Dissolution of Partnership Firms
What the exam tests
Dissolution tests preparation of the Realisation Account, settlement of liabilities and partners' claims, and separation of firm dissolution from legal dissolution. On dissolution, all assets except cash and bank and fictitious assets are transferred to Realisation at book value; outside liabilities are transferred to its credit. Cash and bank are retained to pay realisation expenses, liabilities and partners. A partner's loan is paid before the partner's capital. Any surplus or deficit on realisation is shared in the profit-sharing ratio. Unrecorded assets realised are credited to Realisation; unrecorded liabilities paid are debited.
Worked example
Assets of Rs. 1,00,000 realise Rs. 90,000; liabilities of Rs. 40,000 are settled at Rs. 38,000; realisation expenses are Rs. 2,000. Realisation debits: assets Rs. 1,00,000 + liabilities paid Rs. 38,000 + expenses Rs. 2,000 = Rs. 1,40,000. Credits: liabilities transferred Rs. 40,000 + asset realisation Rs. 90,000 = Rs. 1,30,000. Loss = Rs. 10,000, shared by partners in their profit-sharing ratio. The Rs. 2,000 discount on liabilities is a gain within the account, but the net result is still the Rs. 10,000 loss.
Traps
Do not transfer cash or bank to Realisation. Do not set off a partner's loan against capital automatically; pay the loan first. Record realisation expenses even if a partner bears them. If a partner takes over an asset, debit the partner's capital and credit Realisation. Do not forget unrecorded assets and liabilities.