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Accountancy > Dissolution of Partnership Firm > Accounting Treatment of Dissolution
Dissolution of Partnership Firm

Accounting Treatment of Dissolution

Let us learn about the accounting treatment in case of a dissolution of the partnership firm. There is a special account to be made known as the realisation account, along with the necessary changes to the capital accounts. Let us study this.

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Accounting Treatment

On dissolution, the books of the firm are to be closed. Dissolution process starts by opening the following accounts in the firm’s books:

  1. Realisation Account,
  2. Partner’s Loan Account,
  3. Partners’ Capital Accounts,
  4. Bank or Cash Account.

1] Realisation Account

The object of preparing Realisation account is to close the books of accounts of the dissolved firm and to determine profit or loss on the Realisation of assets and payment of liabilities. It is prepared by:

  • Transferring all the assets except Cash or Bank Account to the debit side of the account.
  • Transferring all the liabilities except Partner’s Loan Account and Partners’ Capital Accounts to the credit side of the account.
  • Crediting the Receipt on the sale of assets to the account.
  • Debiting the payment of Liabilities to the account.
  • Debiting the dissolution expenses of the firm.

The balance in the account may be either profit or loss. We transfer this balance to the Capital Accounts of the Partners in their profit-sharing ratio.

Browse more Topics under Dissolution Of Partnership Firm

Learn more about Adjustment for Revaluation of Assets and Liabilities here

REALISATION ACCOUNT

Particulars Amount Particulars Amount
To Land and Building A/c By Provision for Doubtful Debts A/c
To Plant and Machinery A/c By Sundry Creditors A/c
To Furniture A/c By Bills Payable A/c
To Stock A/c By Outstanding Expenses A/c
To Debtors A/c By Bank Loan, Overdraft  A/c
To Goodwill A/c By Bank/Cash A/c ( assets realized)
To Investment A/c    Land and Building
To Bank/Cash A/c (liabilities paid):    Plant and Machinery
   Sundry Creditors    Furniture
   Bills Payable    Stock
   Outstanding Expenses    Debtors
   Bank loan, overdraft    Bad Debts Recovered
Bank/Cash (expenses realised)    Investment
To Partners’ Capital A/c (expenses paid) By Partners’ Capital A/c (taking over of assets )
To Partners’ Capital A/c (gain) By Partners’ Capital A/c (loss)

Accounting Treatment of Dissolution: Realisation Account, Capital Accs

Source: shutterstock.com

2] Partner’s Loan Account

We do not transfer the loan by a partner to firm to Realisation account, it remains in its account itself. At the time of settlement, i.e., payment of liabilities, we pay partner’s loan after paying the outside liabilities but before payment of capital.

Following entry is the entry on payment of Partner’s loan:

Date Particulars Amount (Dr.) Amount (Cr.)
  Partner’s loan A/c Dr.
     To Bank/Cash A/c
  (being partners’ loan paid)

3] Partners’ Capital Accounts

If partners take over firm’s assets, we debit it to their Capital Accounts at the agreed value being payment against their capital. If a partner takes over the liability of the firm, we credit it to their Capital Accounts. In addition, we also transfer undistributed profits/losses, reserves and Realisation profit/loss to capital accounts in their profit-sharing ratio. Entries are:

1] On transfer of undistributed profits/losses and reserves:

Date Particulars Amount (Dr.) Amount (Cr.)
Profit and Loss A/c Dr.
General reserve A/c Dr.
   To Partners’ Capital A/c
(being profit transferred to capital A/c)
Partners’ Capital A/cs Dr.
    To Profit and Loss A/c
    To Deferred Revenue Expenditure A/c
(being loss transferred to capital Accounts)

2] Transfer of Realisation profit/ loss

Date Particulars Amount (Dr.) Amount (Cr.)
Realisation A/c
   To Partners’ Capital A/c
(being Realisation profit transferred)
Partners’ Capital A/cs
   To Realisation A/c
(being Realisation loss transferred)

3] For final settlement with partners:

a. The partner brings Cash to meet the deficiency in capital

Date Particulars Amount (Dr.) Amount (Cr.)
Bank/Cash A/c Dr.
   To Partners’ Capital A/c
(being amount brought by partner)

b. On payment to partners or closing partners’ capital accounts

Date Particulars Amount (Dr.) Amount (Cr.)
Partners’ Capital A/c Dr.
   To Bank/Cash A/c
(being amount paid to partner)

4] Bank or Cash Account

On the debit side, we show opening balance, the amount received from the sale of assets and amount brought by partners. And on the credit side, we show payment of liabilities, expenses and amount paid to partners.

