The document discusses dissolution of a firm, which refers to the complete breakdown of a partnership where partners do not continue the business. Dissolution can occur through agreement, compulsory events like insolvency, certain events like expiration of term or death, notice by partners, or court order. Upon dissolution, accounts are settled by paying off liabilities, distributing assets to partners based on capital balances and profit ratios. Dissolution of a firm closes the business while dissolution of a partnership only changes the relationship without closing operations.

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.partnership.
It refers to the complete breakdown of a partnership and
partners do not continue the firm.
The dissolution of partnership between all partners of
firm is called the dissolution of firm.

5. The word ‘Dissolution’is very significant.
D stands for Death
I stands for Incapacity
S stands for Shares
S stands for Serious misconduct
O stands for object
L stands for Lunacy
O stands for object
L stands for Lunacy
U stands for Unexpected
T stands for Term
I stands for Insolvency
O stands for Object
N stands for Notice

6. MODES OF DISSOLUTION
1.Dissolution by Agreement
2.Compulsory dissolution2.Compulsory dissolution
3.Dissolution on happening of certain events
4.Dissolution by Notice
5.Dissolution by Court

7. 1.Dissolution by Agreement (Sec. 40):
A firm may be dissolved with the consent of all the partners or in
accordance with a contract between the partners. Partnership is created by
contract; it can also be terminated by contract.
2.Compulsory dissolution (Sec. 41) :
A firm is compulsorily dissolved under any of the following circumstances:
(a) When all the partners, or all the partners but one, are adjudged insolvent; or(a) When all the partners, or all the partners but one, are adjudged insolvent; or
(b) When some event has happened which makes it unlawful for the business of
the firm to be carried on or for the partners to carry it on in partnership
(E.g., when any partner, who is a citizen of a foreign country, becomes an alien
enemy because of the declaration of war between his country and India).

8. 3.Dissolution on happening of certain events (Sec. 42):
(a) If constituted for a fixed term, by the expiry of that term
(b) If constituted to carry out one or more adventures or undertakings, by the
completion thereof;
(c) By the death of a partner; and
(d) By the adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will not be dissolved in
any of the a aforementioned circumstances. Such a provision is valid.
4.Dissolution by Notice (Sec.43):
Where the partnership is at will, the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve the
firm. A notice of dissolution once given cannot be withdrawn without the
consent of other partners.
The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the
communication of the notice.

9. 5.Dissolvency by court (Sec. 44):
Dissolution of a firm by the Court is necessitated when there is a difference
of opinion between the partners regarding the matter of dissolution. For
example, where one of the partners has become insane, some of the
partners may be willing to continue the firm and share profits with the
insane partner, while the other partner(s) may be insisting on the
dissolution of the firm
.
Obviously in these circumstances intervention by the Court becomes
necessary. On receiving the petition for the dissolution of the firm the
Court is not bound to decree dissolution and it enjoys complete discretion
in the matter. It may or may not order for the dissolution of the firm
depending upon the merits of each case.

10. Settlement of Accounts:
In a case where the partners do not have an agreement regarding
the dissolution of the firm, the following provisions of the Indian
Partnership Act 1932 will apply:
The firm will pay the losses including the deficiency of capital
firstly out of the profits, secondly out of the partner’s capital and
lastly by the partners individually in their profit sharing ratio.lastly by the partners individually in their profit sharing ratio.
The firm shall apply its assets including any contribution to
make up the deficiency firstly, for paying the third party debts,
secondly for paying any loan or advance by any partner and lastly
for paying back their capitals.
Any surplus left after all the above payments is shared by
partners in profit sharing ratio.

12. Difference between the Dissolution of Partnership and
Dissolution of Firm
Basis Dissolution of Partnership Dissolution of Firm
1. Closure of business
The business of the firm continues there is
no closure.
The business of the firm gets
discontinued.
2. Settling of assets and
There is a revaluation of assets and liabilities.
Hence, they are shown at revalued figures in
The liabilities are paid-off and
liabilities
Hence, they are shown at revalued figures in
the Balance Sheet.
assets are realized.
3. Intervention by court
In this case, there is no intervention by the
court as the dissolution of partnership takes
place by the mutual consent of all the
partners.
The court may or may not
intervene in this case.
4. Relationship
The relationship between the partners
continues to exist though it may change its
form.
The relationship between the
partners ceases to exist.
5. The closing of Books
of accounts
There is no closure of books as the business
continues.
The books need closure as the
business ceases to continue.

13. ACCOUNTING TREATMENT:
1.When a firm is dissolved , the books of the firm are to be closed. This is
done by preparing an account called Realization Account.
2.This account is mainly prepared to show the profit or loss on realization
of assets and payment of liabilities.
3.The profit or loss shown by realization account is transferred to the3.The profit or loss shown by realization account is transferred to the
capital account of the partners in the profit sharing ratio.
4.After this the accounts of the partners are settled among themselves.
5.If the capital account of a partner show a debit balance , he bring in cash.
6.After incorporating all the amounts relating to the cash or bank in the
cash account, the balance of this account must be equal to the amount
due to partners. When this is done , all accounts in the books of firm are
closed.