Join Your Exam WhatsApp group to get regular news, updates & study materials HOW TO JOIN

Karnataka class 12 commerce Accountancy Dissolution of partnership firm

Karnataka class 12 commerce Accountancy Dissolution of partnership firm

Karnataka class 12 commerce Accountancy Dissolution of partnership

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 Dissolution of partnership

Karnataka class 12 commerce Accountancy Dissolution of partnership

Karnataka class 12 commerce Accountancy Dissolution of partnership

Karnataka class 12 commerce Accountancy Dissolution of partnership

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 Dissolution of partnership

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.

Karnataka class 12 commerce Accountancy Dissolution of partnership

(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 Dissolution of partnership

Accounting Treatment When the firm is dissolved, its books of account are to be closed and the profit or loss arising on realisation of its assets and discharge of liabilities is to be computed. For this purpose, a Realisation Account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities which may be is transferred to partner’s capital accounts in their profit sharing ratio. Hence, all assets (other than cash in hand bank balance and fictitious assets, if any), and all external liabilities are transferred to this account. It also records the sale of assets, and payment of liabilities and realisation expenses. The balance in this account is termed as profit or loss on realisation which is transferred to partners’ capital accounts in thier profit sharing ratio

Karnataka class 12 commerce Accountancy Dissolution of partnership

  • Karnataka class 12 commerce Accountancy CH1 DEPRECIATION PROVISIONS AND RESERVES
  • Karnataka class 12 commerce Accountancy CH5 Partnership Accounts Dissolution Of Partnership Firm
  • Karnataka class 12 commerce Accountancy Circumstances of dissolution of a firm

Karnataka class 12 commerce Accountancy Dissolution of partnership

CAKART provides India’s top class XII commerce  faculty video classes – online Classes – at very cost effective rates. Get class XII commerce Video classes from CAKART.in to do a great preparation for your exam.

Watch class XII commerce sample video lectures Visit cakart.in
Watch class XII commerce Articles Here
Watch class XII commerce free downloads 

For any questions chat with us by clicking on the chat button below or give a missed call at 9980100288

Leave a comment

Your email address will not be published. Required fields are marked *