After settling the claims of the partners, there is no balance in the Bank/Cash Account.

Solved Example for You

Question: P and Q were sharing profits and losses in the ratio of 3: 2. The balance sheet of a firm as at 31st March 2018 is:

Liabilities         ₹ Assets          ₹
Sundry Creditors 80,000 Bank 1,72,000
Q’s Sister’s Loan 20,000 Debtors 27,000
Capital A/c: Stock 50,000
P                                        1,75,000 Furniture 2,20,000
Q                                       1,94,000 3,69,000
4,69,000 4,69,000

On the above date, the firm dissolves. Following is the additional information. Prepare the necessary Accounts.

  • P took over 50% of the furniture at 20% less than book value. The remaining furniture was sold for ₹ 1,05,000.
  • Debtors realised at ₹ 26,000.
  • Q took over the stock for ₹ 29,000.
  • Q’s sister’s loan was paid off along with interest of ₹ 2,000.
  • Expenses on realisation amounted to ₹ 5,000.

Solution: REALISATION ACCOUNT

Particulars Amount Particulars  Amount
To Debtors A/c 27,000 By Sundry Creditors A/c 80,000
To Stock A/c 50,000 By Q’s Sister’s Loan A/c 20,000
To Furniture A/c 2,20,000 P’s Capital A/c (furniture) 88,000
To Bank A/c (sundry creditors) 80,000      (₹ 1,10,000 – ₹ 22,000)
To Bank A/c (₹ 20,000 + ₹ 2,000) 22,000 By Bank A/c ( assets realized)
      (Q’s sister’s loan)    Furniture                    1,05,000
To Bank A/c ( expenses) 5,000    Debtors                          26,000 1,31,000
By Q’s capital A/c ( stock) 29,000
By Loss transferred to:
   P’s capital A/c               33,600
   Q’s capital A/c              22,400 56,000
  4,04,000   4,04,000

 PARTNER’S CAPITAL ACCOUNTS

Particulars    P (₹)   Q (₹) Particulars    P (₹)    Q (₹)
To Realisation A/c 88,000 29,000 By Balance b/d 1,75,000 1,94,000
To Realisation  A/c 33,600 22,400
To Bank (final payment) 53,400 1,42,600
1,75,000 1,94,000   1,75,000 1,94,000

BANK ACCOUNT

Particulars  Amount Particulars  Amount
To Balance b/d 1,72,000 By Realisation A/c ( creditors) 80,000
To Realisation A/c ( assets realised) 1,31,000 By Realisation A/c ( loan) 22,000
By Realisation A/c ( expenses) 5,000
By P’s capital A/c 53,400
By Q’s capital A/c 1,42,600
  3,03,000   3,03,000

 

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kaveri
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kaveri

capital reserv in balace sheet at the time of dissolution

Urvika
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Urvika

It’s reserve fund

Dheeru
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Dheeru

When a give a profit and loss in old balansheet then which side pass entry in realization account and partners capital account and bank account is also given

Vishnu
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Vishnu

Please reply

Angel
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Angel

The entry is not pass in realisation. It is distributed among partners

Vedant Koladiya
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Vedant Koladiya

what if no information is provided regarding realisation of asset

Sai Kiran
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Sai Kiran

Then the value of the asset is 0 .

Muskan
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Muskan

It is assumed that the assets where of no value an it is not recorder

Pamela Bagalatia
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Pamela Bagalatia

how did you get the final bank balance in capital account

Najiya arif
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Najiya arif

How each loan (partners loan, wifes loan,bnk loan )are treated in realisation , capital , cash /bank accounts in dissolution of partnership firm

shivam
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shivam

(sundry creditor 17800) one of the creditor took some of the patents whose book value was 6000 at a valuation of 4500 .the balance of that creditor was paid in cash . what is the adjustment in the realisation account

Angel
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Angel

Can we say that the realisation expenses are liabilities??

bookkeeping melton
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bookkeeping melton

The object of preparing Realisation account is to close the books of accounts of the dissolved firm and to determine profit or loss on the Realisation of assets and payment of liabilities

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