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C H A P T E R

Dissolution of a Partnership Firm

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Dissolution of Partnership
It implies change in relationship of partners of the firm but the firm continues its business. In other
words, there is dissolution of partnership whenever a partnership is reconstituted, viz., admission,
retirement, death or insolvency of a partner.
2. Dissolution of Firm
Dissolution of partnership among all the partners of a firm is called dissolution of the firm. In
such a case the business of the firm also comes to an end.
3. Firm’s Debts
Firm’s Debts means the debts owed by the firm to outsiders.
4. Private Debts
Private Debts means debts owed by a partner to any other person.
5. Realisation Account
It records the realisation of assets and payments of liabilities. It is prepared to determine gain
(profit)/loss on realisation of assets and settlement of liabilities.
6. Unrecorded Asset
Any asset which is not recorded in the books of the firm, is called unrecorded asset.
7. Unrecorded Liability
Any liability which is not recorded in the books of the firm is known as unrecorded liability.

SUMMARY OF THE CHAPTER

• Dissolution of partnership between/among all the partners of a firm is called Dissolution of the
Firm: In case of dissolution of a firm, the business of the firm is closed, the assets are realised and the
liabilities are paid.
• 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/insolvency of a partner or change
in the profit-sharing ratio.
Settlement of Accounts (Section 48)
• Treatment of Losses: Losses including deficiencies of capital are to be paid in the following order:
(i) First out of profits of the firm;
(ii) Then out of capitals of the partners; and
(iii) Lastly by partners individually in their profit-sharing ratio. [Section 48 (a)]