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NCERT Class 12 Accountancy Chapter 4 Dissolution of Partnership Firm
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Dissolution of Partnership Firm
Chapter: 4
| PART – I |
Short Answer Questions:
1. State the difference between dissolution of partnership and dissolution of partnership firm.
Ans:
| Basis | Dissolution of partnership | Dissolution of firm |
| (i) Termination of business. | The business is not terminated. | The business of the firm is closed. |
| (ii) Settlement of assets and liabilities. | Assets and liabilities are revalued and a new balance sheet is drawn. | Assets are sold and liabilities are paid- off. |
| (iii) Court’s intervention. | Court does not intervene because partnership is dissolved by mutual agreement. | A firm can be dissolved by the court’s order. |
| (iv) Economic relationship. | Economic relationship between the partners continues though in a change. | Economic relationship between the partners comes to an end. |
| (v) Closure of books. | Does not require because the business is not terminated. | The books of account are closed. |
2. State the accounting treatment at the time of dissolution of a firm for:
(i) Unrecorded assets.
Ans: Unrecorded assets are those assets that have been completely written off but are still physically present in the business. There is no requirement to show these assets in the books before they are sold off. These assets are directly credited to the Realisation account. For realisation of any unrecorded assets.
Bank A/c Dr.
To Realisation A/c.
(ii) Unrecorded liabilities.
Ans: For settlement of any unrecorded liability.
Realisation A/c Dr.
To Bank A/c
3. On dissolution, how will you deal with partner’s loan if it appears on the:
(a) Assets side of the balance sheet.
Ans: Partner’s loan set off from the capital of the partner due to the loan being owned by the partner.
(b) Liabilities side of the balance sheet.
Ans: Partner’s loan is treated as a liability of the firm and is given priority over the settlement of partners’ capital accounts.
Partner’s Loan A/c Dr.
To Bank/cash A/c.
4. Distinguish between a firm’s debts and a partner’s private debts.
Ans:
| Basis | Firm’s debts | Partner’s private debts. |
| Meaning | Firm’s debts are debts owed by the firm to outsiders. | Private debts are debts owed by the partners to the outsiders. |
| Liability | All the partners of the firm are liable for the firm’s debt. | Only the concerned partner is liable for his private debts. |
| Settlement of debts by private assets | The partners may be utilised to pay back the firm’s debt, if only the partner’s private assets exceed his/her own private debts. | Private debts are settled against the partner’s private assets. |
5. State the order of settlement of accounts on dissolution.
Ans: In case of dissolution of a firm, the firm ceases to conduct business and has to settle its accounts.
(a) Treatment of Losses.
Losses, including deficiencies of capital, shall be paid:
(i) first out of profits.
(ii) Next out of capital of partners, and
(iii) lastly, if necessary, by the partners individually in their profit 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:
(i) In paying the debts of the firm to the third parties.
(ii) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan).
(iii) In paying to each partner proportionately what is due to him on account of capital; and.
(iv) the residue, if any, shall be divided among the partners in their profit sharing ratio.
6. On what account the realisation account differs from the revaluation account.
Ans:
| Realisation account | Revaluation account |
| Used to record the proceeds from the sale of assets. | Used to record the changes in the value of assets due to inflation or market fluctuations. |
| The realisation Account is recorded once when the assets are sold. | Revaluation Account is recorded periodically, usually annually or semi-annually. |
| Assets and liabilities accounts are closed. | No closure of assets and liabilities account. |
| Long Answer Questions |
1. Explain the process of dissolution of partnership firms?
Ans: The process of dissolution of partnership firms are:
(i) Dissolution by Agreement: A firm is dissolved:
(a) with the consent of all the partners or.
(b) in accordance with a contract between the partners.
(ii) Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract.
(b) when the business of the firm becomes illegal. or
(c) 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.
(iii) On the happening of certain contingencies: Subject to contract between the partners, a firm is dissolved:
(a) if constituted for a fixed term, by the expiry of that term.
(b) if constituted to carry out one or more ventures, by the completion thereof.
(c) by the death of a partner.
(d) by the adjudication of a partner as an insolvent.
(iv) 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.
(v) 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:
(a) when a partner becomes insane.
(b) when a partner becomes permanently incapable of performing his duties as a partner.
(c) when a partner is guilty of misconduct which is likely to adversely affect the business of the firm.
(d) when a partner persistently commits breach of partnership agreement.
(e) when a partner has transferred the whole of his interest in the firm to a third party.
(f) when the business of the firm cannot be carried on except at a loss. or
(g) when, on any ground, the court regards dissolution to be just and equitable.
2. What is a Realisation Account?
Ans: Realisation Account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities which may be 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 the profit sharing ratio.
3. Reproduce the format of Realisation Account.
Ans:
Realisation Account
| Particulars | Amount (Rs.) | Particulars | Amount(Rs.) |
| Intangible Assets | xxx | Bank Loan Mortgage | xxx |
| Land and Building | xxx | Sundry creditors | xxx |
| Plant and Machinery | xxx | Bills payables | xxx |
| Furniture and Fittings | xxx | Bank overdraft | xxx |
| Loan to other parties | xxx | Outstanding expenses | xxx |
| Bills receivables | xxx | Provision for doubtful debts | xxx |
| Sundry debtors | xxx | Cash/Bank (sale of assets) | xxx |
| Cash/Bank(payment of liabilities) | xxx | Partner’s capital account.(assets taken by the partner) | xxx |
| Cash/Bank(payment of unrecorded liabilities) | xxx | Loss (transferred to partners.capital accounts) | xxx |
| Partner’s capital account | xxx | Loss (transferred to partners | xxx |
| Investments(liability assumed by the partner) Profit (transferred to partners. | xxx | Investment Fluctuation Fund | xxx |
| capital account’s in their profit sharing ratio) | xxx | ||
| Tota | xxx | Tota | xxx |
4. How deficiency of creditors is paid off at the time of dissolution of firm.
Ans: The deficiency or unpaid creditors amount is transferred to the Partner’s Capital Account.Thus the deficiency of the creditors is borne by all the partners in their profit sharing ratio. The proceeds from the sale of assets along with the contribution of the partners at the time of dissolution of the firm are first used up to pay off the external liabilities, i.e., the creditors, bank loans, bank overdrafts, bills payable etc.If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm.
