Unit 4: Dissolution of Partnership Firm

Q1Written answer

State the difference between dissolution of partnership and dissolution of partnership firm.

Show solutionHide solution

Worked solution

Basis of Comparison	Dissolution of Partnership	Dissolution of Partnership firm
Meaning	It refers to the stage where a partner/partners discontinue their relationship with the firm.	It refers to the situation that all the relations between a firm and its partners cease to exit
Discontinuation	Business continues as usual	Discontinuation of business due to the dissolution of the firm
Accounts	A revaluation account is created	A realization account is created
Liabilities and assets	Revaluation is done	Sold off to pay for the liabilities
Economic Relationship	Continues	It comes to an end
Nature	Such type of event is voluntary in nature	It can sometimes be compulsory and sometimes voluntary
Effect	The firm is not dissolved	Both firm and partnership are dissolved

Q2Written answer

State the accounting treatment for:

i. Unrecorded assets

ii. Unrecorded liabilities

(i) For Unrecorded Assets

Show solutionHide solution

Worked solution

An unrecorded asset is such an asset whose value is written off from books of accounts, but it is in usable form. It is shown as follows:

1. If sold by cash

Cash A/c Dr.

To Realisation A/c

(Unrecorded asset sold off for cash)

2. If taken over by any partner

Partner’s Capital A/c Dr.

To Realisation A/c

(Partner takes over unrecorded asset)

ii) For unrecorded liabilities

Liabilities that are not recorded in the books of the firm are called unrecorded liabilities. It can be shown in records as

1. When unrecorded liability is paid off

Realisation A/c Dr.

To Cash A/c

(Paid in cash the price of unrecorded liability)

2. When undertaken by a partner

Realisation A/c Dr.

To Partner’s Capital A/c

(Liability that is unrecorded is taken over by partner)

Q3Written answer

On dissolution, how you deal with partner’s loan if it appears on the

(a) Assets side of the Balance Sheet (b) Liabilities side of the Balance Sheet

(a) When a partner’s loan is on the asset side of the balance sheet, it means that the partner has borrowed some amount from the business and needs to pay back the same. In this instance, the loan amount gets transferred to the partners’ capital account. It is shown as follows:

Show solutionHide solution

Worked solution

Partner’s Capital A/c Dr.

To Partner’s Loan A/c

(Loan account of partner transferred to partner capital account)

(b) When a partner’s loan appears on the liabilities side of the balance sheet, it means that the partner has provided a loan to the business, and the business has to pay back the amount which it has got from the partner. The loan is paid in cash after fulfilling the payment of all external liabilities.

Partner’s Loan A/c Dr.

To Cash/Bank A/c

(Loan taken from partner paid in cash)

Q4Written answer

Distinguish between firm’s debts and partner’s private debts.

Show solutionHide solution

Worked solution

Basis of Comparison	Firm’s Debts	Partner’s Private Debts
Meaning	Debts that are owed by a firm to the outsiders.	Debts that are owed by a partner to any other person outside the firm.
Liability	Liability of the firm’s debt lies with all the partners jointly as well as individually.	The liability of repaying debt rest only with the partner who has taken the debt.
Debt Settlement by private assets	Whenever the debts of the firm exceed the assets of the firm, the partner’s private assets may be utilized in order to pay the firm’s debt, only on the condition that the partner’s asset is more than his debts.	The debts that are private will be settled by the private assets of the partner. If any surplus happens, it will be used to pay for the firm’s debts.
Debt settlement by firm’s assets	Debts of the firm are settled using the assets of the firm. If any asset remains after clearing the debt, it gets distributed between the partners.	Partner can utilize their share of surplus assets obtained after clearing all debts from the firm for personal use.

Q5Written answer

State the order of settlement of accounts on dissolution.

Show solutionHide solution

Worked solution

The following rules are applicable to the settlement of accounts after a firm is dissolute as per Section 48 of the Partnership Act, 1932.

1. Amount which is received on the sale of assets should be used in this sequence:

i. Paying off all external expenses and liabilities

ii. Loans and advances that are owed to partners should be cleared.

iii. Capitals of all the partners must be paid off.

Any amount that still remains after paying off all these items must be distributed among partners of the dissolute firm in their original profit-sharing ratio.

2. In case of loss and capital deficiency, the following must be paid in this order:

i. Adjust loss and capital deficiency against the profits of the firm

ii. Adjust against the total capital of the firm

iii. If any loss or deficiencies is present after all the adjustments, the next course of action will be to bear the loss as per the individual profit-sharing ratio.

Q6Written answer

On what account realisation account differs from revaluation account.

Show solutionHide solution

Worked solution

Basis of Comparison	Realisation Account	Revaluation Account
Meaning	It is an account that is prepared to determine the net profit or loss on the sale of assets and discharging of liabilities of the firm	It is an account that is prepared to determine variations in the value of liabilities and assets of a firm.
Comprises of	All liabilities and assets	Only those liabilities and assets that are revaluated
Time of preparation	During the dissolution of the firm	During firm restructuring
Frequency of Preparation	One time, when the firm is dissolved.	As and when a new partner is introduced or an existing partner leaves the firm
Effect	All accounts related to liabilities and assets are closed	There is no account closure when revaluation happens
Records	Records all the liabilities and assets	Records liabilities and assets whose value changed over a period.

My Cart

Your Cart 0

Short Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 5