CHAPTER 7
PARTNERSHIP ACCOUNTS-VI
ONE WORD TO ONE SENTENCE QUESTIONS
Q.1.
Realisation expenses rs 5,000 paid by jiwan out of his own pocket. Pass journal
entries?
Ans. To
record the payment of realization expenses by Jiwan out of his own pocket, the
following journal entry would be made:
Jiwan's
Capital Account Dr. 5,000
To Cash
Account 5,000
This entry
recognizes the increase in Jiwan's capital by Rs. 5,000 as he paid the
realization expenses personally. The cash account is credited to reflect the
outflow of cash from the business.
Q.2. What is
meant by dissolution of partnership firm?
Ans. Dissolution
of a partnership firm refers to the termination or cessation of the partnership
relationship between the partners. It involves the winding up and settlement of
the partnership's affairs, including the distribution of assets, settlement of
liabilities, and the formal closure of the business. Dissolution can occur due
to various reasons such as mutual agreement, expiry of a partnership term,
death or retirement of a partner, insolvency, or a court order.
Q.3. Give two
circumstances in which a firm can be dissolved?
Ans. A partnership firm can be dissolved under the following circumstances:
Mutual Agreement: The partners may decide to dissolve
the firm by mutual consent. This can occur when they no longer wish to continue
the partnership or when they have achieved the purpose for which the
partnership was formed.
Court Order: The court may order the dissolution of a firm
in cases of partner misconduct, insolvency, or breach of partnership agreement.
This typically happens when the partnership becomes unworkable or when the
interests of the partners are severely compromised.
It's
important to note that there can be various other circumstances leading to the
dissolution of a firm, such as the expiry of a fixed-term partnership, death of
a partner, or bankruptcy.
Q.4. What is dissolution
by agreement?
Ans. Dissolution
by agreement refers to the termination of a partnership firm by the unanimous
consent of all partners. It occurs when all partners mutually agree to dissolve
the firm and cease its operations. This agreement can be reached due to various
reasons such as the completion of a specific project, disagreement among
partners, retirement of partners, or any other circumstance where the partners
collectively decide to dissolve the partnership. Dissolution by agreement
typically involves the settlement of assets, liabilities, and distribution of
the remaining funds among the partners in accordance with their agreed-upon
terms.
Q.5. Which
liability is be paid first of all after the sale of assets?
Ans. After
the sale of assets, the first liability to be paid off is usually the secured
liabilities. These are the liabilities that are secured by specific assets of
the partnership, such as loans or mortgages. The proceeds from the sale of
assets are used to satisfy these secured liabilities before addressing other liabilities
of the partnership.
Q.6. In which
account, assets and liabilities are transferred at the time of dissolution of a
firm?
Ans. At the
time of dissolution of a firm, assets are transferred to the Realization
Account, and liabilities are transferred to the Realization Account as well.
The Realization Account is a temporary account used to record the disposal of
assets, settlement of liabilities, and distribution of remaining funds during
the process of winding up the partnership.
Q.7. What is
dissolution by notice?
Ans. Dissolution
by notice refers to the termination of a partnership firm by giving notice to
the other partners. It occurs when one partner decides to dissolve the
partnership by serving a notice of dissolution to the other partners, as per
the terms agreed upon in the partnership agreement or as required by the
applicable laws. The notice of dissolution sets a future date for the
dissolution of the partnership, allowing the partners to wind up the affairs of
the firm and settle their obligations.
Q.8. What is
compulsory dissolution?
Ans. Compulsory
dissolution refers to the termination of a partnership firm by legal or
regulatory requirements. It occurs when the partnership is dissolved by force
of law or due to certain events or circumstances specified in the partnership
agreement or relevant legislation. Examples of events that may lead to
compulsory dissolution include bankruptcy, incapacity or death of a partner,
violation of partnership agreement terms, or court order. In such cases, the
partnership is dissolved involuntarily, and the partners must follow the
prescribed legal procedures to wind up the affairs of the firm and settle their
obligations.
Q.9. List the
various accounts to be prepared at the time of dissolution of a firm?
Ans. At the time of dissolution of a firm, the following accounts are
typically prepared:
Realization Account: This account is prepared to record the
realization of assets and settlement of liabilities. It includes the proceeds
from the sale of assets, payment of liabilities, and other expenses incurred in
the process of winding up the firm.
Partners' Capital Accounts: Separate capital accounts are
prepared for each partner to record their respective capital contributions,
accumulated profits or losses, and their share in the firm's assets.
Cash Account: This account tracks the inflow and outflow of
cash during the dissolution process. It includes cash received from the
realization of assets and cash payments made to settle liabilities.
Bank Account: Similar to the Cash Account, the Bank Account
records the transactions related to the firm's bank balances during the
dissolution process.
Loan Account: If there are any loans taken by the firm, a
Loan Account is prepared to record the repayment of loans during the
dissolution.
