1. Change in Profit-Sharing Ratio
2. Admission of a partner
3. Retirement of a partner
4. Death of a Partner

All of these known as Reconstitution or dissolution of partnership.
----> Dissolution of partnership
----> Dissolution of partnership firm

Both are different concepts

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The dissolution of a partnership firm is the process of ending the business and the relationship between the partners. This involves: settling all accounts, paying off debts, and distributing any remaining assets among the partners.

Dissolution of a firm takes place in any of the following ways:

a. Dissolution by Agreement: A firm will be dissolved if all the partners agree to dissolve the firm or as per the terms of partner's contract.

b. Compulsory Dissolution: A firm is dissolved compulsory in the following cases:

1. When all the partners or all excepting one partner becomes insolvent or of unsound mind, rendering them incompetent to sign a contract

II. When the business becomes unlawful or illegal

iii. When all the partners excepting one decide to retire from the firm

iv. When all the partners or all excepting one partner died.


c. On happening of an Event: A firm can also be dissolved on happening of the following events, if the partnership agreement so provides:

i. If the partnership was formed for a fixed period and that term has expired,

ii. If the partnership was formed to complete one or more ventures and those ventures are completed

iii. On the death of a partner, if the partnership deed does not provide for continuation of the firm.

iv. If one of the partners is adjudicated as insolvent

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.


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:

1. When a partner or partners becomes of unsound mind (insane)

II . When a partner or partners becomes permanently incapable of performing his/her duties as a partner

iii. When the business of the firm cannot be carried on except at a loss

iv. When a partner is guilty of misconduct which is likely to adversely affect the business of the firm

v. When a partner persistently commits breach of partnership agreement;

vi. When, on any grounds, the court regards dissolution to be just and equitable.

Order of Payment :

(i) Payment to Creditors and other External liabilities. ---> Realization Account
(ii) Payment of Partners' loan.
(iii) Payment of Partners' capital.
(iv) If any amount remains after making above payments, this is distributed between the partners capital account in Profit-Sharing Ratio.

1) closing of asset

Realisation Alc....Dr 2,20,000
To Goodwill Account. 6000 (Treated as normal Asset)
To Stock Account. 55000
To Debtor Account. 66000
To plant & Machinery Account 45000
To Land & build Account. 48000



2) Closing of Outside Liability

Liabilities Account... Dr. xxx
To Realisation Account xxx

Sundry Creditors Account ...Dr 75,000
Bill payable Account ... Dr. 30,000
Provision for bad debts... Dr. 6000
To Realisation Alc. 1,11,000



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3) sale of assets

a) land and Building sold at 120%

Normally When we sold machinery we record journal entries like this

Bank account ...Dr. 57600
To land and Building account 57600

But In this case we already close machinery account, so Journal entry will be

Bank account ...Dr. 57600
To Realisation account 57600


b) All the debtors are realised except Pinku who could not Pay ₹10,000

Bank Alc Dr. 56000
To Realisation Account 56000


c) Tanya took over the stock at 50,000

Tanya Cap Account. Dr. 50.000
To Realisation Account 50.000


4) Payment of Liabilities

a) Normally When we paid any Creditors we record journal entries like this

Creditors Account ...Dr 67500
To Bank account. 67500

But In this case we already close Creditors account, so Journal entry will be

Realisation account... Dr 67500
To Bank account. 67500



b) jassi paid off bill payable

Realisation account...Dr 30,000
To jassi capital account 30,000

Realisation expenses refer to the expenses incurred at the time of closing down a business or selling an asset. These expenses are incurred to complete the process of realisation, which involves converting the assets of the business into cash and paying off the liabilities. Realisation expenses are deducted from the sale proceeds of the assets and are shown in the profit and loss account.

Examples of Realisation Expenses
1. Brokerage and Commission
2. Legal fees and Stamp Duty
3. Advertisement and Publicity
4. Transportation and Insurance Charges
5. Auctioneer's fees and other incidental expenses.

(i) Expenses of realization Rs. 8,000.

