treated as an external liability and is transferred to the credit of Realisation Account. The relevant Journal entry is as under : External Liabilities A/c Dr. (Individually) To Realisation A/c (Transfer of external liability) Capital and Loan account of the partners’ are treated separately and so are

not transferred to the Realisation Account. 3. Treatment of accumulated reserves and profit/loss Any balance of accumulated reserves (e.g. general reserves), Profit and Loss Account (Cr.), Reserve Fund and other reserves on the date of dissolution will be credited to the Partners’ Capital accounts on the basis of profit sharing ratio. The following journal entry will be recorded : Profit and Loss A/c Dr. General Reserve A/c Dr. Any Other Fund Dr. To Partners’ Capital A/c (Individually) (transfer of profit and reserve) 4. For Sale of Assets (for cash) Bank/ Cash A/c Dr. (Realised Value) To Realisation A/c (Sale of assets)MODULE - 4 Partnership Accounts Notes 221 Dissoloution of a Partnership Firm ACCOUNTANCY 5. For Assets taken over by the partner Partners’ Capital A/c Dr. To Realisation A/c (Agreed Price) (Assets taken over by partner) Bank/Cash/Partners capital A/c Dr.

To Partner’s Loan A/c (settlement of loan to a partner) 6. Settlement of loans given by the Partner Partners’ Loan A/c Dr. To Bank/Cash/Partners’ capital A/c (Settlement of loan given by the partner) 7. Payment of Liabilities in Cash Realisation A/c Dr. To Cash A/c (Payment of liabilities) 8. Payment of Liabilities by the partner(s) Realisation A/c Dr. To Partner Capital A/c (Liabilities taken over by partner) Treatment of unrecorded assets and liabilities Sometimes, there may be some assets that have already been written off completely in previous years and thus, do not appear in the Balance Sheet but physically they still exist for operational purposes. For example, there is an old computer, which is still in working condition though its book value is zero. Similarly, there may be some liabilities, which do not appear in the Balance Sheet, but actually they are still there. For example, a bill discounted with bank, on dissolution it was dishonored and had to be taken up by the firm for payment purposes. It is to be kept in mind that an unrecorded asset would never be transferred to the debit of the Realisation Account, because the amount realised from

its sale is in nature of a gain and the Realization Account is only credited accordingly. Similarly, an unrecorded liability need not be transferred to Realisation.ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 222 Reason being that its payment is a loss and Realisation Account is only debited with the actual payment. In such cases, the following journal entries are made : (a) When the amount realised from the sale of an unrecorded asset. Cash/Bank A/c Dr. To Realisation A/c (Sale of unrecorded assets) (b) When an unrecorded asset is taken over by a partner at an agreed value. Partner’s Capital A/c Dr. To Realisation A/c (Unrecorded assets taken by partner) (c) When unrecorded liability has been discharged by the firm. Realisation A/c Dr. To Bank/Cash A/c (Payment of unrecorded liabilities) (d) When an unrecorded liability is discharged by a partner on behalf of the firm.

Realisation A/c Dr. To Partner’s Capital A/c (Unrecorded Liabilities payment by partner) Payment of Realisation Expenses (a) When realisation expenses are paid by the firm (i.e. borne by the firm). The following journal entry will be recorded: Realisation A/c Dr. To Bank/ Cash A/c (Payment of realisation expenses) (b) When Realisation expenses are paid by the partner on behalf of the firm (i.e. realisation expenses paid by the partner but borne by the firm). The following journal entry is made: Realisation A/c Dr. To Partners’ Capital A/c (Payment of realisation expenses by partner on behalf of firm) (c) Realisation expenses paid by the partner and borne by the partner; Partner’s Capital A/c Dr. To Cash/Bank A/c (Realisation expenses paid and borne by partner)MODULE - 4 Partnership Accounts Notes 223 Dissoloution of a Partnership Firm ACCOUNTANCY Closing of Realisation Account

