Dissolution of Partnership Firms
Scope
The dissolution of a firm ends the business relationship entirely, and a Realisation Account replaces the Revaluation Account. It records the sale of assets, settlement of liabilities, realisation expenses, and the resulting profit or loss, which is shared in the profit-sharing ratio. The relevant provisions are sections 39–44 of the Indian Partnership Act, 1932. Assets are transferred at book value, liabilities are transferred likewise, and any asset or liability that appears only on dissolution is recorded first.
Order of settlement
The firm's cash is applied in this order: external liabilities, partners' loans, then partners' capitals. A partner's loan is a liability of the firm but ranks after outside creditors. Garner v Murray applies where a partner is insolvent: cash brought in by a partner must first be applied to outside creditors, and a partner who owes the firm cannot set off that debt against the loan due to him.
Worked example
Assets of book value ₹1,80,000 realise ₹1,50,000. Creditors of ₹60,000 are settled at ₹57,000, and realisation expenses of ₹3,000 are borne by the firm. Loss on realisation = (1,80,000 − 1,50,000) + 3,000 − 3,000 discount received = ₹30,000, debited to partners in the profit-sharing ratio. Expenses paid by a partner are credited to his Capital Account, not to cash.
Marks-losing traps
- Crediting realisation expenses paid privately by a partner to the Realisation Account instead of to his Capital Account.
- Forgetting that discount received from creditors is a credit in the Realisation Account.
- Treating a partner's loan as part of his capital.
- Omitting an unrecorded asset that is realised, or an unrecorded liability that is paid.