Ans:
Realisation account... Dr 8000
To bank account. 8000

(ii) Expenses of realisation Rs. 10,000 were paid by a partner.

Ans:
Realisation account... Dr 10,000
To partner capital account. 10,000

(iii) Realisation expenses of Rs. 12,000 were to be met by Tina, a partner, but were paid by the firm.

Ans:
Tina's capital account...Dr 12,000
To bank account. 12,000

(iv) Pinku, a partner, was paid remuneration of Rs. 10,000 and he was to meet all expenses.

Ans:

Realisation account... Dr 10,000
To pinku capital account. 10,000

(v) Jassi, a partner, was paid remuneration of Rs. 15,000 and he was to meet all expenses. Actual Expenses amounted to Rs. 20,000 which were paid by the firm.

Ans:

a) Realisation account... Dr 15,000
To jassi capital account. 15,000

b) jassi capital account...Dr 20,000
To bank account. 20,000

(vi) Realisation expenses amounting to Rs. 15,000 were paid by the firm, Rs. 10,000 were to be borne by a partner and the balance by the firm.

Ans:

Realisation Account...Dr. 5,000
Partner capital account....Dr 10,000
To bank account. 15,000

(vii) Tanya, a partner, was allowed a remuneration of Rs. 25,000 and she was to meet all expenses. Firm paid an expense of Rs. 5,000

Ans:

a) Realisation account... Dr 25,000
To tanya capital account. 25,000

b)Partner capital account....Dr 5,000
To bank account. 5,000



(viii) Tina, a partner was appointed to look after the process of dissolution for which she was allowed a remuneration of Rs. 18,000. Tina agreed to take over the stock worth Rs. 18,000 as her remuneration. The stock had already been transferred to realisation A/c.

Ans:

a) Realisation account... Dr 18,000
To tina capital account. 18,000

b) tina capital account....Dr 18,000
To Realisation account. 18,000

No Entry

(a) Sale of Assets--Rs 50,000.

Ans:

Bank account...Dr 50,000
To Realisation Account. 50,000

(b) Payment of Liabilities--Rs 10,000.

Ans:

Realisation account...Dr 10,000
To bank account 10,000

(c) A commission of 5% allowed to Mr. X, a partner, on sale of assets.

Ans:

Realisation account...Dr 2,500
To Mr X capital account 2,500

(d) Realisation expenses amounted to Rs 15,000. The firm had agreed with Amrit, a partner, to reimburse him up to Rs 10,000.

Ans:

Realisation account...Dr 10,000
To amrit capital account 10,000

(e) Z, an old customer, whose account for Rs 6,000 was written off as bad in the previous year, paid 60% of the amount written off.

Ans:

Bank account...Dr 3,600
To Realisation Account 3,600
.

But In normal case (not dissolution of firm )

Bank account...Dr 3,600
To bad debts recovered Account 3,600

(f) Investment (Book Value Rs 10,000) realised at 150%

Ans:

Bank account...Dr 15,000
To Realisation Account 15,000

(a) Loan of Rs 10,000 advanced by a partner to the firm was refunded.

Ans:

Partner Loan account...Dr 10,000
To bank account 10,000

(b) X, a partner, takes over an unrecorded asset (Typewriter) at Rs 300.

Ans:
(We close all assets account including recorded and Unrecorded assets)

X capital account...Dr 300
To Realisation Account 300

(c) Undistributed balance (Debit) of Profit and Loss Account Rs 30,000. The firm has three partners X, Y and Z.

Ans:
X capital account...Dr 10,000
Ycapital account...Dr 10,000
Z capital account...Dr 10,000
To Profit and Loss Account 30,000

(d) Assets of the firm realised Rs 1,25,000.

Ans:

Bank account...Dr 1,25,000
To Realisation Account 1,25,000

(e) Y who undertakes to carry out the dissolution proceedings is paid Rs 2,000 for the same.

Ans:

Realisation account...Dr 2,000
To Y Capital account 2,000

(f) Creditors are paid Rs 28,000 in full settlement of their account of Rs 30,000.

