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NIOS Class 12 Accountancy Chapter 25 Dissolution of Partnership Firm
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Dissolution of Partnership Firm
Chapter: 25
| Module – 4: Partnership Account |
INTEXT QUESTIONS 25.1
Fill in the blanks with the appropriate word/words:
(i) A partnership firm comes to an end when the activities of the firm become ___________.
Ans: Unlawful.
(ii) When a firm decides to close its business, it is said to be __________ .
Ans: Dissolved.
(iii) Dissolution of a ________ is different from dissolution of _________ .
Ans: Firm, partnership.
(iv) The firm is compulsorily __________ when all the partners or all excepting one partner die.
Ans: Dissolved.
(v) The firm is dissolved by ________ when a partner becomes of unsound mind.
Ans: Court.
(vi) The firm is dissolved by ________ when all the partners give their consent.
Ans: Agreement.
INTEXT QUESTIONS 25.2
Given below are certain statements. Some of these statement are true and some of these are false. Write T’ against true statement and ‘F’ against false statements.
(i) At the time of dissolution an account including cash and bank are transferred to realisation account.
Ans: F.
(ii) On dissolution of a firm, business operations of the firm are closed down.
Ans: T.
(iii) After the preparation of realisation account, Gain or loss of realisation is transferred to Partners capital account
Ans: T.
(iv) Amount realised from the sale of an unrecorded asset is recorded in Realisation Account.
Ans: T.
(v) Balance of general reserve is transferred to partners’ capital accounts.
Ans: T.
(vi) Realisation expenses paid by the partners on behalf of the firm are recorded in realisation account and partners capital account.
Ans: T.
INTEXT QUESTIONS 25.3
I. Which of the following is treated as unrecorded asset :
(i) Sale of old Furniture.
Ans: Not an unrecorded asset.
(ii) Goodwill appearing in the balance sheet.
Ans: Not an unrecorded asset.
(iii) Bad debts recovered, written off in pervious year.
Ans: Unrecorded asset.
(iv) Sale of Investments.
Ans: Not an unrecorded asset.
(v) Sale of old computer, written off in pervious year.
Ans: Unrecorded asset.
II. Which of the following is treated as unrecorded liability :
(i) A Bill Discounted with bank dishonoured.
Ans: Unrecorded liability.
(ii) Repayment of Bank Loan.
Ans: Not an unrecorded liability.
(iii) Creditors for stock purchase of goods.
Ans: Not an unrecorded liability.
(iv) Settlement of a dispute against the firm.
Ans: Unrecorded liability.
(v) Payment of outstanding bills.
Ans: Not an unrecorded liability.
| TERMINAL EXERCISE |
1. Answer the following questions in one sentence:
(a) What is meant by dissolution of partnership firm ?
Ans: It refers to the complete breakdown of partnership relations among all partners, resulting in the cessation of business activities and the winding up of affairs by selling assets and paying liabilities.
(b) Why Realisation account is prepared ?
Ans: It is prepared to facilitate the disposal of assets and the settlement of liabilities, ultimately showing the profit or loss resulting from the dissolution process.
(c) What journal entry is made in case of payment of unrecorded Liability?
Ans: The entry is: Realisation A/c Dr. To Bank/Cash A/c.
(d) What journal entry is made when expenses are agreed to be borne by the partners and paid by the firm.
Ans: The entry is: Partner’s Capital A/c Dr. To Cash/Bank A/c.
2. Distinguish between dissolution of partnership firm and dissolution of partnership.
Ans: Dissolution of a firm means the business closes entirely and ceases to exist. Dissolution of a partnership merely terminates the old agreement, and the firm may continue to operate under a new agreement.
(i) Scope: Dissolution of a firm necessarily includes the dissolution of the partnership, but dissolution of a partnership may or may not involve dissolving the firm.
(ii) Accounting: In a firm dissolution, a Realisation Account is opened to close the books. In a partnership dissolution (like admission or retirement), the firm is reconstituted, often involving a Revaluation Account rather than a Realisation Account.
3. Under what circumstances can the court dissolve the partnership firm?
Ans: The court may order a partnership firm to be dissolved in the following situations:
(i) A partner becomes of unsound mind or permanently incapable of performing their duties.
(ii) A partner deliberately and consistently breaches agreements related to management.
(iii) A partner’s conduct is likely to adversely affect the firm’s business.
(iv) A partner transfers their interest in the firm to a third party.
(v) The court regards the dissolution to be just and equitable.
