Page 176 - DEBKVOL-1

8

C H A P T E R

Dissolution of a Partnership Firm

MEANING OF KEY TERMS USED IN THIS CHAPTER

1. Dissolution of Firm Dissolution of the firm means business of the firm comes to an
end. Assets of the firm are sold and liabilities are paid. In effect,
economic relationship among the partners comes to an end.
2. Dissolution of Partnership It means change in economic relationship among 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.
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 is the account to which assets owned by the firm and liabilities
owed to outsiders are transferred at the time of firm’s dissolution.
Amounts realised from assets and payments of liabilities are
recorded in this account. The balance is Gain (Profit) or Loss on
realisation of assets and settlement of liabilities.
6. Unrecorded Assets Assets which are not recorded in the books (Balance Sheet) of the
firm but exist are called unrecorded assets.
7. Unrecorded Liability Liability which is not recorded in the books of the firm but payable
is known as unrecorded liability.

CHAPTER SUMMARY

• Dissolution of a partnership between 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, assets are realised and 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;
(iii) Lastly by partners individually in their profit-sharing ratio. [Section 48(a)]
• Application of Assets: Assets of the firm, including any sum contributed by the partners to meet the
deficiencies of capital are applied in the following order:
(i) In paying firm’s debts to the third parties;
(ii) In paying to each partner rateably what is due to him on account of loans and advances;
(iii) In paying to each partner rateably what is due to him on account of capital; and
(iv) The surplus, if any, is distributed among the partners in their profit-sharing ratio. [Section 48(b)]