(1)

ACCOUNTING SOLUTIONS
SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-5017149, 9876149390, 9915169925
SCO: 209, F.F. Sector-36/D Chandigarh. 0172-5017149, 9876149390, 9915169925
DISSOLUTION OF PARTNERSHIP
Dissolution:
The term dissolution stands for discontinuation. Under the Indian Partnership Act
1932, the dissolution may be either of partnership or of a firm.
Dissolution of partnership refers to the change in the existing relations of the
partners. The firm continues its business. It may take place on admission, retirement,
death, and expulsion, insolvency of a partner or on change in the profit sharing ratio.

Dissolution may be of the following way:
(a) Dissolution by agreement:
When all the partners agree to dissolve the firm by mutual agreement.

(b) Compulsory Dissolution:
(i) On the insolvency of all the partners or all except one partner
(ii) On business becoming illegal

(c) Dissolution on the happening of certain contingencies:
(i) The expiry of the term for which the firm was formed
(ii) The completion of the venture for which the firm was formed.
(iii) The death of a partner.
(iv) The adjustment of a partner as insolvent.
(d) Dissolution by Notice of Partnership at will:
When any one of the partners gives a notice in writing to other partners in
case of partnership at will.
(e) Dissolution by court:
(i) Insanity of Partner
(ii) Permanent incapacity of a partner
(iii) Misconduct by a partner
(iv) Persistent breach of agreement by a partner
(v) Transfer of interest by a partner to a third party
(vi) The business of the firm cant be carried on except at a loss
(vii) Any other ground on which is satisfied that it would be just and
equitable to dissolve the firm.
Distinguish Between Dissolution of Partnership & Dissolution of firm
Basis Partnership Firm
Meaning


Continuation


Closure of
It refers to a change in the
existing agreement between the
partners
In case of dissolution of
partnership, the firm continues
its business
In case of dissolution of
It refers to the dissolution of
partnership between all the
partners
In case of dissolution of firm,
the firm does not continue the
business.
In case of dissolution of firm,

(2)


ACCOUNTING SOLUTIONS
SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-5017149, 9876149390, 9915169925
SCO: 209, F.F. Sector-36/D Chandigarh. 0172-5017149, 9876149390, 9915169925
books

Interference


Effect



Nature

partnership, books of accounts
may not be closed.
Court does not intervene
because partnership is dissolved
by mutual agreement
Dissolution of partnership does
not necessarily means the
dissolution of firm

It is voluntary
books of accounts have to be
closed.
A firm can be dissolved by the
courts order

Dissolution of firm necessarily
means the dissolution of
partnership also.

It maybe both

Firms debts and private debts can be distinguished as under:
Basis Firms Debts Private Debts
Who Incurs


Liability



Application of
Firms property


Application of
private
property
Firms debts are incurred by the
firm


All partners are jointly and
severally liable.


Firms property shall be applied
first for firms debts


For firms debts, only the excess
of partners private property
over his private debts can be
applied
Private debts are incurred by a
partner

Only the concerned partner is
liable



For private debts, only the
share of concerned partner in
the excess of firms property
over the firms debts can be
applied
For private debts, private
property shall be applied first.

Garner & Murray Rule:
If the capital of the partner shows a debit balance on the dissolution of the firm, he is
to bring cash in order to settle his account. If such a partner is insolvent , he is unable
to settle his debit balance-either wholly or in part, the unrecoverable portion of the
said partner must be borne by the solvent partners in accordance with the decision
in Garner & Murray Rule.

Rules in Garner & Murray principle:
(a) The solvent partner must bring in cash equal to their share of loss on
realisation.
(b) The deficiency of the insolved partner must be borne by the solvent partners
in proportion to their last agreed capital (and not in profit-sharing ratio). But if

(3)


ACCOUNTING SOLUTIONS
SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-5017149, 9876149390, 9915169925
SCO: 209, F.F. Sector-36/D Chandigarh. 0172-5017149, 9876149390, 9915169925
a solvent partner has nil balance or a debit balance in capital accounts, he
will not bear such deficiency of the insolvent partner.
Fixed & Fluctuating Capital

It is very important whether the capital is fixed or fluctuating. If the capital is
fixed the deficiency of the insolvent partner must be borne by the solvent
partners as per their capital ratio. But, if the capital is fluctuating, all necessary
adjustments, viz.reserves, inappropriate profits or losses(not realisation profit
or loss), drawings unrecorded assets and liabilities must be adjusted in order
to find out the last agreed capital.