Goodwill Account: If the firm had goodwill, a Goodwill Account is
prepared to distribute the goodwill among the partners or to record any adjustments
related to goodwill.
Reserve and Surplus Accounts: If the firm had accumulated
reserves or surplus, separate accounts are prepared to distribute these amounts
among the partners or to make necessary adjustments.
Miscellaneous Accounts: Depending on the specific circumstances of the
dissolution, additional accounts may be prepared, such as Accounts Payable,
Accounts Receivable, Provision for Bad Debts, etc., to account for any
outstanding debts, receivables, or provisions.
It's
important to note that the exact accounts prepared during dissolution may vary
depending on the specific requirements and agreements of the partnership, as
well as applicable accounting standards and regulations.
Q.10. How will
you deal with partner’s loan account?
Ans. In the dissolution of a firm, the partner's loan account is settled in
the following manner:
Settlement from Firm's Assets: The partner's loan account is considered as a
liability of the firm. As part of the dissolution process, the firm's assets
are liquidated, and the proceeds are used to settle the liabilities, including
the partner's loan account. The amount owed to the partner as a loan is repaid
using the available funds.
Adjustment in Capital Accounts: Once the partner's loan account is settled, the
remaining balance, if any, is adjusted in the partner's capital account. If the
partner's loan account has a debit balance (indicating a loan owed by the
partner to the firm), the debit balance is reduced or eliminated by reducing
the partner's capital account accordingly. If the partner's loan account has a
credit balance (indicating a loan given by the partner to the firm), the credit
balance is added to the partner's capital account.
By settling
the partner's loan account and making appropriate adjustments in the capital
accounts, the financial relationship between the partner and the firm is
resolved during the dissolution process.
Q.11. Explain
the realisation expenses?
Ans. Realization
expenses are the costs incurred during the process of winding up or liquidating
a business or partnership. These expenses are directly related to the sale,
transfer, or disposal of assets, settling of liabilities, and overall
dissolution of the firm.
Realization
expenses can include various costs such as legal fees, professional fees,
brokerage fees, valuation charges, transportation costs, advertisement
expenses, and any other expenses incurred to facilitate the liquidation
process.
The purpose
of incurring realization expenses is to ensure a smooth and orderly winding up
of the business while maximizing the value of the assets. These expenses are
necessary to complete the necessary legal formalities, sell the assets at fair
market value, settle outstanding obligations, and distribute the remaining
proceeds to the partners or creditors.
Realization
expenses are typically recorded as a deduction from the sale proceeds or
distributed proportionately among the partners or creditors based on their
respective entitlements. These expenses are reflected in the realization
account, which tracks the expenses incurred and calculates the net proceeds
available for distribution.
By properly
accounting for realization expenses, the firm can ensure transparency and
fairness in the liquidation process. It helps in accurately determining the
final distribution of assets and liabilities, allowing for an equitable
settlement among the partners or creditors involved.
Q.15. How will
you treat sale of unrecorded assets?
Ans. User
in very
short How will you treat sale of unrecorded assets?
ChatGPT
The
treatment of the sale of unrecorded assets in a business or partnership
involves recognizing the proceeds from the sale and adjusting the capital
accounts of the partners or owners. Here is a brief explanation of the treatment:
Recognition of sale proceeds: The proceeds from the sale of
unrecorded assets are recorded as cash or accounts receivable, depending on the
form of payment received.
Allocation of sale proceeds: The sale proceeds are allocated among the
partners or owners based on their profit sharing or capital sharing ratios.
This allocation is typically done in proportion to their respective ownership
interests.
Adjustment of capital accounts: The partners' or owners' capital accounts are
adjusted to reflect their share of the sale proceeds. The credited amount is
added to their capital accounts, increasing their capital balances.
Recognition of gain or loss: If the sale proceeds exceed the value at which
the unrecorded assets were originally acquired, a gain is recognized.
Conversely, if the sale proceeds are less than the value at which the assets
were acquired, a loss is recognized. The gain or loss is allocated among the
partners or owners based on their profit sharing or capital sharing ratios.
Recording of any related expenses: Any expenses incurred in connection with the
sale of unrecorded assets, such as brokerage fees or transportation costs, are
recorded as part of the realization expenses and deducted from the sale
proceeds.
Overall,
the treatment of the sale of unrecorded assets aims to properly allocate the
proceeds among the partners or owners and adjust their capital accounts
accordingly. It ensures that the financial records accurately reflect the
impact of the sale on the partners' or owners' equity in the business.
Q.16. How will
you deal with provision for doubtful debts appearing in balance sheet?
Ans. In the case of the provision for doubtful debts appearing in the balance
sheet, it is typically treated in the following manner:
Adjustment of the provision: The provision for doubtful debts is adjusted to
its actual estimated value. This adjustment is made by considering the aging of
the accounts receivable, historical collection patterns, and any specific
information regarding the recoverability of individual debts.