4. Sumit and Anish are equal partners in a firm. They decided to dissolve the partnership on December 31, 2014 when the balance sheet is as under:
Balance Sheet as on December 31, 2014
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Sundry creditors | 30,000 | Cash at Bank | 7,000 |
| Reserve fund | 7,000 | Sundry Debtors | 23,000 |
| Bills Payable | 30,000 | Stock | 42,000 |
| Capital | Furniture | 35,000 | |
| Sumit | 70,000 | Plant | 40,000 |
| Anish | 60,000 | Leasehold land | 50,000 |
| 1,30,000 | |||
| Total | 1,97,000 | Total | 1,97,000 |
Assets were realised as follows :
Leasehold land – ₹ 62,000
Furniture – ₹ 30,500
Stock – ₹ 40,500
Plant – ₹ 48,000
Sundry debtors – ₹ 22,500
Sundry creditors were paid ₹ 29,500 in full settlement.
Bills payable paid 5% less.
Expenses of realisation amounted to ₹ 2,500.
Prepare realisation account, Bank account and partners’ capital accounts to close the books of the firm.
Ans:
Realisation Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Sundry Assets: | By Sundry Creditors | 30,000 | |
| Leasehold Land | 50,000 | By Bills Payable | 30,000 |
| Furniture | 35,000 | By Bank (Assets realised): | |
| Stock | 42,000 | Leasehold Land | 62,000 |
| Plant | 40,000 | Furniture | 30,500 |
| Sundry Debtors | 23,000 | Stock | 40,500 |
| To Bank (Realisation expenses) | 2,500 | Plant | 48,000 |
| To Bank (Bills Payable) | 28,500 | Sundry Debtors | 22,500 |
| To Bank (Sundry Creditors) | 29,500 | By Partners’ Capital A/c (Profit): | |
| Sumit | 6,500 | ||
| Anish | 6,500 | ||
| Total | 2,50,500 | Total | 2,50,500 |
Profit on realisation = ₹13,000
Bank Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Balance b/d | 7,000 | By Sundry Creditors | 29,500 |
| To Realisation A/c (Assets Realised) | 2,03,500 | By Bills Payable | 28,500 |
| By Realisation Expenses | 2,500 | ||
| By Sumit’s Capital A/c | 80,000 | ||
| By Anish’s Capital A/c | 70,000 | ||
| Total | 2,10,500 | Total | 2,10,500 |
Partners’ Capital Accounts
Sumit’s Capital Account:
Partners’ Capital Accounts
| Particulars | Sumit (₹) | Anish (₹) | Particulars | Sumit (₹) | Anish (₹) |
| To Bank | 80,000 | 70,000 | By Balance b/d | 70,000 | 60,000 |
| By Reserve Fund | 3,500 | 3,500 | |||
| By Realisation Profit | 6,500 | 6,500 | |||
| Total | 80,000 | 70,000 | Total | 80,000 | 70,000 |
5. Ashu and Hemani are Partners sharing profit and losses in the ratio of 3 : 2.They decided to dissolve the firm on December 31, 2014. Their balance sheet on the above date was :
Balance Sheet as on December 31, 2014
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Capital | Building | 90,000 | |
| Ashu | 1,00,000 | Machinery | 60,000 |
| Hemani | 92,000 | Furniture | 10,000 |
| 1,92,000 | Stock | 24,000 | |
| Creditors | 88,000 | Investments | 50,000 |
| Bank overdraft | 20,000 | Debtors | 48,000 |
| Cash in hand | 18,000 | ||
| Total | 3,00,000 | Total | 3,00,000 |
Ashu is to take over the building at ₹ 98,000 and machinery and furniture is to be taken over by Hemani at value of ₹ 70,000.
Ashu agreed to pay creditor and Hemani agreed to meet bank overdraft.
Stock and investments are taken by both partners in their profit sharing ratio.
Debtors realised for ₹ 46,000, expenses of realisation amounted to ₹ 3,000.
Prepare necessary ledger accounts.
