Dissolution of Partnership Test - 7

When there is no liability towards workmen compensation fund, in such a case do not transfer it in realisation account. Workmen compensation reserve should be credited to the partners in their profit sharing ratio.

Deferred Advertisement Expenditure Account is to be written off as:

A = 28,000 × 5/7 = 20,000

B = 28,000 × 2/7 = 8,000

Now debit A and B with the calculated amount.

:Loan of partner is not shown in realization account. To pay off the partner’s loan, entry should be made through his loan account only in a normal situation.

Partner’s loan can be transferred in his capital account, when his capital account shows a negative balance as it will increase the capital of partner.

Debit balance of profit and loss account is a loss and should be distributed among the partners or should be debited to the partners’ capital account in their profit sharing ratio. In this case profit sharing ratio is not given, so it should be debited equally to all the partners.

At the time of dissolution, all assets are to be transferred to the realization account at their actual value (Book value) and all provision given against the assets are to be transferred in the realization account opposite side.

In case of deficiencies or losses including deficiencies of capital are to be paid first out of the capitals of the partners. When it is difficult to recover the losses from the capitals of the partners only then their personal property can be used.

Section 48 is concerned with the settlement of accounts of the partners at the time of dissolution. In settling the accounts of a firm after dissolution, some rules shall, subject to agreement by the partners, be observed; for example: Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

 When liabilities are paid, should be recorded at the paid amount and not at the actual value of the liability.

Section 44 of the Indian Partnership Act, 1932 states that at the suit of a partner, the Court may dissolve a firm.

Calculation of loss to be transferred:

Anil : 30,000 × 1/2 = 15,000

Baman : 30,000 × 1/2 = 15,000

As per the Section 49, where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall he applied first in the payment of his separate debts, and the surplus (if any) in payment of the debts of the firm.

Amount to be transferred to B’s Account:

Total amount of investment ₹18,000 but they have taken investment at ₹12,000

A’s Share = 12,000 × 5/12 = 5,000

B’s Share = 12,000 × 4/12 = 4,000

C’s Share = 12,000 × 3/12 = 3,000

Amount to be transferred to B’s Account:
Total amount of investment ₹24,000 but they have taken investment at ₹18,000
A’s Share = 18,000 × 5/12 = 7,500
B’s Share = 18,000 × 4/12 = 6,000
C’s Share = 18,000 × 3/12 = 4,500

This is the basic rule of any business firm that first pay to the outsiders (firm’s debts) and then pay to the partners and other personal payments (if any).

When a realized value of an asset is not given, in such a case it should be assumed that the asset is not realized ( that asset is not sold). Ralised value will be Nil for that asset.

No entry for expenses Rs.2,000 paid and borne by Ramesh. only amount will be paid to ramesh for carrying out the dissolution

Section 48 is concerned with the settlement of accounts of the partners at the time of dissolution. In settling the accounts of a firm after dissolution, some rules shall, subject to agreement by the partners, be observed; for example: Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

Cash Account and Bank account should be merged at the time of dissolution and should not be prepared separately. Cash Account should be closed by transferring the balance of cash account to the bank account.

Loan paid by Shyam should be paid first ( on prioritys basis) because he is not a partner. As per the rule, payment to the outsiders will be made first and then to the partners.

In Normal situation we do not transfer loan account of a partner in his capital account but at the time of dissolution when his capital account shows negative balance (at the time of closing) in such a case required amount can be recovered from his loan account and remaining amount of his loan will be paid back to him.

At the time of dissolution firm must pay firm’s debt first and then to the partners i.e.

1.Creditors

2.Partner’s Loan

3.To Partners (Capital A/c balance)

since partner capital account is being closed cash is paid to the partner so it is credited.

Advertisement Suspense Account is the part of accumulated losses, therefore, like any other accumulated loss it should be transferred to Partners' Capital/current account debit side in the old profit sharing ratio of partners.

 When liabilities are paid bank account should be credited with the actual amount paid and not with the total amount of liability.