The balance in the realisation account would show either profit or loss on dissolution. If the total of the credit side is more than the debit side, then there is a profit and following journal entry is made : Realisation A/c Dr. (Individually) To Partner’s Capital/ Current A/c (Individually) (Profit on realisation transferred to capital accounts) If, the debit side is more than credit side, then there is a loss on dissolution and following journal entry is made : Partner’s Capital/Current A/c Dr. (Individually) To Realisation A/c (loss on realisation transferred to capital account) Format of Realisation account Realisation account Dr Cr Particulars Amount Particulars Amount (Rs.) (Rs.) All Assets A/c (Book Value) All External liabilities A/c (Except Cash/Bank) (Book Value) Cash/Bank A/c Cash/Bank A/c (Payment of external (Amount realised on sale liabilities) of various assets) Partners Capital A/c Partners’ capital A/c (if any liability paid by partner) (If any asset is taken over) Cash/Bank A/c Partners Capital A/c (Expenses on realisation) (For transferring loss on

realisation) Partners capital A/c (Expenses on realisation paid by a partner) Partners capital A/c (For transferring profit on realisation)ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 224 INTEXT QUESTIONS 21.2 Given below are certain statements. Some of these statement are true and some of these are false. Write T’ against true statement and ‘F’ against false statements. (i) At the time of dissolution a account including cash and bank are transferred to realisation account. (ii) On dissolution of a firm, business operations of the firm are closed down. (iii) After the preparation of realisation account, Gain or loss of realisation account transferred to Partners capital account (iv) Amount realised from the sale of an unrecorded asset is recorded in Realisation Account. (v) Balance of general reserve is transferred to partners’ capital account.

(vi) Realisation expenses paid by the partners on behalf of the firm are recorded in realisation account and partners capital account. 21.3 PARTNERS’ CAPITAL ACCOUNT AND CASH/BANK ACCOUNT Settlement of Partners’ Capital Accounts After all the adjustments related to partners’ capital accounts and transfer of profit or loss on realisation to the partners’ capital accounts, the capital accounts are closed in the following manner: (a) If the Partner’s Capital Account shows a debit balance, the partner is to bring the necessary amount of cash. The following journal entry is made : Bank/Cash A/c Dr. To Partner’s Capital A/c (Cash brought by the partner) (b) If the Partner’s Capital Account shows a credit balance, he/she is to be paid off the necessary amount of money. The following journal entry will be made : Partner’s Capital A/c Dr. To Bank/Cash A/c (Cash paid to partner)MODULE - 4 Partnership Accounts Notes 225 Dissoloution of a Partnership Firm ACCOUNTANCY

Preparation of Cash/Bank account After closing the partners’ capital accounts, bank account is prepared and all entries pertaining to the bank/cash are posted in it including any cash brought in by the partner on the dissolution of firm. Partners’ capital accounts are closed by making payment from the bank account and thereby bank account stands closed by making/receiving payment. In this way all the accounts stand closed. If cash/bank account does not show any balance, it implies that all the accounts of the dissolved firm are closed properly. Illustration 1 Arun and Seema are equal partners in a firm. They decided to dissolve the partnership on December 31,2006 when the balance sheet stood as under: Balance sheet as on December 31, 2006 Liabilities Amount Assets Amount (Rs.) (Rs.) Sundry creditors 54,000 Cash at Bank 22,000 Reserve fund 20,000 Sundry Debtors 24,000 Loan 80,000 Stock 84,000 Capital Furniture 50,000 Arun 1,20,000 Plants 94,000 Seema 1,20,000 2,40,000 Leasehold land 1,20,000 3,94,000 3,94,000 Assets were realised as follows: Rs. Leasehold land 1,44,000 Furniture 45,000

Stock 81,000 Plant 96,000 Sundry debtors 21,000 The creditors were paid Rs.51,000 in full settlement. Expenses of realisation amounted to Rs.6,000. Prepare Realisation account, Bank account, partners’ capital accounts to close the books of the firm.ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 226 Solution Books of Arun and Seema Realisation account Dr Cr. Particulars Amount Particulars Amount (Rs) (Rs) Assets transferred Sundry creditors 54,000 Sundry Debtors 24,000 Loan 80,000 Plants 94,000 Bank Stock 84,000 Sundry Debtors 21,000 Leasehold land 1,20,000 Plants 96,000 Furniture 50,000 372000 Stock 81,000 Bank Lease hold land 1,44,000

