CH – DISSOLUTION OF A PARTNERSHIP FIRM

Dissolution process starts by preparing the following accounts in the firm’s book:
1. Realisation A/c
2. Loan by Partner A/c
3. Loan to Partner A/c
4. Partners’ Capital A/c
5. Cash / Bank A/c

Realisation Account

➢ It is prepared to:
✓ close the books of account of the firm (i.e. assets & liabilities); and
✓ determine profit / loss on realisation of assets & settlement of liabilities.

➢ Journal Entries:

(i) For closing the “Asset Accounts”

Realisation A/c Dr. xxx

To Asset A/c (Individually) xxx

Note: Following items appearing on Asset side of the Balance Sheet will NOT
be transferred to Realisation A/c in the above entry:
▪ Fictitious Assets [Deferred Revenue Expenditure, P&L (Dr. Balance)]
▪ Cash / Bank A/c
▪ Debit Balance of Capital / Current A/c
▪ Loan to Partner A/c

Note: Existing goodwill appearing in the Balance Sheet will also be

transferred to Realisation A/c.

(ii) For closing the “Liabilities Accounts”

Liabilities A/c (Individually) Dr. xxx

To Realisation A/c xxx

Note: Following items appearing on Liabilities side of the Balance Sheet will
NOT be transferred to Realisation A/c in the above entry:
▪ P&L (Cr. Balance)
▪ Credit Balance of Partners’ Capital A/c & Current A/c
▪ Loan by Partners A/c
▪ Reserves (other than Reserves made against Asset)
 Note: Provisions & Reserves against an asset is also transferred to Realisation
A/c in the above entry. (For eg: Investment Fluctuation Reserve, Provision for
Doubtful Debts etc.)

(iii) For realisation (Sale) of Assets (whether recorded or unrecorded)

(a) Assets sold for cash

Cash / Bank A/c Dr. [Amount

To Realisation A/c Realised]

(b) Assets taken over by Partner

Partner’s Capital A/c Dr. [Agreed

To Realisation A/c Amount]

(c) Asset transferred to settle a liability (For eg: Asset given to creditor)

---------------------------------- NO ENTRY --------------------------------

Note: If question is silent on realisation of any asset, it is assumed that such

asset has not been realised. However, as per CBSE guidelines, realised value
of asset should be given in the question.

(iv) For settlement of liabilities (whether recorded or unrecorded)

(a) Payment of liability in Cash

Realisation A/c Dr. [Amount

To Cash / Bank A/c Paid]

(b) Partner agrees to settle the liability

Realisation A/c Dr. [Agreed

To Partner’s Capital A/c Amount]

Note: If question is silent on settlement of any liability, then assume it has

been settled in cash at Book Value.
Conceptual Example:
Book Value of Creditor = ₹15,000
Stock (Book Value) = ₹25,000
Creditors took stock of Book Value of ₹12,000 at ₹10,000. Balance Stock realised
₹10,000. Pass journal entries for settlement & realisation.
Solution:
(1) Stock taken over by creditor:

No entry will be passed.

(2) Stock sold for ₹10,000:

Cash / Bank A/c Dr. 10,000

To Realisation A/c 10,000

(3) Settlement of balance creditors:

Realisation A/c Dr. 5,000

To Cash / Bank A/c 5,000
* Balance Creditors = ₹15,000 (-) ₹10,000
= ₹5,000

(v) Realisation / Dissolution Expenses

Case (1) – Borne & Paid by Firm

Realisation A/c Dr. xxx

To Cash / Bank A/c xxx

Case (2) – Borne by Firm but Paid by Partner (i.e. Paid by Partner on Behalf
of Firm)

Realisation A/c Dr. xxx

To Partner’s Capital A/c xxx

Case (3) – Borne by Partner But Paid by Firm (i.e. Paid by Firm on Behalf of
Partner)

Partner’s Capital A/c Dr. xxx

To Cash / Bank A/c xxx

Case (4) – Borne & Paid by Partner

---------------------------------NO ENTRY------------------------------

Case (5) – For Payment of Remuneration or Agreed Fixed Amount to a

Partner
 Realisation A/c Dr. xxx
To Partner’s Capital A/c xxx

Note: If agreed amount is paid to a partner, and actual expenses are to be

borne by such partner, then no entry is passed in the books of the firm for
payment of actual expenses by the partner, even if actual expenses exceed
the agreed amount.

Note: As per CBSE Guidelines, if a partner has borne and/or paid the
realisation expenses, it should be stated in the Question.