Creation or reversal of the
provision:
If the actual estimated
value of the provision is higher than the amount recorded in the balance sheet,
an additional provision is created to bring it to the appropriate level. On the
other hand, if the estimated value is lower than the provision recorded in the
balance sheet, a reversal of the excess provision is made.
Impact on the income statement: The adjustment to the provision for doubtful
debts affects the income statement. An increase in the provision results in
higher expenses, reducing the net profit. Conversely, a decrease in the
provision leads to lower expenses and increases the net profit.
Disclosure in financial statements: The adjustment made to the provision for
doubtful debts should be disclosed in the financial statements, typically in
the notes to the financial statements or as a separate line item in the balance
sheet.
The
treatment of the provision for doubtful debts ensures that the financial
statements accurately reflect the estimated amount needed to cover potential
bad debts and provides a more realistic view of the financial position and performance
of the business.
Q.17. What
journal entries will be passed for unrecorded assets taken away by a partner
time of dissolution?
Ans. In the case of unrecorded assets taken away by a partner at the time of
dissolution, the following journal entries may be passed:
To record
the removal of unrecorded assets by the partner:
Partner's
Capital Account (Debit)
Unrecorded
Asset Account (Credit)
To transfer
the value of unrecorded assets to the remaining partners' capital accounts:
Remaining
Partners' Capital Accounts (Debit)
Unrecorded
Asset Account (Credit)
The first
entry recognizes the partner's withdrawal of unrecorded assets, reducing their
capital in the firm. The second entry distributes the value of the unrecorded
assets among the remaining partners, increasing their capital accounts by their
respective share.
It's
important to note that the specific journal entries may vary depending on the
circumstances and the accounting practices followed by the firm. Additionally,
consulting with a professional accountant or referring to the relevant
accounting standards is recommended for accurate and compliant treatment of
unrecorded assets in a dissolution scenario.
Q.18.
Realisation expenses rs. 4,000 were agreed to be payable to partner mohan by
the firm actual expenses were however rs 6,000. Pass necessary journal entry?
Ans. To record the agreed realisation expenses payable to partner Mohan, and
the actual expenses incurred, the following journal entry can be passed:
Partner's
Realisation Expenses Account (Debit) - Rs. 4,000
Cash/Bank
Account (Credit) - Rs. 4,000
To adjust
the actual expenses incurred:
Realisation
Expenses Account (Debit) - Rs. 2,000
Partner's
Realisation Expenses Account (Credit) - Rs. 2,000
In the
first entry, the agreed amount of Rs. 4,000 is debited to Partner's Realisation
Expenses Account, representing the expenses payable to partner Mohan. The same
amount is credited to the Cash/Bank Account.
In the
second entry, the actual expenses incurred, which are higher at Rs. 6,000, are
debited to the Realisation Expenses Account. The same amount is credited to the
Partner's Realisation Expenses Account, adjusting the discrepancy.
It's
important to note that the specific journal entries may vary depending on the
accounting practices followed by the firm and the terms of the agreement.
Consulting with a professional accountant or referring to the relevant
accounting standards is recommended for accurate and compliant treatment of
realisation expenses in a dissolution scenario.
Q.19. Stock
worth rs 8,000 is taken over by partner sohan. Pass necessary journal entry
time of dissolution of partnership firm?
Ans. To
record the transfer of stock worth Rs. 8,000 taken over by partner Sohan at the
time of dissolution of the partnership firm, the following journal entry can be
passed:
Partner's
Capital Account (Debit) - Rs. 8,000
Stock
Account (Credit) - Rs. 8,000
In this
entry, the Partner's Capital Account is debited with the value of the stock
taken over by partner Sohan, representing his share in the partnership assets.
The Stock Account is credited with the same amount, reducing the stock value in
the books of the firm.
It's
important to note that the specific journal entry may vary depending on the
accounting practices followed by the firm and the terms of the dissolution
agreement. Consulting with a professional accountant or referring to the
relevant accounting standards is recommended for accurate and compliant
treatment of assets taken over by partners during the dissolution of a
partnership firm.
Q.20. Pass
necessary journal entry at the time of dissolution of firm when rs 2.50,000
realised the assets of firm?
Ans. To record the realization of assets worth Rs. 2,50,000 at the time of
dissolution of the firm, the following journal entry can be passed:
Cash/Bank
Account (Debit) - Rs. 2,50,000
Realization
Account (Credit) - Rs. 2,50,000
In this
entry, the Cash/Bank Account is debited with the amount realized from the sale
of assets, representing the inflow of cash or funds. The Realization Account is
credited with the same amount, reflecting the transfer of the realized assets'
value to the realization account.
Please note
that the specific journal entry may vary depending on the accounting practices
followed by the firm and the details of the asset realization. It is advisable
to consult with a professional accountant or refer to the relevant accounting
standards for accurate and compliant treatment of asset realization during the
dissolution of a firm.