Creditors 51,000 Furniture 45,000 Loan 80,000 3,87,000 Realisation 6,000 1,37,000 [Expense] Profit transferred to Arun Capital 6,000 Seema Capital 6,000 12,000 5,21,000 5,21,000 Capital accounts Dr. Cr. Particulars Arun Seema Particulars Arun Seema (Rs) (Rs) (Rs) (Rs) Bank 1,36,000 1,36,000 Balance b/d 1,20,000 1,20,00 Reserve fund 10,000 10,000 Realisation (Profit) 6,000 6000 1,36,000 1,36,000 1,36,000 1,36,000 Bank account Dr. Cr. Particulars Amount Particulars Amount (Rs) (Rs) Balance b/d 22,000 Realisation A/c 1,37,000 Realisation A/c 3,87,000 Arun Capital 1,36,000 Seema Capital 1,36,000 4,09,000 4,09,000MODULE - 4 Partnership Accounts

Notes 227 Dissoloution of a Partnership Firm ACCOUNTANCY Illustration 2 Sonya and Mayank are partners, who shared profit as 3:2. Following is the balance sheet as on December 31, 2006 Balance sheet as on December 31, 2006 Liabilities Amount Assets Amount (Rs) (Rs) Creditors 28,000 Cash in hand 10,500 Bills payable 20,000 Cash at Bank 30,000 Profit & Loss A/c 13,500 Stock 7,500 Sonya Capital 32,500 Sundry debtors 21,500 Mayank Capital 11,500 Less Provision 500 21,000 for bad debt Land & Building 36,500 1,05,500 1,05,500 The firm was dissolved on December 31, 2006 . 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) Building realised at Rs.42,000. (iv) Realisation expenses amounted to Rs. 1,500 . (v) Creditors and bills payable are paid in full.

Prepare necessary ledger accounts. Solution Books of Sonya and Mayank Realisation account Dr. Cr. Particulars Amount Particulars Amount (Rs) (Rs) Assets transferred Provision for bad debts 500 Stock 7,500 Creditors 28,000 Sundry assets 21,500 Bills payable 20,000 Land & Building 36,500 65500 Bank Bank Debtors 20,425 Creditors 28,000 Stock 7,000 Bills payable 20,000 Land & Building 42,000 69,425 Realisation [Expense] 1,500 49500 Profit transferred to 3 : 2 Sonya Capital 1,755 Mayank Capital 1,170 2,925 1,17,925 1,17,925ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 228 Capital accounts

Dr. Cr. Particulars Sonya Mayank Particulars Sonya Mayank (Rs) (Rs) (Rs) (Rs) Bank 42,355 18,070 Balance b/d 32,500 11,500 Profit 8s Loss A/c 8,100 5,400 Realisation{Profit} 1,755 1,170 42,355 18,070 42,355 18,070 Cash and Bank account Dr. Cr. Particulars Amount Particulars Amount (Rs) (Rs) Balance b/d 40,500 Realisation 49,500 Realisation 69,425 Sonya Capital 42,355 Mayank Capital 18,070 1,09,925 1,09,925 Illustration 3 Tanu, Manu and Chetan are in partnership sharing profit in the proportion of 1/2, 1/3, 1/6 respectively. They dissolve the partnership of the December 31, 2006, when the balance sheet of the firm stood as under: Balance sheet as on December 31, 2006 Liabilities Amount Assets Amount (Rs) (Rs) Sundry Creditors 30,000 Bank 37,500 Bills payable 25,000 Sundry debtors 58,000 Manu’s loan 40,000 Stock 39,500

