MEANING OF DISsOLUTION OF FIRM

tion of the firm means closure of the firm and discontinuation of business. In
usiness
other words, bu relationship among all the partners ends. According to Section 39 ot
the Indian Partnership Act, 1932, "Dissolution of the firm neans dissolution of partnershiP
a l l the partners in the firm." Thus, in the event of dissolution of firm, all its assets are
amon
ralised, liabilities are settled and the balance, if any, is distributed among all the partners.
Diference between Dissolution of Firm and Dissolution of Partnership
Basis Dissolution of Firm Dissolution of Partnership
1. Meaning It means closure of the firm and end of It means change in business relationship among the
business relationship among all the partners. partners. The firm continues its business.
2 Court's Intervention It can be either voluntary by the partners| It is always voluntary.
or compulsorily by the order ofthe court.
3Business Continuation Business of the firm comes to an end. Business of the firm continues.
4.Books of Account Books of account of thefirm areclosed. Books of account of the firm need not be closed.
5 Settlement of Assets ofthe firm are realised and liabilities Assets of the firm are revalued and liabilities
Accounts are settled. The balance amount, if any, is| are reassessed. The profit or loss due to it, is
distributed among all the partners. distributed among the partners in their old
profit-sharing ratio.
6Economic
Oomic Relationship
Relationship Economic relationship among the partners| Economic relationship among the partners
Comes to an end forever. continues with changes.
1. Effect
Dissolution offirm also means dissolution Dissolution of partnership may or may not involve
of partnership. dissolution ofthefirm.
 A-
DISSOLUTION OF FIRM
MODES OF
The modes of dissolution are
Dissolution without the Court Order; and
Dissolution with the Court Order.
Dissolution without the Court Order
without the Court
Order in the tollowing situatione.
S
A hm is dissolved
.When all the partners agree to
dissolve the firm.
partners except one become insolvent
.When all the partners or all the
becomes unlawful on
the happening
of
some event
When business nrm was
for which the Constitute
tuted
4. Dissolution on the expiry of the term
5. On completion of the venture.
at Will.
6. Dissolution by notice, in case Partnership is
Dissolution with the Court Order
dissolution of the firm
in the following situatio
tions
A Court may order for the
unsound mina.
A partner becomes a person of
(disabled).
A partner is permanently incapacitated
. A partner is found guilty of misconduct.
4. The partnership agreement is persistently breached by a partner or artners.

5. The Court finds the dissolution of the firm justihed.

following two isues arise:
Accounting at the time of dissolution involves
1. Settlement of Accounts; and
2. Payment of Firm's Debts and Private Debts.
1. Settlement of Accounts (Section 48)
Section 48 of the Indian Partnership Act, 1932 deals with the settlement of Account
s at t
ent among
time of dissolution of a firm, which provides that, subject to agreement among papartnen
following rules shall apply:
Treatment of Losses [Section 48(a)]
(a) Losses, including deficiencies of capital, shall be paid:
i) First out of profits;
(ii) Next out of capital; and
(iit) Lastly, if necessary, by the partners individually in their profit-sharing ratio.
Application of Assets [Section 48(b)]
(b) The amount realised from the sale of assets of the firm, including any sum of mone
contributed by the partners to make up deficiencies of capital, are applied in the
following order:
(i) In paying firm's debts to the third parties;
(ii) In paying to each partner rateably what is due to him from the firm
of loan;
onacou
(ii) In paying rateably what is due to each partner on account of capital; and
(iv) The balance, if any, is distributed
among the partners in their profit-sharing
 ment of Firm's Debts and Private Debts (Section 49)
Payment

9
49 of the
of the Indian Partnership Act, 1932 deals with firm's debts and private debts.
Sectio

a r e as follows:
The provisions
Application
irm's Property: Firm's property is applied first towards the paymern
of Firn
1.
m's debts, then surplus, if any, is applied towards the payment of a partner's loan
balance towards his capital.
tothe firm and
Anplication of Partner's Private Property: Private property of each partner is applied first
towards the payment of his personal debts and the surplus, if any, is applied towards
the payment of the firm's debts.
liassets of the firm are not adequate to pay firm's creditors, the partners have to contribute
fom their net private assets, i.e., private assets minus personal liabilities. It is because of
the fact that liability of a partner is unlimited.

Difference between Firm's Debts and Private Debts

Basis Firms Debts Private Debts

1. Meaning Firm's debts mean debts owed by the firm Private debts mean debts owed by a partner
to outsiders. personaly
2 Liability All the partners are liable jointly and Concerned partner is liable personally for his
personal debts.
severally for the firm's debts.
3. Firms property is applied first for settling The share of a partner in excess of the firm's
Application of Firm's property over the firms debts can be applied
Property firm's debts.
for his personal debts.
Private property is first applied for personal
4Application of Private The excess of a partners private property
for debts and then towards firm's liability.
Property over his personal debts can be applied
the firm's debts.
1. Realisation Account
Realisation Account is prepared at the time of dissolution for realising the assets of the fim
and payment of dues to outside parties. It is a Nominal Account, in which all assets (excen
Cash and Bank Accounts) and liabilities to outside parties of the firm are transferred. Te
amount realised from sale of assets are credited while payment of liabilities and expenses
incurred on realisation are debited to the account. Balance in the account is either gain
(profit) (if total of credit side is more than the total of debit side) or loss (if total of debit
side is more than the total of credit side). The gain (profit) or loss is transferred to the
Capital Accounts of the Partners in their profit-sharing ratio.

.Realisation Account is a Nominal Account.

./ts objective is to close the books ofaccount of the dissolved firm and determine
gain (profit) or loss on realisation of assets and settlement of liabilities.
Gain (Profit) or lossrealisation ís transferred to Partners'
on
Capital Accounts in
their profit-sharing ratio.
(u) For Realisation Expenses
Realisation Expenses or Dissolution expenses are incurred in the process of dissolving
These expenses may be
the firm, i.e., selling the assets and paying the liabilities. paid as
to carry out dissolution and/or as expenses incurred. These being
remuneration to a partner
to Realisation Account. Realisation
the expenses for dissolution of the firm are debited
expenses may either be paid or may
be credited to the Concerned Partner's Capital Account.
 Difference between Revaluation Account and Realisation Account
Basis Revaluation Account Realisation Account
1. Meaning It records the effect of revaluation of assets It records the realisation of assets and settle
and reassessment of liabilities. ment of liabilities.
2. Objective It is prepared to make necessary adjustments in | t is prepared to detemine net gain (proft)/Moss
the value of assets and amount of liabilities. on realisation ofassets and settlementofliabilities
3. Time
| It is prepared at the time of admission or It is prepared at the time of dissolution of
retirement or death of a partner. the firm.
4. Contents
this account,
Inliabilities only changes in assets and | In this account, al assets and liabilities are
are recorded. recorded.
5. Effect of entries on accounts As a result of entries passed in this account, As a result of
| entries passed in this account
relating to assets and the accounts of assets and liabilities revalued, the accounts of assets and
| liabilities are dosed.
liabilities are not closed.
6. Frequency of Preparation This account may be prepared a number of | This account is prepared only once during
of Account times during the life of a firm. life firm.
the ofa
Why is the balance at bank never transferred to the Realisation Account on the
dissolution of a partnership?
The purpose of opening a realisation account on the dissolution of the firm is
to record the realisation of assets, payment of liabilities and determine the
profit or loss on realisation. Cash at Bank is reliased asset and does not
involve any profit or loss. Hence, it is not transferred to the Realisation
Account.