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What is dissolution?

Section 39 of Indian Partnership Act, 1932 provides that The dissolution of a partnership between all the partners of a firm is called “dissolution of a firm”. It implies the complete break down of the relation of partnership between all the partners.

When the relation between all the partners of the firm comes to an end, this is called Dissolution of a firm.

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Modes of Dissolution

By order of the Court

Without intervention of

the Court

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Circumstances of Dissolution

The Dissolution of Partnership takes place under following circumstances

1)When a firm was constituted for a fixed term, on the expiry of the term.

2)On the completion of a particular venture, if constituted for a purpose.

3)On the death of a partner4)On the retirement of a partner5)On the insolvency of a partner.

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Dissolution of FirmPoints to Discuss

1.Journal Entries at the time of Dissolution.

2.Prepration of Realization a/c.

3. Preparation of Capital a/c.

4. Preparation of Cash / Bank a/c.

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Journal EntriesWhen Assets are transferred to the Realisation A/c: Realisation A/c Dr. To Sundry Assets A/c

When liabilities are transferred to the Realisation A/c: Sundries Liabilities A/c Dr. To Realisation A/c

When Sale of Asset: Cash/bank A/c Dr. To Realisation A/c

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When Liabilities are paid : Realisation A/c Dr.

To Cash/Bank A/c

When Asset is taken over by the partner : Partners Capital A/c Dr.

To Realisation A/c

When Liability taken over by the partner : Realisation A/c Dr.

To Partners capital A/c

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When unrecorded Assets are realized : Cash/bank A/c Dr. To Realisation A/c

When unrecorded liabilities are realized : Realisation A/c Dr. To Cash /Bank A/c

When bank overdraft is paid : Bank overdraft A/c Dr.

To Cash/Bank A/c

When Realisation expense are paid : Realisation A/c Dr.

To Cash/bank A/c

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When Realisation expenses are paid by the partner :Realisation A/c Dr. To Partners capital A/c

When Provisions of related assets are transferred to realisation A/c : Provision for doubtful debts A/c Dr. Provision for Depreciation A/c Dr. To Realisation A/c

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When realization profit is transferred to the partners : Realisation A/c Dr. To Partners Capital A/c

If there is loss on realization Account following entry should be recorded : Partners Capital A/c Dr. To Realisation A/c

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Note :

All Liabilities must be paid off , whereas assets will not be sold off if no information regarding sale of asset is given in adjustment.

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Prepration of Cash/Bank a/c.Cash/Bank a/cDr.

To Bal b/d a/c By Partner’s loan a/c

To Partner’s loan a/c By Realization a/c (Creditors & Expenses paid)

Particulars Amounts

Cr.Particulars Amounts

To Partner’s capital a/c

By Partner’s capital a/c

Note : Cash / Bank a/c must be equal .

To Realization a/c (Assets Realized)

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Differences between Revaluation and Realization A/c

Basis Revaluation Account Realisation Account

Meaning Revaluation accounts is related with the revaluation of assets and re-assessment of liabilities

Realisation Account is prepared to realize the assets and to pay the liabilities.

Objective Main purpose is to record the fluctuating values of assets and liabilities and to calculate the profit or loss on revaluation.

Main purpose is to calculate the profit/loss after realizing the assets and payment of liabilities.

Need Revaluation account is needed at the time of admission and retirement or death of a partner.

Realisation Account is needed when dissolution takes place.

Result Profit or loss calculated in Revaluation account is distributed among the old partners only.

Profit or loss calculated in Realisation Account is distributed among the all the Partners

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N. Bala Murali Krishna