Capital Investment 42,000 Tanu 90,000 Machinery 48,000 Manu 75,000 Freehold property 90,000 Chetan 55,000 2,20,000 3,15,000 3,15,000MODULE - 4 Partnership Accounts Notes 229 Dissoloution of a Partnership Firm ACCOUNTANCY The machinery was taken over by Manu for Rs.45,000, Tanu took over the investment for Rs.40,000 and freehold property took over by Chetan at Rs.95,000. The remaining assets realised as follows: Sundry Debtors Rs.56,500 and Stock Rs.36,500. Sundry creditors were settled at discount of 5%. Bills payable is taken over by Chetan for Rs.23,000. There liabilities amounting to Rs.3,000 not shown in books are also to be paid. An office computer, not shown in the books of accounts, realised Rs.9,000 Realisation expenses amounted to Rs.3,000. Prepare realisation account, partners capital account, bank account. Solution: Books of Tanu Manu and Chetan Realisation account Dr. Cr. Particulars Amount Particulars Amount (Rs) (Rs)

Assets transferred Sundry Creditors 30,000 Sundry debtors 58,000 Bills payable 25,000 55000 Stock 39,500 Tanu Capital (Investment) 40,000 Machinery 48,000 Manu Capital (Machinery) 45,000 Investment 42,000 Chetan Capital 95,000 (freehold property) Freehold property 90,000 277500 Bank Chetan Capital 23,000 S.Debtors 56,500 (Bills payable) Stock 36,500 Bank Computer 9,000 1,12,000 S.Creditors 28,500 Liabilities 3,000 (Unrecorded) Realisation 6,000 37,500 [Expense] Profit transferred to Tanu Capital 4,500 Manu Capital 3,000 Chetan Capital 1,500 9,000 3,47,000 3,47,000ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 230

Capital Account Dr. Cr. Particulars Tanu Manu Chetan Particulars Tanu Manu Chetan (Rs) (Rs) (Rs) (Rs) (Rs) (Rs) Realisation 40,000 45,000 95,000 Balance b/d 90,000 75,000 55,000 (Assets) Bank 54,500 33,000 — Realisation — — 23,000 (Assets) Realisation 4,500 3,000 1,500 {Profit} Bank — — 15,500 94,500 78,000 95,000 94,500 78,000 79,500 Bank Account Dr. Cr. Particulars Amount Particulars Amount (Rs) (Rs) Balance b/d 37,500 Realisation 37,500 Realisation 1,12,000 Manu’s loan 40,000 Chetan Capital 15,500 Tanu Capital 54,500 Manu Capital 33,000 1,65,000 1,65,000 INTEXT QUESTIONS 21.3 I. Which of the following is treated as unrecorded asset : (a) Sale of old Furniture: (b) Goodwill appearing in the balance sheet.

(c) Bad debts recovered, written off in pervious year. (d) Sale of Investments. (e) Sale of old computer, written off in pervious year. II. Which of the following is treated as unrecorded liability. (i) A Bill Discounted with bank dishonored. (ii) Repayment of Bank Loan (iii) Creditors for stock purchase of goods. (iv) Settlement a dispute against the firm. (v) Payment of outstanding bills.MODULE - 4 Partnership Accounts Notes 231 Dissoloution of a Partnership Firm ACCOUNTANCY WHAT YOU HAVE LEARNT l When a firm decides to close its business and no business activity is carried out by the firm, it is said to be dissolved. l Dissolution of a firm is different from the dissolution of a partnership. Dissolution of a firm means that the firm closes its business and comes to an end. While dissolution of a partnership means termination of old partnership agreement and a reconstitution of firm due to admission, retirement and death of a partner. l On dissolution of the firm the books of accounts are closed. All assets and liabilities are transferred to an account is called “Realisation Account”. This account records the realisation of assets and the payment

of liabilities. l When the partners decide to discontinue the business of the firm, it becomes necessary for to settle its accounts. For this purpose, it disposes off all its assets (except cash and bank balances) for satisfying all the claims against it. l An unrecorded asset would never be transferred to Realisation Account, because the amount realised from its sale is in the form of a gain and the Realization Account is only credited accordingly. l After all the adjustments related to partners’ capital account and transfer of profit or loss on realisation to the partners capital accounts, the capital accounts are closed. l Partners capital accounts are closed through making payment from the bank account and thereby bank account stands closed by making/ receiving payment. TERMINAL QUESTIONS 1. Answer the following questions in one sentence: (a) What is meant by dissolution of partnership firm ? (b) Why Realisation account is prepared ? (c) What journal entry is made in case of payment of unrecorded Liability? (d) What journal entry is made when expenses paid by the partners and borne by the partner.ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm

