Dissolution of Partnership Firms
This section covers Dissolution of Partnership Firms. BSEB tests the difference between dissolution of partnership and dissolution of firm, Realisation Account, treatment of assets and liabilities, and Garner v Murray.
Core rules
- Dissolution of partnership changes the relation between partners; dissolution of firm closes the business. Only dissolution of firm requires Realisation Account.
- Open Realisation Account: debit all assets except cash/bank and credit external liabilities. Sale proceeds and liabilities taken over are credits; payments of liabilities and realisation expenses are debits. The balance is realisation profit/loss, shared in old ratio.
- Cash/bank, partner’s loan and partner’s capital are not transferred to Realisation Account.
- Garner v Murray: if a partner is insolvent and there is capital deficiency, solvent partners bear the deficiency in the ratio of their capitals before dissolution, not in profit-sharing ratio, unless the deed says otherwise.
Worked example
Assets of ₹2,00,000 realise ₹1,80,000. External liabilities are ₹60,000 and are paid ₹55,000. Realisation expenses are ₹5,000. Realisation Account: debit assets ₹2,00,000 + expenses ₹5,000 + liabilities paid ₹55,000 = ₹2,60,000; credit cash realised ₹1,80,000 + liabilities transferred ₹60,000 = ₹2,40,000. Loss = ₹20,000, divided among partners in old ratio.
Traps
Do not transfer cash/bank to Realisation Account. A partner’s loan is a liability to the partner, not an external liability. Unrecorded assets taken over by a partner are credited to Realisation Account. Do not apply Garner v Murray using profit-sharing ratio; use opening capital ratio.