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

• Dissolution of Partnership and Settlement of Accounts

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)

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 31^st 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