Piece-Meal Distribution
Normal questions in Dissolution were attempted on the assumption that all
the assets are realised within a day or two, liabilities are paid accordingly and
accounts are settled among the partners at the same time. But in actual
practice this is not possible due to a number of reasons. Since assets are
realised and cash is collected gradually over a long period, therefore creditors,
other outside liabilities and capital also paid gradually. The distribution so
made is known as Piecemeal Distribution.

Surplus Capital Method or Proportionate Capital Method:

Under Surplus Capital method, the capital of each partner is compared with
that of other according to profit sharing ratio and the partner whose capital is
found in excess is to be paid first by the excess amount only. This procedure
will continue till the balance of capital is distributed among the partners in
profit sharing ratio. When all realisations have been distributed, the unpaid
balance of capital accounts will represent a loss on realisation which will be in
profit sharing ratio.

Maximum Loss Method:

Under Maximum Loss Method, after the payment of realisation expenses,
outside liabilities and partners loan, each partners share in cash realisation is
calculated as:

Step 1. Find out the capital claims after adjusting accumulated profits/losses
reserves and drawings, etc. Of the partners.

Step 2. Find out the maximum possible loss at every stage of realisation on
the assumption that there will be no further realisation of cash. The same is
done by deducting the available cash for distribution among the partners from
their total capital claims.

(4)


ACCOUNTING SOLUTIONS
SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-5017149, 9876149390, 9915169925
SCO: 209, F.F. Sector-36/D Chandigarh. 0172-5017149, 9876149390, 9915169925
Step 3. Deduct the possible loss from the capital claims of the partners in
profit sharing ratio. The balance shows the amount payable to the partners. If
this balance is found to be a negative one, the said balance of capital account
of the partners is treated as insolvent and hence, must be borne by the
solvent partners as per Garner vs. Murray rule. If all final balances are found
to be positive, they are to be paid off.

Conversion into a limited company:

Sometimes it so happens that a partnership firm converts itself into a limited
company to get advantage of limited liability and some other concessions as
less rate of income tax. In such a case, it is obvious that the partnership firms
comes to an end, consequently the books of the partnership firm are closed in
the same way. Realisation a/c is opened and assets and liabilities taken over
by the company are transferred to the Realisation A/c at their book value. The
company formed will be debited with the amount agreed to be paid by it for
the purchase of the firm and the realisation a/c credited.

Entry for Assets not taken over:
Cash/Bank A/c Dr.
To Relevant Asset A/c

Entry for Liabilities not taken over:
Liability A/c Dr.
To Cash/Bank A/c

Entry for the purchase consideration
Purchasing Company A/c Dr.
To Realisation A/c

Entry for the shares/debentures issued by the purchasing company:
Cash A/c Dr.
Shares A/c Dr.
Debentures A/c Dr.
To Purchasing Company A/c
Also distribute the share & Debentures among the partners

Difference between Revaluation & Realisation Account
Basis` Revaluation A/c Realisation A/c
Meaning


When Prepared
It records increase or decrease
in the value of assets and
Liabilities.
It is prepared at the time of
It records the book value and
the realised value of assets and
liabilities.
It is prepared at the time of

(5)


ACCOUNTING SOLUTIONS
SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-5017149, 9876149390, 9915169925
SCO: 209, F.F. Sector-36/D Chandigarh. 0172-5017149, 9876149390, 9915169925



Purpose


Transfer of
Profit & Loss
admission, retirement or death
of a partner.

It is prepared to find out
profit/loss on revaluation of
assets and liabilities.
Profit/Loss is transferred only to
old partners capital accounts.
dissolution of the firm.


It is prepared to find out
profit/loss on realisation of
assets and liabilities.
Profit/Loss is transferred to all
partners Capital Accounts.