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Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

The four circumstances under which a firm is dissolved are follows:

By Agreement A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

Dissolution by Notice In case of partnership at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm.

Compulsory Dissolution A firm is compulsory dissolved if :

All the partners except one are insolvent or all,partners are insolvent.

The business of partnership has become illegal by happening of an event.

Dissolution by Court The court may at the move of a partner dissolve a firm in any one of the following ways

  • When a partner has become of unsound mind.
  • When a partner has become permanently incapable of performing his duties as a partner.
  • When a partner is guilty of misconduct which is likely to affect prejudicially the business of the firm.
  • When a partner willfully and persistently commits breach of agreement regarding management of the affairs of the firm.
  • When a. partner has transferred the whole of his interest to a third party.
  • When the business of the firm cannot be carried on except at a loss.
  •  Any other ground which render it just and equitable that the firm should be dissolved.

Subject to contract between the partners a firm is dissolved

  • By the expiry of the term for which the firm was formed
  • By the completion of the venture for which the firm was formed
  • By the death of a partner, or by the adjudication of a partner as an insolvent.

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a 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 Circumstances of dissolution of a 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 Circumstances of dissolution of a firm

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 only 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 dissolutions 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.

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Meaning of 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 settled, the partners take away their capital investment. If there is any surplus or deficit in this process it will be shared by the partners in their profit sharing ratio.

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

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