Partnership Accounts 232 2. Distinguish between dissolution of partnership firm and dissolution of partnership. 3. Under what circumstances can the court dissolve the partnership firm? 5. Sumit and Anish are equal partners in a firm. They decided to dissolve the partnership on December 31,2006 when the balance sheet is as under: Balance sheet as on December 31, 2006 Liabilities Amount Assets Amount (Rs) (Rs) Sundry creditors 30,000 Cash at Bank 7,000 Reserve fund 7,000 Sundry Debtors 23,000 Bills Payable 30,000 Stock 42,000 Capital Furniture 35,000 Sumit 70,000 Plants 40,000 Anish 60,000 1,30,000 Leasehold land 50,000 1,97,000 1,97,000 Assets were realised as : Rs. Leasehold land 62,000 Furniture 30,500 Stock 40,500 Plant 48,000 Sundry debtors 22,500

Sundry creditors were paid Rs.29,500 in full settlement. Bills payable paid 5% less. Expenses of realisation amounted to Rs.2,500. Prepare realisation account, Bank account, partners’ capital accounts to close the books of the firm. 6. Ashu and Hemani are Partners sharing profit and losses in the ratio of 3 : 2. They decided to dissolve the firm on December 31 , 2006. Their balance sheet on the above date was:MODULE - 4 Partnership Accounts Notes 233 Dissoloution of a Partnership Firm ACCOUNTANCY Balance sheet as on December 31, 2006 Liabilities Amount Assets Amount (Rs) (Rs) Capital Building 90,000 Ashu 1,00,000 Machinery 60,000 Hemani 92,000 1,92,000 Furniture 10,000 Creditors 88,000 Stock 24,000 Bank overdraft 20,000 Investments 50,000 Debtors 48,000 Cash in hand 18,000 3,00,000 3,00,000 Ashu is to take over the building at Rs. 98,000 and machinery and furniture is to take over by Hemani at value of Rs 70,000. Ashu agree

to pay creditor and Hemani agreed to meet bank overdraft. Stock and investment are taken by both partner in profit sharing ratio. Debtors realised for Rs.46,000, expenses of realisation amounted to Rs.3,000. Prepare necessary ledger accounts. 7. Tarun, Neeru and Vikas shared profit in the ratio of 3:2:1. On December 31, 2006 their balance sheet was as follows: Balance sheet as on December 31, 2006 Liabilities Amount Assets Amount (Rs) (Rs) Capital Plant 80,000 Tarun 90,000 Debtors 70,000 Neeru 1,00,000 Furniture 22,000 Vikas 80,000 2,70,000 Stock 70,000 Creditors 60,000 Investments 60,000 Bills payable 30,000 Bills receivable 46,000 Reserve 20,000 Cash in hand 32,000 3,80,000 3,80,000 On this date the firm was dissolved. The assets realised as follows: Plant Rs.85,000, Debtors Rs.69,000 Furniture Rs.20,000, stock 95% of the book value, Investments Rs.86,000 and Bills receivable Rs.31,000. AnACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts

234 office Electronic Typewriter, not shown in the books of accounts realised Rs.9,000. Expenses of realisation amounted to Rs.4,500. Creditor are taken over by Vikas at book value. Prepare realisation account, Capital accounts and cash account 8. The following was the balance sheet of Anu and Hema as on December 31,2006: Balance sheet as on December 31, 2006 Liabilities Amount Assets Amount (Rs) (Rs) Sundry Creditors 42,000 Cash at Bank 13,000 Bills payable 26,000 Sundry debtors 50,000 Hema’s loan 20,000 Stock 40,000 Reserve fund 6,000 Bills receivable 28,000 Provision of Bad debts 2,000 Machinery 60,000 Capital Investment 30,000 Anu 90,000 1,52,000 Fixtures 27,000 Hema 62,000 2,48,000 2,48,000 The firm was dissolved on December 31, 2006 and assets realised and settlements of liabilities as follows : (a) The realisation of the assets were as follows: Rs. Sundry debtors 48,000 Stock 38,000