Q.21. How will
you deal with firm’ s debt and private debt of the partners on dissolution of a
firm?
Ans. On the dissolution of a firm, both the firm's debt and the private debts
of the partners are settled in the following manner:
Firm's Debt: The firm's debt, including any outstanding
loans or liabilities, is paid off using the firm's assets. The assets are
realized, and the proceeds are used to settle the firm's obligations. If the assets
are insufficient to cover the debts, the partners contribute the remaining
amount in accordance with their agreed-upon sharing ratio.
Private Debts of Partners: Each partner is responsible for their own
private debts, which are not related to the firm's obligations. The partners
settle their private debts using their personal assets or funds. Any remaining
assets of the firm, after settling the firm's debts, can be distributed among
the partners to assist them in meeting their private obligations.
It's
important to note that the specific treatment of firm debt and private debt may
vary based on the partnership agreement, legal requirements, and accounting
practices followed by the firm. Consulting with a professional accountant or
legal advisor is recommended to ensure proper and compliant handling of debts
during the dissolution of a firm.
VERY SHORT ANSWER TYPE QUESTIONS
Q.1. Give any
four reasons of dissolution of partnership firm?
Ans. There are several reasons that may lead to the dissolution of a
partnership firm. Here are four common reasons:
Mutual Agreement: The partners may decide to dissolve the firm by
mutual agreement. This can happen due to various reasons such as a change in
business circumstances, disagreement among partners, or the desire to pursue
different ventures.
Expiry of Term: If the partnership agreement
specifies a fixed term, the firm may dissolve automatically upon the expiration
of that term. The partners may choose not to renew the agreement or decide to
pursue other business opportunities individually.
Death or Retirement of a Partner: The death or retirement of a partner can lead
to the dissolution of the firm, especially if the partnership agreement does
not provide for the continuation of the business in such situations. The
remaining partners may choose not to continue the business without the departed
partner.
Insolvency or Bankruptcy: If the partnership firm becomes
insolvent or bankrupt, meaning it is unable to meet its financial obligations,
the partners may opt for dissolution. This allows for the orderly winding up of
the business, settling of debts, and distribution of remaining assets.
It's
important to note that these reasons may vary based on the specific
circumstances and legal requirements of each partnership. Consulting with a
legal advisor or professional accountant is advisable for accurate guidance in
the event of a partnership firm dissolution.
Q.2. Give any
two difference between revaluation account and realisation account?
Ans. Purpose: The main difference between a revaluation account and
a realization account lies in their purpose. A revaluation account is prepared
during the revaluation of assets and liabilities in an existing partnership
firm, with the aim of adjusting the values of assets and liabilities and
redistributing the resulting gains or losses among the partners. On the other
hand, a realization account is prepared at the time of the dissolution of a
partnership firm, with the objective of recording the sale of assets, payment
of liabilities, and distribution of remaining funds among the partners.
Timing: Another difference is the timing of their
preparation. A revaluation account is typically prepared during the ongoing
existence of a partnership firm, when there is a need to adjust the values of
assets and liabilities due to changes in their market or book values. It helps
in determining the revised capital balances of the partners. In contrast, a
realization account is prepared at the time of dissolution when the firm is
winding up its operations and selling its assets to settle liabilities and distribute
the remaining funds.
Overall,
while both revaluation and realization accounts involve adjustments and
distributions, their focus and timing differ based on whether it is an ongoing
adjustment within the partnership or a final settlement during the dissolution
of the firm.
Q.3. Give any four
differences between dissolution of partnership and dissolution of firm?
Ans. Nature: Dissolution of partnership refers to the termination
of a specific partnership agreement between two or more individuals. It does
not necessarily lead to the complete closure of the business. Dissolution of a
firm, on the other hand, signifies the complete winding up and closure of the
business entity.
Continuity of Business: In the dissolution of a partnership, the
remaining partners may choose to continue the business or form a new
partnership. The dissolution of a firm, however, indicates the end of the business
operations, and no continuity is expected.
Legal Entity: A partnership is not a separate legal entity
from its partners. Therefore, dissolution of partnership does not involve the
legal formalities required for winding up a company or corporation. In the case
of a firm, which is a registered entity, dissolution involves complying with
legal requirements for closure, such as filing appropriate forms and settling
legal obligations.
Distribution of Assets and
Liabilities: In the
dissolution of a partnership, the assets and liabilities are typically
distributed among the partners based on their agreed profit-sharing or capital
ratio. The partners are personally responsible for the settlement of any
remaining liabilities. In the dissolution of a firm, the assets are sold off,
liabilities are settled, and any remaining funds are distributed among the
partners according to their entitlements. The remaining funds, if any, are
distributed as per the rules defined by the partnership agreement or applicable
laws.
