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Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm:

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm:Dissolution of partnership changes the existing relationship between partners but the firm may continue its business as before. The dissolution of partnership may take place in any of the following ways:

  • Change in existing profit sharing ratio among partners;
  • Admission of a new partner;
  • Retirement of a partner;
  • Death of a partner;
  • Insolvency of a partner;
  • Completion of the venture, if partnership is formed for that; and
  • Expiry of the period of partnership, if partnership is for a specific period of time;

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

Dissolution of a firm – Dissolution of a partnership firm may take place without the intervention of court or by the order of a court, in any of the ways specified later in this section. It may be noted that dissolution of the firm necessarily brings in dissolution of the partnership.

Dissolution of a firm takes place in any of the following ways:

1. Dissolution by Agreement: A firm is dissolved :

  • with the consent of all the partners or
  • in accordance with a contract between the partners.

2. Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:

  • when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract;
  • when the business of the firm becomes illegal; or
  • 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.

3. On the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved :

  • if constituted for a fixed term, by the expiry of that term;
  • if constituted to carry out one or more ventures, by the completion thereof;
  • by the death of a partner;
  • by the adjudication of a partner as an insolvent.

4. 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.

5. Dissolution by Court: At the suit of a partner, the court may order a partnership firm to be dissolved on any of the following grounds:

  • when a partner becomes insane;
  • when a partner becomes permanently incapable of performing his duties as a partner;
  • when a partner is guilty of misconduct which is likely to adversely affect the business of the firm;
  • when a partner persistently commits breach of partnership agreement;
  • when a partner has transferred the whole of his interest in the firm to a third party;
  • when the business of the firm cannot be carried on except at a loss; or
  • when, on any ground, the court regards dissolution to be just and equitable.

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

We have seen about the reconstitution of a partnership firm which takes place on account of 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 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 partnership firm. This brings an end to the existence of firm, and no business is transacted after dissolution except the activities related to closing of the firm as the affairs of the firm are to be wound up by selling firm’s assets and paying its liabilities and discharging the claims of the partners.

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

Settlement of Accounts – In case of dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. For this purpose, it disposes off all its assets for satisfying all the claims against it. In this context it should be noted that, subject to agreement among the partners, the following rules as provided in Section 48 of the Partnership Act 1932 shall apply.

(a) Treatment of Losses Losses, including deficiencies of capital, shall be paid :

  • first out of profits,
  • next out of capital of partners, and
  • lastly, if necessary, by the partners individually in their profits sharing ratio.

(b) Application of Assets The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:

  • In paying the debts of the firm to the third parties;
  • In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan);
  • In paying to each partner proportionately what is due to him on account of capital; and
  • the residue, if any, shall be divided among the partners in their profit sharing ratio.

Thus, the amount realised from assets along with contribution from partners, if required, shall be utilised first to pay off the outside liabilities of the firm such as creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured loans have precedence over the unsecured loans); the balance should be applied to repay loans and advances made by the partners to the firm. (in case the balance amount is not adequate enough to pay off such loans and advances, they are to be paid propartionately); and surplus, if any is to be utilised in settlement of the capital account balances, after adjusting all profits and losses.

Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

Private Debts and Firm’s Debts: Where both the debts of the firm and private debts of a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply.

(a) The property of the firm shall be applied first in the payment of debts of the firm and then the surplus, if any, shall be divided among the partners as per their claims, which can be utilised for payment of their private liabilities. (b) The private property of any partner shall be applied first in payment of his private debts and the surplus, if any, may be utilised for payment of the firm’s debts, in case the firm’s liabilities exceed the firm’s assets. \

It may be noted that the private property of the partner does not include the personal properties of his wife and children. Thus, if the assets of the firm are not adequate enough to pay off firm’s liabilities, the partners have to contribute out of their net private assets (private assets minus private liabilities).

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Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm

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