Bills receivable 27,000 Machinery 62,000 (b) Investment was taken over by Hema at agreed value of Rs.36,000 and agreed to pay of creditors. Bills payable is paid 3% less. (c) Fixture are value less. (d) The expenses incurred to realisation were Rs.2,200. Journalise the entries to be made on the dissolution and prepare realisation account, bank account and partners capital accounts. 9. Rohit and Tina were partners in a firm and shared profit as 3 : 2. They decided to dissolve their firm on March 31, 2007 when their balance sheet was as follows:MODULE - 4 Partnership Accounts Notes 235 Dissoloution of a Partnership Firm ACCOUNTANCY Balance sheet as on March 31, 2007 Liabilities Amount Assets Amount (Rs) (Rs) Capital Machinery 80,000 Rohit 80,000 Investments 60,000 Tina 90,000 1,70,000 Stock 22,000 Sundry creditors 70,000 Sundry Debtors 80,000 Reserve 10,000 Cash at bank 8,000 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 is taken over by Rohit at Rs. 19,000. (b) Investment were taken over by Tina at book value. Sundry debtors of book value Rs.50,000 taken over by Rohit at 10% less and remaining debtors realised for Rs.28,000. (c) Realisation expenses amounted to Rs.2,000 paid by Rohit. Prepare necessary ledger accounts to close the books of the firm. ANSWERS TO INTEXT QUESTIONS Intext Questions 21.1 1. Unlawful 2. Dissolved 3. Firm, partnership 4. Dissolved 5. Court 6. Agreement Intext Questions 21.2 (i) F (ii) T (iii) T (iv) T (v) T (vi) T Intext Questions 21.3 I. (c) and (e) II. (i) and (iv) Answers Practical Terminal Questions 5. Profit on Realisation Rs. 13,000 Total of Cash A/c Rs. 210500 6. Profit on Realisation Rs. 2000 Total of Cash A/c Rs. 64000 7. Profit on Realisation Rs. 14000 Total of Cash A/c Rs.398500 8. Loss on Realisation Rs. 23420 Total of Cash A/c Rs.188000 9. Loss on Realisation Rs. 92000 Total of Cash A/c Rs.83800s

Rakesh and Mukesh were very good friends. They were running a business as a partnerhsip firm. They were very successful. People were jealous of their relations. But one day people came to know that they have closed the business. Some dispute had arisen between the two on a trivial issue. Similarly, firm may come to an end because of dispute among the partners or firm running losses for last few years or because of order of the court and so on. We can say that the partnership firm is dissolved. In this lesson, you will learn about the accounting treatment in case of dissolution of partnership firm. OBJECTIVES After going through this lesson, you will be able to: l state the meaning of dissolution of partnership firm; l distinguish between dissolution of partnership and dissolution of partnership firm: l explain the Realisation account and disposal of assets and payment of liabilities; l illustrate the treatment of unrecorded assets and liabilities; l prepare partners’ capital accounts and bank and/or cash account. 21.1 DISSOLUTION OF PARTNERSHIP AND DISSOLUTION OF PARTNERSHIP FIRM The term dissolution means coming to an end or discontinuation. The dissolution of the firm implies a complete breakdown of the partnership 21 Dissoloution of a Partnership Firm ACCOUNTANCY

relation among all the partners. Dissolution of the partnership (owing to retirement, death or insolvency of a partner), merely involves change in the relation of the partners but it does not end the firm; the partnership would certainly come to an end but the firm, the reconstituted one might continue under the same name. So the dissoluton of the partnership may or may not include the dissolution of the firm but the dissoluton of the firm necessarily means the dissoluton of the partnership. On dissolution of the firm, the business of the firm ceases to exist since its affairs are would up by selling the assets and by paying the liabilities and discharging the claims of the partners. The dissolution of partnership among all partners of a firm is called dissolution of the firm. (i) Dissolution by Agreement : A firm is dissolved in case l all the partners give consent or l as per the terms partnership agreement . (ii) Compulsory dissolution : A firm is dissolved compulsorily in the following cases l When all the partners or all excepting one partner becomes insolvent or of unsound mind. l When the business becomes unlawful. l When all the partners excepting one decide to retire from the firm. l When all the partners or all excepting one partner die. l A firm is also dissolved compulsorily if the partnership deed includes any provision regarding the happening of the following events (a) expiry of the period for which the firm was formed,

