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NCERT Class 12 Accountancy Textbook Chapter 5 With Answer PDF Free Download
Chapter 5: Dissolution Of Partnership Firm
You have learned about the reconstitution of a partnership firm that takes place on account
of the admission, retirement, or death of a partner.
In such a situation while the existing partnership is dissolved, the firm may continue under the same name if the partners so decide.
In other words, it results in the dissolution of a partnership but not that of the firm. According to Section 39 of the partnership Act 1932, the dissolution of a partnership between all the partners
of a firm is called the dissolution of the firm.
That means the Act recognizes the difference in the breaking of relationship between all the partners of a firm and between some of the partners, and it is the breaking or discontinuance of relationship between all the partners which is termed as the dissolution of the partnership firm.
This brings an end to the existence of the firm, and no business is transacted after dissolution except the activities related to the closing of the firm as the affairs of the firm are to be wound up
by selling the firm’s assets and paying its liabilities and discharging the claims of the partners.
5.1 Dissolution of Partnership
As stated earlier dissolution of a partnership changes the existing relationship between partners but the firm may continue its business as before.
The dissolution of a partnership may take place in any of the following ways:
(1) Change in existing profit sharing ratio among partners;
(2) Admission of a new partner;
(3) Retirement of a partner;
(4) Death of a partner;
(5) Insolvency of a partner;
(6) Completion of the venture, if the partnership is formed for that; and
(7) Expiry of the period of the partnership, if the partnership is for a specific period of time;
5.2 Dissolution of a Firm
Dissolution of a partnership firm may take place without the intervention of a court or by the order of a court, in any of the ways specified later in this section.
It may be noted that the dissolution of the firm necessarily brings in the dissolution of the partnership. However, the dissolution of a partnership would not necessarily involve the dissolution of firms.
Dissolution of a firm takes place in any of the following ways:
- Dissolution by Agreement: A firm is dissolved :
(a) with the consent of all the partners or
(b) in accordance with a contract between the partners.
Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership, e.g.,
when a partner who is a citizen of a country becomes an alien enemy because of the declaration of war with his country and India.
On the happening of certain contingencies: Subject to a contract between the partners, a firm is dissolved :
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more ventures, by the completion thereof;
(c) by the death of a partner;
(d) by the adjudication of a partner as an insolvent.
Dissolution by Notice: In case of partnership at will, the firm may be dissolved if any one of the partners gives a notice in writing to the other partners, signifying his intention of seeking dissolution of the firm.
Dissolution by Court: In the suit of a partner, the court may order a partnership firm to be dissolved on any of the following grounds:
(a) when a partner becomes insane;
(b) when a partner becomes permanently incapable of performing his duties as a partner;
(c) when a partner is guilty of misconduct that is likely to adversely affect the business of the firm;
(d) when a partner persistently commits a breach of partnership agreement;
(e) when a partner has transferred the whole of his interest in the firm to a third party;
(f) when the business of the firm cannot be carried on except at a loss; or
(g) when, on any ground, the court regards dissolution to be just and equitable.
| Author | NCERT |
| Language | English |
| No. of Pages | 37 |
| PDF Size | 2.4 MB |
| Category | Accountancy |
| Source/Credits | ncert.nic.in |
NCERT Solutions Class 12 Accountancy Chapter 5 Dissolution Of Partnership Firm
1. State the difference between the dissolution of partnership and dissolution of the partnership firm.
| Basis of Comparison | Dissolution of Partnership | Dissolution of Partnership firm |
| Meaning | It refers to the stage where a partner/partners discontinue their relationship with the firm. | It refers to the situation that which all the relations between a firm and its partners cease to exit |
| Discontinuation | The business continues as usual | Discontinuation of business due to the dissolving of firm |
| Accounts | A revaluation account is created | A realization account is created |
| Liabilities and assets | Revaluation is done | Sold off to pay for the liabilities |
| Economic Relationship | Continues | It comes to an end |
| Nature | Such type of event is voluntary in nature | It can be sometimes compulsory and sometimes voluntary |
| Effect | The firm is not dissolved | Both firm and partnership are dissolved |
2. State the accounting treatment for:
i. Unrecorded assets
ii. Unrecorded liabilities
(i) For Unrecorded Assets
An unrecorded asset is such an asset whose value is written off from books of accounts, but it is in usable form. It is shown as:
1. If sold by cash
Cash A/c Dr.
To Realisation A/c
(Unrecorded asset sold off for cash)
2. If taken over by any partner
Partner’s Capital A/c Dr.
To Realisation A/c
(Partner takes over unrecorded asset)
ii) For unrecorded liabilities
Liabilities that are not recorded in the books of the firm are called unrecorded liabilities. It can be shown in records as
1. When unrecorded liability is paid off
Realization A/c Dr.
To Cash A/c
(Paid in cash the price of unrecorded liability)
2. When undertaken by a partner
Realization A/c Dr.
To Partner’s Capital A/c
(Liability that is unrecorded is taken over by the partner)
3. On dissolution, how do you deal with your partner’s loan if it appears on the
(a) Assets side of the Balance Sheet (b) Liabilities side of the Balance Sheet
(a) When a partner’s loan is on the asset side of the balance sheet, it means that the partner has borrowed some amount from the business and needs to pay back the same. In this instance, the loan amount gets transferred to the partners’ capital account. It is shown as:
Partner’s Capital A/c Dr.
To Partner’s Loan A/c
(Loan account of partner transferred to partner capital account)
(b) When a partner’s loan appears on the liabilities side of the balance sheet, it means that partner has provided a loan to the business and the business has to pay back the amount which it has got from the partner. The loan is paid in cash after the full filling payment of all external liabilities.
Partner’s Loan A/c Dr.
To Cash/Bank A/c
(Loan taken from partner paid in cash)
4. Distinguish between the firm’s debts and the partner’s private debts.
| Basis of Comparison | Firm’s Debts | Partner’s Private Debts |
| Meaning | Debts that are owed by a firm to the outsiders | Debts that are owed by a partner to any other person outside the firm. |
| Liability | The liability of a firm’s debt lies with all the partners jointly as well as individually. | The liability of repaying debt rest only with the partner who has taken the debt. |
| Debt Settlement by private assets | Whenever the debts of a firm exceed the assets of the firm, the partner’s private assets may be utilized in order to pay the firm’s debt, only on the condition that the partner’s asset is more than his debts | The debts that are private will be settled by the private assets of the partner. If any surplus happens it will be used in paying for the firm’s debts |
| Debt settlement by firm’s assets | Debts of firms’ are settled using the assets’ of the firm. If an asset remains after clearing the debt, it gets distributed between the partners. | Partner can utilize their share of surplus assets obtained after clearing all debts from the firm for personal use. |
5. State the order of settlement of accounts on dissolution.
Following rules are applicable on settlement of accounts after a firm is dissolute as per Section 48 of the Partnership Act, 1932.
1. Amount which is received on the sale of assets should be used in this sequence:
i. Paying off all external expenses and liabilities
ii. Loans and advances that are owed to partners should be cleared.
Iii.Capital of all the partners must be paid off.
Any amount that still remains after paying off all these items must be distributed among partners of the dissolute firm in their original profit sharing ratio.
2. In case of loss and capital deficiency, the following must be paid in this order:
i. Adjust loss and capital deficiency against profits of the firm
ii. Adjust against the total capital of the firm
iii. If any loss or deficiencies is present after all the adjustments, the next course of action will be to bear the loss as per the individual profit sharing ratio.
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