Introduction to dissolution accounting entries

1. DISSOLUTION
INTODUCTION

2. Dissolution of Partnership Firm
Dissolution of Partnership Firm identifies the distinction in the breaking of the
association between all the partners of an enterprise and between a few
partners; and it is the breaking or adjournment of the association between the
partners which is known as the dissolution of partnership firm. This puts an
end to the presence of an enterprise and no business concern is carried out
after the dissolution apart from the pursuits associated with winding up of the
enterprise as the financial affairs of the enterprise are to be affected by selling
enterprise’s assets.
When the current partnership is dissolved, the enterprise may go on under
the same name if the partners determine. To put it in other words, it outcomes
in the dissolution of a partnership however, not that of the enterprise. Section
39 of the partnership Act 1932 says, the dissolution of a partnership between
all the partners of an enterprise is known as the dissolution of the firm.

3. Dissolution of Partnership
Partnership can be dissolved only when some predefined
provisions, according to the Partnership Act of 1932 are
matched, such as:
1. Dissolution by Agreement
2. Dissolution by Notice
3. Dissolution by the Court
4. Compulsory Dissolution
5. Conditional Dissolution

4. What is Dissolution of a Firm?
Dissolution of a partnership firm might occur without the
interference of the court or by the court’s order, in any of the
ways stated. It has to be noted that dissolution of the
enterprise necessarily brings in dissolution of the partnership.
Dissolution of a firm takes place in any of the following ways :

5. 1.Dissolution by Agreement: An enterprise is dissolved :
• With the consent of all the partners
• In accordance with an agreement between the partners
2.Mandatory Dissolution: An enterprise is dissolved mandatorily in the below
mentioned cases:
• When all the partners or one partner, become bankrupt, rendering them
incapable to sign an agreement
• When the business concern of the enterprise is illegal
• When some occurrence has taken place which makes it illegitimate for
the partners to take over and carry on the business concern of the
enterprise in partnership, for example, when a partner who is a citizen of
a nation becomes an alien antagonist because of the alleged declaration
of war with his nation and India

6. 3.On the occurrence of certain emergencies: Subject to agreement
between the partners, an enterprise is dissolved :
• If established for a steady period, by the expiry of that time
frame
• If established to carry out one or more deals, by the
accomplishment thereon
• When the fellow partner is deceased
• By the judgment of a partner as a bankrupt
4.Dissolution by Notice:
If the partnership is at will, the enterprise may be dissolved if one
of the partners furnishes a notice in written proof to the other
fellow partners, bespeaking his motive of pursuing dissolution of
the enterprise

7. 5.Dissolution by Court: At the suit of a partner, the court may
order a partnership enterprise to be dissolved in any of the
following mentioned aspects:
• When a fellow partner turns out to be a mentally ill person
• When a partner becomes ineffective in performing his
responsibilities
• When a partner is found guilty of misconduct or unethical
behavior which skeptically influence the business concern of
the enterprise

8. Dissolution of Partnership Dissolution of Firm
Definition
Dissolution of a partnership – to the adjournment of the
association between a partner and the rest of the partners of
an enterprise
When all the existing partnership of an organisation is
dissolved, it is known as dissolution of a firm
Continuation of business
In event of dissolution of partnership, business continues as
usual, but the partnership is reconstituted
In event of dissolution of firm, business stops
Intervention of Court
No requirement for court intervention Firms can be dissolved by court intervention
Closure of book of accounts
Not closed Closed for firm
After winding up of the entity
Assets and liabilities are revalued after winding up of existing
partnership
Assets and liabilities are settled on winding up of a firm
Scope
Does not result in dissolution of firm Dissolution occurs between partners of the firm

9. It should be noted that, subject to agreement among the partners, the following
rules as furnished in Section 48 of the Partnership Act 1932 shall be applicable.
When the firm is dissolved :
•Its books of a/c are to be closed, and the profit or loss (P/L) emerging on the
realisation of its assets and dismissal of liabilities is to be calculated
•For this purpose, a Realisation a/c is outlined to determine the net effect
(profit/loss) of realisation of assets and payment of liabilities which might be
is transferred to the partner’s capital a/c in their profit sharing ratio (PSR)
•Therefore, all assets and external liabilities are transferred to this a/c
•It records the sale of assets and payment of liabilities and realisation
expenditures
•The balance in this account is known as profit/loss on realisation which is
transferred to partners’ capital a/c in their profit sharing ratio (PSR)

11. For transferring the assets
Transfer to the debit of realization account at their gross book values of all
accounts of assets excluding cash, bank and the fictitious assets.
Realization a/c Dr.
To Assets a/c(individually)
It is to be noted that debit balance such as accumulated losses deferred
expenses are not transferred to the realization account. These are transferred to
the partners’ capital account in their profit sharing ratio by recording the
following entry :
Partners’ capital a/c Dr.
To Fictitious assets a/c

12. For transferring the liabilities
All external liability accounts including provisions, if any, in
respect of assets which have been transferred to the realization
account are closed by transferring them to the credit of
realization account at their book values.
External liabilities A/c(Individually) Dr.
To Realization A/c
Partners’ capital account and loan account of the partner are
prepared separately and are not transferred to realization
account.