Ans:
Realisation Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Building | 90,000 | By Ashu (Building taken over) | 98,000 |
| To Machinery | 60,000 | By Hemani (Machinery + Furniture) | 70,000 |
| To Furniture | 10,000 | By Creditors (taken over by Ashu) | 88,000 |
| To Stock | 24,000 | By Bank Overdraft (taken over by Hemani) | 20,000 |
| To Investments | 50,000 | By Bank (Debtors realised) | 46,000 |
| To Debtors | 48,000 | ||
| To Bank (Expenses) | 3,000 | ||
| To Partners’ Capital A/c: | |||
| Ashu (Loss) | 3,000 | ||
| Hemani (Loss) | 2,000 | ||
| Total | 2,90,000 | Total | 2,90,000 |
Partners’ Capital Accounts
Ashu’s Capital Account:
| Particulars | ₹ | Particulars | ₹ |
| To Building (Taken Over) | 98,000 | By Balance b/d | 1,00,000 |
| To Stock (3/5 × 24,000) | 14,400 | By Creditors Taken Over | 88,000 |
| To Investments (3/5 × 50,000) | 30,000 | ||
| To Realisation A/c (Loss) | 3,000 | ||
| By Cash/Bank (Balancing Figure) | 42,600 | ||
| Total | 1,88,000 | Total | 1,88,000 |
Hemani’s Capital Account:
| Particulars | ₹ | Particulars | ₹ |
| To Realisation Loss | 2,000 | By Balance b/d | 92,000 |
| To Stock (2/5 × 24,000) | 9,600 | By Machinery & Furniture | 70,000 |
| To Investments (2/5 × 50,000) | 20,000 | By Bank Overdraft Taken Over | 20,000 |
| To Cash/Bank | 1,50,400 | ||
| Total | 1,82,000 | Total | 1,82,000 |
Cash / Bank Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Balance b/d (Cash) | 18,000 | By Realisation Expenses | 3,000 |
| To Debtors Realised | 46,000 | By Ashu (Final payment) | 1,40,600 |
| By Hemani (Final payment) | 1,50,400 | ||
| Total | 64,000 | Total | 2,94,000 |
6. Tarun, Neeru and Vikas shared profit in the ratio of 3 : 2 : 1. On December 31, 2014 their balance sheet was as follows:
Balance Sheet as on December 31, 2014
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Capital | Plant | 80,000 | |
| Tarun | 90,000 | Debtors | 70,000 |
| Neeru | 1,00,000 | Furniture | 22,000 |
| Vikas | 80,000 | Stock | 70,000 |
| 2,70,000 | Investments | 60,000 | |
| Creditors | 60,000 | ||
| Bills payable | 30,000 | Bills receivable | 46,000 |
| Reserve | 20,000 | Cash in hand | 32,000 |
| Total | 3,80,000 | Total | 3,80,000 |
On this date the firm was dissolved. The assets realised as follows:
Plant ₹ 85,000, Debtors ₹ 69,700, Furniture ₹ 20,000, Stock 95% of the book value, Investments ₹ 8,600 and Bills receivable ₹ 31,000.
An office Electronic Typewriter, not shown in the books of accounts realised ₹ 9,000.
Expenses of realisation amounted to ₹ 4,500.
Creditor are taken over by Vikas at book value.
Prepare realisation account, Capital accounts and cash account.
Ans: Given
Profit-sharing ratio:
Tarun : Neeru : Vikas = 3 : 2 : 1
Reserve = ₹20,000 → to be distributed in PSR.
Creditors taken over by Vikas at book value.
Unrecorded asset (Electronic Typewriter) realised ₹9,000.
Realisation Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Plant | 80,000 | By Creditors (Taken over by Vikas) | 60,000 |
| To Debtors | 70,000 | By Bank (Plant) | 85,000 |
| To Furniture | 22,000 | By Bank (Debtors) | 69,700 |
| To Stock | 70,000 | By Bank (Furniture) | 20,000 |
| To Investments | 60,000 | By Bank (Stock) | 66,500 |
| To Bills Receivable | 46,000 | By Bank (Investments) | 8,600 |
| To Bank (Realisation Expenses) | 4,500 | By Bank (Bills Receivable) | 31,000 |
| By Bank (Unrecorded Electronic Typewriter) | 9,000 | ||
| To Partners’ Capital A/c (Loss) | 2,700 | ||
| Total | 3,52,500 | Total | 3,52,500 |
Loss on realisation = ₹2,700
Distributed in 3 : 2 : 1
Partners’ Capital Accounts
Tarun’s Capital Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Realisation (Loss) | 1,350 | By Balance b/d | 90,000 |
| To Bank (Final payment) | 98,650 | By Reserve | 10,000 |
| Total | 1,00,000 | Total | 1,00,000 |
Neeru’s Capital Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Realisation A/c (Loss) | 900 | By Balance b/d | 1,00,000 |
| To Bank (Final Payment) | 1,05,767 | By Reserve | 6,667 |
| Total | 1,06,667 | Total | 1,06,667 |
Vikas’s Capital Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Bank (Final Payment) | 1,42,883 | By Balance b/d | 80,000 |
| By Reserve | 3,333 | ||
| By Realisation A/c (Creditors Taken Over) | 60,000 | ||
| To Realisation A/c (Loss) | 450 | ||
| Total | 1,43,333 | Total | 1,43,333 |
Cash Account:
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Balance b/d | 32,000 | By Realisation Expenses | 4,500 |
| To Plant | 85,000 | By Tarun’s Capital A/c | 98,650 |
| To Debtors | 69,700 | By Neeru’s Capital A/c | 1,05,767 |
| To Furniture | 20,000 | By Vikas’s Capital A/c | 1,42,883 |
| To Stock | 66,500 | ||
| To Investments | 8,600 | ||
| To Bills Receivable | 31,000 | ||
| To Unrecorded Electronic Typewriter | 9,000 | ||
| Total | 3,21,800 | Total | 3,51,800 |
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