Q.4. Give any
four difference between revaluation account and realisation account?
Ans. Purpose:
A revaluation account is prepared to adjust the values of assets and
liabilities of a partnership firm upon a change in the profit-sharing ratio,
retirement, or admission of a partner. It is used to update the book values of
assets and liabilities. On the other hand, a realisation account is prepared
during the dissolution of a partnership firm to record the sale of assets,
settlement of liabilities, and distribution of the remaining funds among the
partners.
Timing: A revaluation account is prepared while the
partnership firm is still in operation, usually when there are changes in the
partnership structure. It is used to update the accounting records. A realisation
account, on the other hand, is prepared at the time of dissolution when the
firm is being wound up.
Nature of Entries: In a revaluation account, the entries are made
to adjust the book values of assets and liabilities, and the resulting entries
may increase or decrease the partners' capital accounts. In a realisation
account, the entries are made to record the sale of assets, settlement of
liabilities, and distribution of the remaining funds, leading to a final
distribution of profit or loss.
Treatment of Profits/Losses: In a revaluation account, any revaluation gains
or losses are distributed among the partners as per their profit-sharing ratio.
It affects the partners' capital accounts but does not lead to the distribution
of actual cash or assets. In a realisation account, the profits or losses
arising from the sale of assets and settlement of liabilities are divided among
the partners in their profit-sharing ratio. It results in the distribution of
cash or other assets among the partners.
Q.5. What are
the different modes of dissolution of partnership firm? Explain?
Ans. The different modes of dissolution of a partnership firm are as follows:
Dissolution by Agreement: When partners mutually agree to dissolve the
partnership firm, it is known as dissolution by agreement. In this case, the
partners enter into a dissolution agreement, which outlines the terms and
conditions of the dissolution and the subsequent settlement of assets,
liabilities, and the distribution of remaining funds.
Dissolution by Notice: If the partnership is formed for a fixed term
or a specific undertaking, and one of the partners gives notice to dissolve the
firm before the agreed-upon period, it is known as dissolution by notice. The
notice period is usually specified in the partnership agreement or as per the
legal requirements. After the notice period, the firm is dissolved, and the
necessary procedures for settlement and distribution are followed.
Compulsory Dissolution: Under certain circumstances, the partnership
firm may be dissolved compulsorily by law. These circumstances include
insolvency or bankruptcy of a partner, incapacity of a partner, or when the
partnership becomes illegal due to changes in the law or the partnership
agreement.
Dissolution by Court Order: In some cases, the court may order the
dissolution of a partnership firm. This can happen due to misconduct or
wrongdoing by one or more partners, persistent disputes among partners that
hinder the smooth functioning of the firm, or if it is just and equitable to
dissolve the firm as per the court's decision.
In all
modes of dissolution, the partnership firm goes through the process of winding
up, which involves settling the firm's debts, collecting outstanding dues,
selling assets, and distributing the remaining funds among the partners as per
their agreed-upon share or as per the legal requirements. The mode of
dissolution may vary depending on the circumstances and the applicable laws in
the jurisdiction.
Q.6.
Differentiate between revaluation account and realisation account?
Ans. Revaluation Account:
Purpose: Revaluation account is prepared to revalue the
assets and liabilities of the partnership firm at their current market values
or fair values.
Timing: Revaluation account is prepared before the
dissolution of the partnership firm or when there is a change in the profit sharing
ratio among the partners.
Nature: Revaluation account is a temporary account that
reflects the adjustments in the values of assets and liabilities. It does not
involve the actual realization or disposal of assets.
Treatment: In revaluation account, the increase or
decrease in the values of assets and liabilities is recorded. If there is an
increase, it is credited, and if there is a decrease, it is debited.
In summary,
the revaluation account deals with adjustments in the values of assets and
liabilities, while the realisation account records the actual realization and
settlement of assets and liabilities during the dissolution of the partnership
firm.
Q.7.
Differentiate between dissolution of partnership and dissolution of partnership
firm?
Ans. Dissolution of Partnership:
Meaning: Dissolution of partnership refers to the
termination or ending of the partnership relationship between the partners. It
may occur due to various reasons such as retirement, death, insolvency, or
mutual agreement among the partners.
Continuity: In dissolution of partnership, the partnership
entity ceases to exist, and the partnership agreement comes to an end. The
partners may settle the remaining affairs and distribute the assets and
liabilities among themselves.
Legal Entity: After the dissolution of partnership, the legal
entity of the partnership no longer exists. The partners may choose to form a
new partnership, enter into a different business structure, or discontinue
their business activities.
Dissolution
of Partnership Firm:
Meaning: Dissolution of partnership firm refers to the
complete winding up or liquidation of the partnership business. It involves the
process of settling the affairs of the firm, realizing the assets, paying off
the liabilities, and distributing the remaining assets among the partners.