(b) completion of the specific venture or project for which the firm was formed. (iii) Dissolution by notice : In case of a partnership at will, the firm may be dissolved if any one of the partner gives a notice in wririting to the other partners. (iv) Dissolution by Court : A court may order a partnership firm to be dissolved in the following cases: (a) When a partner becomes of unsound mind (b) When a partner becomes permanently incapable of performing his/her duties as a partner,ACCOUNTANCY MODULE - 4 Notes Dissolsolution of a Partnership Firm Partnership Accounts 218 (c) When partner deliberately and consistently commits breach of agreements relating to the management of the firm; (d) when a partner’s conduct is likely to adversely affect the business of the firm; (e) when a partner transfers his/her interest in the firm to a third party; (g) When the court regards dissolution to be just and equitable. Distinction Between Dissolution of Partnership and Dissolution of Partnership Firm You have already studied that on the occasion of admission, retirement and death existing partnership comes to an end, but the business of the firm

continues under a new agreement. When a firm decides to wind up its business operations under any of the circumstances mentioned, it stands dissolved. Dissolution of a partnership firm is different from the dissolution of a partnership. Dissolution of a firm means that the firm closes its business and comes to an end. While dissolution of a partnership means termination of old partnership agreement and a reconstitution of firm due to admission, retirement and death of a partner. In dissolution of a partnership the remaining partners may agree to carry on the business under a new agreement. INTEXT QUESTIONS 21.1 Fill in the blanks with the appropriate word/words: 1. A partnership firm ccomes to an end when the activities of the firm become ........................ 2. When a firm decides to close its business, it is said to be ........................ 3. Dissolution of a ........................ is different from dissolution of ........................ 4. The firm is compulsorily ........................ when all the partners or all excepting one partner die. 5. The firm is dissolved by ........................ when a partner becomes of unsound mind. 6. The firm is dissolved by ........................ when all the partne

21.4 TREATEMENT OF ASSETS AND LIABILITIES

Treatement of assets and liabilities When the partners decide to discontinue the business of the firm, it becomes necessary to settle its accounts. For this purpose, it disposes off all its assets (except cash and bank balances) for satisfying all the claims against it. For this purpose a separate account called ‘Realisation Account’ is opened. Realisaiton is an account in which assets excluding cash in hand and bank are transferred at their book value and all external liabilities are transferred at their book It also shows what amount were realised on the sale of assets and which liabilities were discharged at what amount. In order to record the disposal of assets and discharge of liabilities, the following journal entries are recorded: 1. For Transfer of Assets Assets account is closed by transferring it to the Realisation Account at its Book Value. Realisation A/c Dr. To Assets A/c (Individually) (Transfer of assets) It is to be noted that the following items on the assets side of the Balance Sheet are not transferred to the Realisation Account : (a) (i) Undistributed loss (is (i.e. Debit Balance of Profits and Loss account) (ii) Fictitious assets or deferred revenue expenditures such as preliminary expenses . All the above items are closed by transferring them to the partners’ Capital Account in their profit sharing ratio. The Journal entry is made:

Partner’s capital A/c Dr. (Individually) To Profit & Loss A/c To Fictitious Assets A/c (Transfer of loss and fictitious Asset (b) Cash in hand, and Cash at Bank, will be the opening balance of the Cash/Bank account; (c) Provisions and reserves against assets should be closed by crediting the Realisation Account.ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm Partnership Accounts 220 The Journal entry is made : Provision for Doubtful Debts A/c Dr. Provision for r Depreciation A/c Dr. Any other Provision A/c Dr. To Realisation A/cferred to the credit of Realisation Account. The relevant Journal entry is as under : External Liabilities A/c Dr. (Individually) To Realisation A/c (Transfer of external liability) Capital and Loan account of the partners’ are treated separately and so are not transferred to the Realisation Account. 3. Treatment of accumulated reserves and profit/loss