(vi) Profit / Loss on Realisation

(a) Profit on Realisation

Realisation A/c Dr. xxx

To Partners’ Capital A/c [in PSR]

(b) Loss on Realisation

Partners’ Capital A/c Dr. [in PSR]

To Realisation A/c xxx

Format of Realisation Account

Realisation A/c
Particulars ₹ Particulars ₹
To Land & Building A/c xxx By Provision for Doubtful Debts A/c xxx
To Plant & Machinery A/c xxx By Investment Fluctuation Reserve A/c xxx
To Furniture A/c xxx By Creditors A/c xxx
To Stock A/c xxx By Bills Payable A/c xxx
To Debtors A/c xxx By Outstanding Expenses A/c xxx
To Bills Receivable A/c xxx By Bank Loan A/c xxx
To Goodwill A/c xxx By Bank Overdraft / Cash Credit A/c xxx
To Investment A/c xxx By Bank / Cash A/c (Assets realised) xxx
To Bank / Cash A/c xxx By Partner’s Capital A/c (Assets taken) xxx
(Liabilities settled) By Partners’ Capital A/c (bal. fig.) xxx
To Bank / Cash A/c xxx (Loss on Realisation - in PSR)
(Realisation expenses)
To Partner’s Capital A/c xxx
(Liability settled by the partner)
To Partner’s Capital A/c xxx
(Remuneration)
To Partners’ Capital A/cs (bal. fig.) xxx
(Gain on Realisation - in PSR)
xxx xxx
Treatment of Partner’s Loan

(A) Loan by Partner

Following entry is passed for settlement:

Loan by Partner A/c Dr. [Book Value]

To Cash / Bank A/c [Amt Paid]
To Realisation A/c [Gain on Settlement]

(B) Loan to Partner

Following entry is passed on receipt of loan (even if Q is silent):

Cash / Bank A/c Dr. [Amt Received]

Realisation A/c Dr. [Loss, if any]
To Loan to Partner A/c [BV of Loan]

Treatment of Reserves, Accumulated Profits & Fictitious Assets

(A) Reserves & Accumulated Profit

Reserves A/c* Dr. [BV]

Profit & Loss (Cr.) A/c Dr. [BV]
To Partners’ Capital A/c [in PSR]

* Excluding Investment Fluctuation Reserve

(B) Treatment of Fictitious Assets

Partners’ Capital A/c Dr. [in PSR]

To Advertisement Suspense A/c [BV]
To Profit & Loss (Dr.) A/c [BV]

Treatment of Workmen Compensation Reserve

Example:
Balance Sheet of X & Y as at…(Extract)
Liabilities ₹ Assets ₹
Workmen Compensation Reserve 10,000
Case (1) – When no claim exist / no information is given

Workmen Compensation Reserve A/c Dr. 10,000

To X’s Capital A/c 5,000
To Y’s Capital A/c 5,000

Case (2) – When Claim < WCR (say ₹6,000)

(i) WCR A/c Dr. 10,000

To Realisation A/c 6,000
To X’s Capital A/c 2,000
To Y’s Capital A/c 2,000

(ii) Realisation A/c Dr. 6,000

To Cash / Bank A/c 6,000

Case (3) – When Claim = WCR (i.e. Claim = ₹10,000)

(i) WCR A/c Dr. 10,000

To Realisation A/c 10,000

(ii) Realisation A/c Dr. 10,000

To Cash / Bank A/c 10,000

Case (4) – When Claim > WCR (say ₹14,000)

(i) WCR A/c Dr. 10,000

To Realisation A/c 10,000

(ii) Realisation A/c Dr. 14,000

To Cash / Bank A/c 14,000

Treatment of Partners’ Current A/c

If the firm follows Fixed Capital Method, and accordingly, Partners’ Current A/c Balances
appear in the given Balance Sheet, then such Current A/c Balances are closed by transferring
them to respective Capital A/cs, as follows:

(i) Debit Balance of Partner’s Current A/c (i.e. Asset Side of B/S)
 Partner’s Capital A/c Dr. xxx
To Partner’s Current A/c xxx

(ii) Credit Balance of Partner’s Current A/c (i.e. Liability Side of B/S)

Partner’s Current A/c Dr. xxx

To Partner’s Capital A/c xxx

Preparation & Settlement of Partners’ Capital A/c

After posting all the transactions, Partners’ Capital A/cs are closed, by putting the balancing
figure in Cash / Bank A/c, as follows:

(i) When Balancing Fig. is on debit side (i.e. Credit Balance of Capital A/c)

It shows the final amount due to the partner, which is settled by paying cash:

Partner’s Capital A/c Dr. xxx

To Cash / Bank A/c xxx

(ii) When Balancing Fig. is on credit side (i.e. Debit Balance of Capital A/c)

It shows the final amount due from the partner (i.e. deficiency of capital), which is
brought in cash by the partner:

Cash / Bank A/c Dr. xxx

To Partner’s Capital A/c xxx

Preparation of Cash / Bank A/c

➢ After preparing & closing all the accounts, finally Cash / Bank A/c (depending on
what is given in the B/S of the Question) is prepared. All the transactions along with
given opening balance, are posted in the A/c.

➢ If both, Cash & Bank, is given in the B/S, then it is better to pass all the transactions
through Bank A/c only, and close the Cash A/c, by transferring it to the Bank A/c.
Alternatively, Bank A/c may be closed by transferring the balance to Cash A/c.

➢ In the end, Cash A/c / Bank A/c will tally i.e. no balance will be left.