Ans:

Realisation account 30,000
To bank account 28,000
To Realisation Account 2,000

Or

Realisation account 28,000
To bank account 28,000

(a) There was an old furniture in the firm which had been written off completely in the books. This was sold for Rs 3,000.

Ans:
Bank account...Dr 3,000
To Realisation Account 3,000

(b) Ashish, an old customer whose account for Rs 1,000 was written off as bad in the previous year, paid 60%, of the amount.

Ans:

Bank account...Dr 600
To Realisation Account 600

(c) Paras agreed to take over the firm's goodwill (not recorded in the books of the firm), at a valuation of Rs 30,000.

Ans:

Paras capital account...Dr 30,000
To Realisation Account 30,000

(d) There was an old typewriter which had been written off completely from the books. It was estimated to realise Rs 400. It was taken by Priya at an estimated price less 25%.

Ans:

Priya capital account...Dr 300
Realisation account..Dr 100
To Realisation Account 400

Priya capital account...Dr 300
To Realisation Account 300

(e) There were 100 shares of Rs 10 each in Star Limited acquired at a cost of Rs 2,000 which had been written-off completely from the books. These shares are valued @ Rs 6 each and divided among the partners in their profit-sharing ratio.

Ans:

(Share are treated as asset of the firm, so in this case partners acquire share in their psr)

Priya capital account...Dr 300
Paras capital account...Dr 300
To Realisation account 600

(a) There was furniture worth Rs 50,000. Aman took over 50% of the furniture at 10% discount and the remaining furniture was sold at 30% profit on book value.

Ans:

a) aman capital account...Dr 22,500
To Realisation Account. 22,500

b) bank account...Dr 32500
To Realisation Account 32500

(b) Profit and Loss Account was showing a credit balance of Rs 15,000 on the date of dissolution.

Ans:

Profit and Loss Account...Dr 15,000
To Aman capital account 7500
To Harsh capital account 7500

(c) Creditors, to whom the firm owed Rs 6,000, accepted stock of Rs 5,000 at a discount of 5% and the balance in cash.

Ans:

Realisation Account...Dr 6000
To Realisation Account 4750
To cash account 1250

Realisation Account...Dr 1250
To cash account 1250

(d) The firm paid realisation expenses amounting to Rs 5,000 on behalf of Harsh who had to bear these expenses.

Ans:

Harsh capital account...Dr 5,000
To bank account 5,000

(e) There was a bill for 1,200 under discount. The bill was received from Soham who proved insolvent and a first and final dividend of 25% was received from his estate.

Ans:

a) Realisation account...Dr 1200
To bank account 1200

b) bank account...Dr 300
To Realisation Account 300

1. Loan to partner

=> Firm ----> partner

Loan to partner is a asset for partnership firm

2. Loan by partner

=> partner ----> firm

Loan by partner is a liability for partnership firm

1. Payments made in cash (Loan by partner)

Partner Loan Dr. (Liability Pay) 200,000
To Bank 200,000

2. Partner took over the asset

Partner Loan Dr. 200,000
To Realisation 200,000

3. Laptop 180,000 in full settlement

Partner Loan Account. Dr 200,000
To Realisation Account (asset) 180,000
To Realisation Account(gain) 20,000

4. Laptop 230,000

Partner Loan Account. Dr 200,000
To Realisation Account (asset) 200,000

Or

Partner Loan Account. Dr 200,000
Realisation Account(loss) Dr. 30,000
To Realisation Account (asset) 230,000

5. Laptop 100,000 & cash 80000 in full settlement

Partner Loan Account. Dr 200,000
To Realisation Account(asset) 100,000
To cash account 80,000
To Realisation Account(gain) 20,000

(i) Dhwani's Loan of 50,000 to the firm was settled by paying 42,000.

(ii) Paavni's Loan of 40,000 was settled by giving an unrecorded asset of 45,000.

(iii) Loan to Charu of amount. 60,000 was settled by payment to Charu's brother loan of the same

(iv) Iknoor's Loan of payment. 80,000 to the firm and she took over Machinery of 60,000 as part

You are required to pass necessary entries for all the above-mentioned transactions.