13. 3.For sale of assets
Bank A/c(realized price) Dr.
To Realization A/c
4. For an asset taken over by a partner
Partner’s capital A/c Dr.
To Realization A/c(Agreed price)
5. For payment to creditors
Any amount paid in cash to creditors, realization account is debited
and cash/bank account is credited.
Realization a/c Dr.
To Bank a/c

14. 6. Settlement with the creditors through transfer of asset
When a creditor accepts an asset in part payment no entry is recorded. It
is because the liability due to the creditors has already been transferred
to the credit of realization account and the asset taken over by the creditor
is appearing on the debit side of the realization account. Thus, the debit of
the asset cancels the credit of the corresponding liability in the
realization account. Sometimes, a creditor may accept part of his payment in
cash and part of his payment by taking over an asset. In this case, the entry
will be recorded for cash payment only.
For example, a creditor to whom Rs. 10,000 was due accepted office
equipment worth Rs. 8,000. He will be paid Rs. 2,000 in cash by recording
the following entry :
Realization a/c Dr. Rs. 2,000
To Bank a/c Rs. 2,000

15. Whenever a creditor takes over an asset, there may be two
situations :
(a) When a creditor accepts an asset whose value is more than
the amount due to him, he will pay cash. It is recorded as :
Bank a/c Dr.
To Realization a/c
(b) When a creditor accepts an asset as full and final settlement,
no journal entry is recorded.

16. 7. Expenses of realization
(a) When realization expenses are paid by the firm
Realization a/c Dr.
To Bank a/c
(b) When firm has agreed to pay partner a fixed amount towards realization
expenses irrespective of the actual realization expenses
Realization a/c Dr.
To Partners’ capital a/c
(c) When the actual expenses are paid by the firm on behalf of a partner, the
following entry will be recorded :
Partners’ capital a/c Dr.
To Bank a/c
(d) However, if a partner himself pays and agreed not to get them reimbursed,
no journal entry is recorded.
(e) When the partner agrees to pay the expenses on behalf of the firm, the entry
to be recorded :
Realization a/c Dr.
To Partners’ capital a/c

17. 8. When liabilities are paid off
Realization a/c Dr.
To Bank a/c
9. When partner discharges a liability
The liability account is transferred from realization account to partner’s capital account by
recording the following entry :
Realization a/c Dr.
Partners’ capital a/c
10. For realization of any unrecorded assets
Bank a/c Dr.
To Realization a/c
11. Unrecorded asset taken over by a partner
Partners’ capital a/c Dr.
To Realization a/c
12. For settlement of any unrecorded liability
Realization a/c Dr.
To Bank a/c
13. Unrecorded liability taken over by a partner
Realization a/c Dr.
To Partners’ Capital a/c

18. 14. When the profit (loss) on realization is transferred to partners’
capital account in their respective profit sharing ratio :
(a) In case of profit on realization
Realization a/c Dr.
To Partners’ Capitals a/c(individually)
(b) In case of loss on realization
Partners’ Capitals a/c (individually) Dr.
To Realization a/c
15. For transferring accumulated profits and reserve
All accumulated profits and reserves are transferred to the
partners’ capital account in their respective profit sharing ratio :
Accumulated profit/reserves Dr.
To Partners’ capitals a/c (Individually)

19. 16. Transfer of fictitious assets
All accumulated losses and fictitious assets are debited to the
partners’ capital accounts in their profit sharing ratio :
Partners’ capitals a/c (Individually) Dr.
To Accumulated losses/Fictitious Assets a/c
17. Payment of loans
Any loans due to partners are paid off :
Partner’s loan a/c Dr.
To Bank a/c

20. 18. Settlement of capital accounts
(a) If the partner’s capital account shows debit balance, he is to
bring in the necessary cash :
Bank a/c Dr.
To Partners’ capital a/c
(b) In case of partners whose accounts show credit balance, the
same is paid off :
Partners’ capitals a/c Dr.
To Bank a/c