Liquidation Process: In the dissolution of partnership firm, the
firm goes through a liquidation process where all the assets are sold or
disposed of, liabilities are paid off, and any remaining assets are distributed
among the partners
Final Settlement: The dissolution of partnership firm involves
the final settlement of all the financial matters, including the realization of
assets, payment of liabilities, settlement of partners' capital accounts, and
distribution of any surplus or losses.
In summary,
dissolution of partnership refers to the termination of the partnership
relationship between the partners, while dissolution of partnership firm involves
the winding up and liquidation of the entire partnership business.
Q.8. What are
the various steps to be taken to close the books of accounts at the time of
dissolution?
Ans. The following are the various steps to be taken to close the books of
accounts at the time of dissolution of a partnership firm:
Recording of Realization Account: A Realization Account is opened to record all
the assets and liabilities of the firm at their respective values as of the
date of dissolution. All the assets are transferred to the debit side of the
Realization Account, and all the liabilities are transferred to the credit side
of the Realization Account.
Sale of Assets: The assets of the firm are sold or disposed of
to convert them into cash. The proceeds from the sale of assets are recorded on
the debit side of the Realization Account.
Payment of Liabilities: The firm's liabilities, including
creditors, loans, and any outstanding expenses, are paid off using the cash
generated from the sale of assets. The payments are recorded on the credit side
of the Realization Account.
Settlement of Capital Accounts: The partners' capital accounts are settled by
transferring their respective shares of the cash balance in the Realization
Account. Any remaining balance, representing profit or loss on realization, is
distributed among the partners based on their profit sharing ratio.
Distribution of Reserves and Profits: If there are any accumulated reserves or
profits in the firm, they are distributed among the partners as per the partnership
agreement or profit sharing ratio.
Closing of Partners' Loan Accounts: If any partner has a loan account with the
firm, it is settled by transferring the loan amount to their capital account or
by making necessary adjustments.
Distribution of Remaining Cash: After settling all the liabilities, capital
accounts, and reserves/profits, any remaining cash balance in the Realization
Account is distributed among the partners based on their profit sharing ratio
or as agreed upon.
Closing of Books of Accounts: Finally, the books of accounts of the
partnership firm are closed, and a final account statement is prepared to show
the distribution of assets, payment of liabilities, and settlement of partners'
capital accounts.
It is
important to note that these steps may vary based on the specific circumstances
of the partnership firm and the agreement among the partners. Consulting with a
professional accountant or seeking legal advice is recommended to ensure the
proper closure of the books of accounts during the dissolution process.
SHORT ANSWER TYPE QUESTIONS
Q.1. Write any
four steps to be taken at the time of dissolution of a firm?
Ans. At the time of dissolution of a firm, the following four steps need to be
taken:
Agreement among Partners: The partners should first come to an agreement
regarding the dissolution of the firm. This involves mutual consent and
decision-making to terminate the partnership.
Settlement of Assets and Liabilities: The assets of the firm need to be identified,
valued, and sold or distributed among the partners. The liabilities, including
debts and obligations, should be settled and paid off using the available
assets or funds.
Preparation of Realization Account: A Realization Account is prepared to record all
the assets, liabilities, and adjustments related to the dissolution. This
account helps in determining the profit or loss on realization and facilitates
the distribution of assets and settlement of partners' capital accounts.
Settlement of Partners' Capital
Accounts:
The partners' capital
accounts are adjusted based on their respective shares of the firm's assets and
liabilities. Any remaining profit or loss on realization is distributed among
the partners according to their profit sharing ratio or as agreed upon.
It is
important to note that the process of dissolution may involve additional steps
depending on the specific circumstances of the firm, such as the sale of
assets, settlement of outstanding contracts, fulfillment of legal obligations,
and compliance with applicable laws and regulations. Seeking professional
advice from an accountant or legal expert is recommended to ensure the proper
and lawful dissolution of the firm.
Q.2. What is realisation account?
Ans. Realisation
Account is a nominal account prepared at the time of dissolution of a
partnership firm or upon its conversion into a new form of business. It is used
to record all the transactions related to the sale of assets, settlement of
liabilities, and distribution of the firm's remaining assets among the partners.
The main
purpose of preparing a Realisation Account is to determine the profit or loss
on the realization of assets and settlement of liabilities. It helps in
providing a clear picture of the financial position of the firm during the
process of dissolution. The Realisation Account is eventually closed by
transferring the profit or loss to the partners' capital accounts or the
partners' loan accounts.
The
Realisation Account typically includes the following entries:
Sale of Assets: The proceeds from the sale of fixed assets,
investments, and other assets are recorded on the debit side of the Realisation
Account.
Payment of Liabilities: The payment of creditors, loans, and other
liabilities is recorded on the credit side of the Realisation Account.
Distribution of Assets: The distribution of the remaining assets among
the partners is recorded on the credit side of the Realisation Account.
