Dissolution of Partnership Test - 3

when all the partners agree to close down the business, partners can dissolve the firm without interference of the court that is mutual agreement.

When liability is paid off it is debited in the realization account and since partner is paying it partner is credited.

Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved when a partner becomes insane.

Nature of realization account is of Nominal account. All incomes are credited and all losses are debited.

Following journal entry will take place:

Workmen Compensation Reserve A/c Dr.

To Realisation A/c

To Partner’s Capital A/c

Note: Amount equal to the liability should be transferred to the Realization Account and the balance amount is credited to the capital accounts of the partners in their profit sharing ratio.

At the time of dissolution, a partner may take asset, liability or unrecorded assets/liability at the agreed price but cannot take capital of any other partner.

Any unrecorded liability (which is not given in the balance sheet or which was not recorded earlier) will be shown on the debit side of realization account. It will be paid by the firm at the time of dissolution or might be paid by a partner.

Money realized from the sale of an unrecorded asset at the time of dissolution of partnership firm, should be shown in the credit side of realization account and debit side of cash account.

All liabilities will be paid at the time of dissolution of a partnership firm. Whether some information is given or not about the payment of the same. In this case nothing is mentioned about the payment of creditors but it is mandatory to pay the full amount ₹20,000 to the creditors.

Unrecorded asset (if any) given in the additional information, which is realized (sold) at the time of dissolution, should be shown in the credit side of Realization Account because it is income and according to nominal account rule all incomes are credited.