Any balance of accumulated reserves (e.g. general reserves), Profit and Loss Account (Cr.), Reserve Fund and other reserves on the d (Transfer of provision on assets) 2. For Transfer of Liabilities The accounts of various external liabilities are closed by transferring them to the Realisation Account. The loan given to the firm by a partner’s wife treated as an external liability and is transfferred to the credit of Realisation Account. The relevant Journal entry is as under : External Liabilities A/c Dr. (Individually) To Realisation A/c (Transfer of external liability) Capital and Loan account of the partners’ are treated separately and so are not transferred to the Realisation Account. 3. Treatment of accumulated reserves and profit/loss Any balance of accumulated reserves (e.g. general reserves), Profit and Loss Account (Cr.), Reserve Fund and other reserves on the ddate of dissolution will be credited to the Partners’ Capital accounts on the basis of profit sharing ratio. The following journal entry will be recorded : Profit and Loss A/c Dr. General Reserve A/c Dr. Any Other Fund Dr. To Partners’ Capital A/c (Individually) (transfer of profit and reserve) 4. For Sale of Assets (for cash) Bank/ Cash A/c Dr. (Realised Value)

To Realisation A/c (Sale of assets)MODULE - 4 Partnership Accounts Notes 221 Dissoloution of a Partnership Firm ACCOUNTANCY 5. For Assets taken over by the partner Partners’ Capital A/c Dr. To Realisation A/c (Agreed Price) (Assets taken over by partner) Bank/Cash/Partners capital A/c Dr. To Partner’s Loan A/c (settlement of loan to a partner) 6. Settlement of loans given by the Partner Partners’ Loan A/c Dr. To Bank/Cash/Partners’ capital A/c (Settlement of loan given by the partner) 7. Payment of Liabilities in Cash Realisation A/c Dr. To Cash A/c (Payment of liabilities) 8. Payment of Liabilities by the partner(s) Realisation A/c Dr. To Partner Capital A/c

(Liabilities taken over by partner) Treatment of unrecorded assets and liabilities Sometimes, there may be some assets that have already been written off completely in previous years and thus, do not appear in the Balance Sheet but physically they still exist for operational purposes. For example, there is an old computer, which is still in working condition though its book value is zero. Similarly, there may be some liabilities, which do not appear in the Balance Sheet, but actually they are still there. For example, a bill discounted with bank, on dissolution it was dishonored and had to be taken up by the firm for payment purposes. It is to be kept in mind that an unrecorded asset would never be transferred to the debit of the Realisation Account, because the amount realised from its sale is in nature of a gain and the Realization Account is only credited accordingly. Similarly, an unrecorded liability need not be transferred to Realisation.ACCOUNTANCY MODULE - 4 Notes Dissolution of a Partnership Firm

The accounts of affirm on dissolution must be settled according to the following rules: Losses suffered by the firm shall be paid- first out of profits, next, out of capital, and lastly, if necessary by the partners individually in the proportion in which they were entitled to share profits. The assets of the firm, including the contributions of the partners are to be distributed in the following order: In paying the debts due to third parties; In paying the partners rateably advance made by them as distinguished from their contributions towards the capital; In paying the partners rateably what is due to them on account of capital.

If there is any surplus, it shall be divided between the partners in the proportion in which they were entitled to share profits. We may also describe the above statement as follows. External debts shall be paid out of assets of the firm first and if any surplus is left the same shall be utilized for repayment of loans advanced by the partners and next the residue shall be applied among the partners for the repayment of capitals and if still the surplus is left it shall be distributed among partners as profit in their profit sharing ratio. However, in case of deficiency the deficiency of the insolvent partner is borne by the solvent partners in the ratio of their fixed capitals.

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