Profit or Loss on Realisation: The difference between the total debits and
credits in the Realisation Account represents the profit or loss on the
realization of assets. If the total credits exceed the total debits, it
indicates a profit, while if the total debits exceed the total credits, it
indicates a loss.
By
preparing the Realisation Account, the partners can assess the financial
outcome of the firm's dissolution and ensure a fair distribution of the
remaining assets among themselves.
Q.3. Explain the methods of dissolution of
partnership?
Ans. There are several methods of dissolution of a partnership, which are as
follows:
Dissolution by Agreement: When partners mutually agree to dissolve the
partnership, it is known as dissolution by agreement. The partners can decide
on the terms and conditions of dissolution and settle the affairs of the
partnership accordingly.
Dissolution by Notice: In a partnership at will, any partner can give
a notice to dissolve the partnership. The partnership will be dissolved after
the expiration of the notice period as specified in the partnership agreement
or as per the provisions of the Partnership Act.
Dissolution by Court Order: A court may order the dissolution
of a partnership under certain circumstances, such as if a partner is declared
insolvent, if a partner becomes of unsound mind, if a partner is guilty of
misconduct, or if the partnership becomes unlawful.
Compulsory Dissolution: A partnership may be compulsorily dissolved due
to various reasons, including the expiry of the partnership term, the
completion of a specific project, or the occurrence of an event specified in
the partnership agreement.
Dissolution on the Happening of an
Event: A partnership may be dissolved on
the occurrence of a specific event mentioned in the partnership agreement, such
as the death, retirement, or bankruptcy of a partner.
Dissolution by Operation of Law: The partnership may be dissolved by operation
of law in situations such as the death of a partner, the insolvency of a
partner, or the illegality of the partnership's activities.
In each
method of dissolution, it is important to follow the legal requirements and
procedures, settle the partnership's debts and liabilities, distribute the
remaining assets among the partners, and complete all necessary legal
formalities to ensure a smooth and lawful dissolution of the partnership.
Q.4.
Distinguish between realisation account and revaluation account?
Ans. Realisation Account and Revaluation Account are two different types of
accounts prepared during the dissolution of a partnership firm. Here are the
distinctions between the two:
Purpose:
Realisation Account: The purpose of the Realisation Account is to
record the realization of assets, settlement of liabilities, and distribution
of remaining assets among the partners during the dissolution of the
partnership.
Revaluation Account: The purpose of the Revaluation Account is to
adjust the values of assets and liabilities in the books of the partnership
firm based on their current market or fair values.
Timing:
Realisation Account: The Realisation Account is prepared at the time
of actual dissolution when the partnership is being wound up.
Revaluation Account: The Revaluation Account is prepared before the
Realisation Account to update the values of assets and liabilities prior to
their realization.
Items
Recorded:
Realisation Account: The Realisation Account records the sale of
assets, settlement of liabilities, and any gains or losses arising from the
realization process.
Revaluation Account: The Revaluation Account records the adjustments
made to the values of assets and liabilities, reflecting their fair values at
the time of dissolution.
Treatment of
Profits/Losses:
Realisation Account: The Realisation Account
incorporates any gains or losses made during the realization of assets. It
determines the profit or loss arising from the realization process, which is
distributed among the partners.
Revaluation Account: The Revaluation Account does not directly deal
with the distribution of profits or losses. It adjusts the values of assets and
liabilities to reflect their fair values, which indirectly affects the
partners' capital accounts and their ultimate share of profits or losses.
In summary,
the Realisation Account focuses on the actual realization of assets and
liabilities and the distribution of remaining assets, while the Revaluation
Account deals with adjusting the values of assets and liabilities based on
their current market or fair values. Both accounts play crucial roles in the
dissolution process and help in the proper allocation of assets and liabilities
among the partners.
Q.5.
Distinguish between dissolution of partnership and dissolution of firm?
Ans. Dissolution
of Partnership and Dissolution of Firm are two terms that refer to the
termination of a partnership entity. Here are the distinctions between the two:
Nature
of Termination:
Dissolution of Partnership: Dissolution of Partnership refers
to the termination of a specific partnership agreement between the partners. It
may result in the reconstitution of the partnership with new partners or
complete cessation of the partnership activities.
Dissolution of Firm: Dissolution of Firm refers to the complete
cessation of the partnership entity as a whole. It involves the winding up of
the business operations and the distribution of assets and liabilities among
the partners.
Continuity
of Business:
Dissolution of Partnership: In the case of Dissolution of
Partnership, there may be a possibility of continuing the partnership business
with the admission of new partners or the remaining partners carrying on the
business.
Dissolution of Firm: Dissolution of Firm signifies the end of the
partnership business. It involves the settlement of all the partnership affairs
and the closure of the business operations.
Legal
Entity:
Dissolution of Partnership: In the Dissolution of Partnership, the legal existence
of the partnership entity may or may not be terminated. The partnership may
continue with different partners or cease to exist.
