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CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution Notes

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution : CBSE is a reputed educational board of India and it provides updated syllabus for different classes. Several proficient subject experts are associated with this board and based on current research; they evaluate the syllabus of each subject from time to time. Thus, they make students up-to-date with current information and also maintain its standard in all respects. All essential subjects including Math, Chemistry, Physics, Biology, History, Geography, English and other language subjects are included in the syllabus designed for different classes. CBSE syllabus is known for its standard educational pattern and comprehensive marking scheme. The most important thing is that each subject gets equal focus in the entire syllabus so that students can get adequate information on different subjects.

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution Notes

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution :  Here we provides all CBSE Class 12 Accountancy best books, video classes and CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution free download study materials. Here we gave direct download links for CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution in pdf format. Download this CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution Complete Details in PDF Format and Read Well.

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution Notes

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution : A partnership firm is not a legal entity. It has no perpetual existence as in case of a company incorporated under Companies Act. However, the Act gives the partnership limited rights of continuity of business despite change of partners. In absence of specific provision in partnership deed, death or insolvency of a partner means dissolution of the firm. However, partnership can provide that the firm will not dissolve in such case. A partnership firm is not a legal entity.

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Any change in agreement of partnerships called reconstitution of partnership firm. In following circumstances a partnership firm may be reconstituted:

1. Change in Profit Sharing Ratio

2. Admission of a partner

3. Retirement/Death of a partner

Change in profit sharing ratio among the existing partners

Meaning:

When all the partners of a firm agree to change their profit sharing ratio, the ratio may be changed. In this case one profit is purchasing a share of partner from another one. In other words, share of one partner may increase and share of another partner may decrease.

Accounting treatment of goodwill: In case of change in profit sharing ratio, the gaining partner must compensate the sacrificing partner by paying the proportionate amount of goodwill.

Illustration 1 Amit and Kajal were partners in a firm sharing profits in the ratio of 3:2. With effect from January 1,2012 they agreed to share profits equally. For this purpose the goodwill of the firm was valued at ‘60,000. Pass the necessary journal entry. Accounting treatment of Reserves and Accumulated Profits: Case (i) When reserves and accumulated profits/losses are to be distributed At the time of change in profit sharing ratio, if there are some reserves or accumulated profits/losses existing in the books of the firm, these should be distributed to partners in their old profit sharing ratio.

Illustration 2 : Vaishali, Vinod and Anjali are partners sharing profits in the ratio of 4:3:2. From April 1,2011, they decided to share the profits equally. On that date their books showed a credit balance of ‘3,60,000 in the profit and loss account and a balance of ‘ 90,000 in the General reserve. Record the journal entry for distribution of these profits and reserves.

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution Notes

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution : Dissolution of a partnership firm is the process by which the existence of a partnership firm comes to an end. This involves the sale or disposal of assets, settlement of liabilities and closing of books of accounts. Once the outside liabilities of the firm are paid or settled. The partners can withdraw their capital investment. Further if there is any surplus or deficit comes the same will be shared by the partners in their profit sharing ratio.

Reasons of Dissolution of Partnership firm

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Dissolution of a partnership firm can take place due to the following reasons:

a. Dissolution by Agreement: When the partners themselves reach an agreement to discontinue their business for any reason.

b. Compulsory Dissolution: Compulsory dissolution takes place because of business of the firm is declared illegal, or the partners become insolvent.

c. Dissolution by notice: A partner can demand dissolution of a partnership at will, by giving a notice to the firm.

d. Dissolution by Court: Court may initiate dissolution of a firm due to following circumstances:

i) When one of the partners has become of unsound mind
ii) When a partner is guilty of misconduct which may affect the business
iii) When a partner commits wilful breach of contract
iv) Any other reason which the court may find adequate

e. Dissolution by the expiry of a pre determined period or completion of event: Such partnerships will be dissolved due to completion of the specific period of or the project as the case may be.

Dissolution of Partnership and Dissolution of Partnership Firm

The term dissolution, referred in relation to a partnership business generally denotes the winding up of the business. However, there is a difference between ‘dissolution of partnership’ and ‘dissolution of the partnership firm’. The former indicates ending of agreement to replace it with a new one, but the latter indicates the ending of partnership business altogether. The following points may be noted in comparison between the two:

Dissolution of Partnership

  • Only the agreement is dissolved, no physical disposal takes place.
  • The partners will continue to run the business with a new agreement.
  • Limited effect on employees or debtors and creditors of the business
  • Many dissolution of agreement can take place during the life of a partnership business.
  • Admission, retirement and or death of a partner can result in compulsory dissolution of existing agreement. Dissolution of Partnership Firm
  • The Firm is dissolved, by selling off assets and settling liabilities.
  • The partners will discontinue the business
  • Since the business is closed down it affects the workers, debtors and creditors of the firm
  • Dissolution of firm can take place only once in the lifetime of a partnership business.
  • None of these events can lead to a compulsory dissolution of the firm.

Settlement of Accounts on Dissolution

The first step in dissolution is the realization of assets and settlement of outside liabilities. All individual accounts for assets and liabilities, except cash, are closed by transferring their balances to a Realization Account. Further Realization account is the temporary account for accumulating all assets and liabilities. All ledger accounts except partner’s capital accounts and cash account are closed prior to realization procedure. Accumulated profits or losses are directly transferred into the capital accounts in the profit sharing ratio. The following is the order of priority in settlement of liabilities and capital upon dissolution:

i) Expense incurred on realization of assets such as commission, cartage, brokerage etc.
ii) All outside creditors
iii) Partner’s Loan accounts
iv) Balances in Capital Accounts of partners

Special Items In Case of Dissolution

1. Treatment of Goodwill: Goodwill does not have any special treatment in dissolution. If it appears in the books it has to be transferred into Realization Account. If goodwill does not appear in the books just ignored it.

2. Realization Expenses: Expenses of realization such as commission paid to brokers for the disposal of assets, registration documentation charges for the assets sold etc. are debited to Realization Account and credited to Cash Account. However if any partner agrees to bear the expense then treat as drawing of partner.

3. Wife’s Loan: Loans from a partners’ wife is to be treated as normal creditor. The basic aim of providing a loan in the name of partner’s wife is to by-pass the legal restrictions on the Loan from a Partner to the firm.

4. Provident Fund: Provident fund should be understood as a liability payable to the employees. It should be paid off.

5. Specific Funds: Specific funds like Investment Fluctuation Funds , Provision for doubtful debts and accumulated depreciation etc. must be credited to Realization Account along with the transfer of assets.

6. Profits Kept Aside: General Reserve; credit balance in P& L Account etc should be directly transferred into the Capital Accounts of Partners, in the profit sharing ratio.

7. Unrecorded Assets: Unrecorded assets are those assets which are completely written off may fetch some cash at the time of dissolution. There is no need of bringing them into books and selling them afterwards. Thus realization from these assets can be directly credited to realization account and by debiting cash account.

8. Transfer of Assets to Creditors : When creditors purchase some assets against amount due to them.  Debit the Creditors account by passing a journal entry and credit the assets account. If the value of asset taken over is more than the amount due, the creditors will pay the excess amount to the firm.

CBSE Class 12 Commerce Accounting For Partnership Firms Reconstitution And Dissolution Notes

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