Dissolution of Firm: Dissolution of Firm results in the complete
termination of the legal entity of the partnership. The partnership ceases to
exist as a business entity.
Settlement
of Accounts:
Dissolution of Partnership: In the Dissolution of Partnership, the
settlement of accounts involves the adjustment of the partners' capital
accounts, distribution of assets and liabilities, calculation of gain or loss
on realization, and the final settlement of each partner's share.
Dissolution of Firm: In the Dissolution of Firm, the
settlement of accounts includes the realization of assets, payment of
liabilities, calculation of gain or loss on realization, distribution of the
remaining assets among the partners, and the final settlement of their capital
accounts.
In summary,
Dissolution of Partnership refers to the termination of a specific partnership
agreement, while Dissolution of Firm signifies the complete cessation of the
partnership entity. The former may involve the possibility of continuing the
business with new or remaining partners, while the latter leads to the closure
of the business operations.
Q.6. Write any
four difference between firm’ s debts and partner’s personal debts?
Ans. Here are four differences between firm's debts and partner's personal
debts:
Liability:
Firm's Debts: Firm's debts refer to the obligations and
liabilities incurred by the partnership entity as a whole. The firm is legally
responsible for these debts, and they are considered the collective
responsibility of all the partners.
Partner's Personal Debts: Partner's personal debts are the individual
obligations and liabilities of a partner that are unrelated to the partnership
business. These debts are the personal responsibility of the partner and do not
involve the partnership entity.
Nature:
Firm's Debts: Firm's debts arise from the normal course of
the partnership business operations. They are usually related to business
transactions, such as trade payables, loans, or other financial obligations
incurred by the firm.
Partner's Personal Debts: Partner's personal debts can be unrelated to
the partnership business and are typically associated with personal financial
matters, such as personal loans, credit card debts, or personal expenses.
Liability
Scope:
Firm's Debts: Firm's debts are typically joint liabilities,
meaning that all partners are collectively liable for the full amount of the
debt. Creditors can seek repayment from any partner or the partnership assets
to settle these debts.
Partner's Personal Debts: Partner's personal debts are individual
liabilities that are the responsibility of the specific partner who incurred
them. Other partners or the partnership itself are not liable for these
personal debts.
Impact on
Partnership:
Firm's Debts: Firm's debts can directly impact the
partnership entity and its financial stability. If the firm fails to meet its
debt obligations, it may lead to insolvency, legal actions, or the need for
dissolution of the partnership.
Partner's Personal Debts: Partner's personal debts do not directly affect
the partnership entity. They are separate from the partnership business and do
not have a direct impact on its operations or financial standing.
It is
important to note that the specific legal and financial obligations of a
partnership may vary based on the jurisdiction and the terms outlined in the
partnership agreement. It is advisable to consult legal and financial
professionals for accurate and comprehensive information regarding firm's debts
and partner's personal debts.
Q.7. What are
the methods of settlement of accounts on dissolution of a firm?
Ans. There are three common methods of settling accounts at the time of
dissolution of a firm:
Payment in Cash: Under this method, all the assets
of the firm are sold, the liabilities are paid off, and the remaining cash is
distributed among the partners in their profit-sharing ratio. Each partner
receives their share of the cash based on their capital balance and the profits
or losses accumulated during the partnership.
Transfer of Assets and Liabilities: In this method, the assets and liabilities of
the firm are transferred to the partners' individual accounts. Each partner
takes over the assets and liabilities assigned to them at their agreed-upon
values. The partners then settle their respective liabilities and realize their
shares of the assets independently.
Piecemeal Distribution: This method involves selling the firm's assets
one by one and settling the liabilities as they arise. The proceeds from the
asset sales are used to pay off the liabilities, and any remaining amount is
distributed among the partners according to their profit-sharing ratio. This method
is typically used when it is not feasible to sell all the assets at once.
The method
of settlement of accounts may vary depending on the specific circumstances,
agreements between the partners, and legal requirements. It is essential to
consult with legal and financial professionals to determine the most
appropriate method for the dissolution of a firm and the settlement of
accounts.
Q.8. How are
unrecorded assets and unrecorded liabilities death with on dissolution of a
firm?
Ans. Unrecorded assets and liabilities are typically dealt with in the
following manner at the time of dissolution of a firm:
Unrecorded
Assets:
Identification: The partners and the firm's representatives
conduct a thorough review and assessment to identify any unrecorded assets that
may exist. These are assets that were not included in the firm's books of
accounts.
Valuation: Once the unrecorded assets are identified,
their value is determined. This may involve obtaining professional valuations
or estimates to assess their fair market value.
Inclusion in Realisation Account: The value of the unrecorded assets is then
included in the realisation account, which is prepared to record the
transactions and adjustments related to the dissolution of the firm.
Distribution: The proceeds from the sale of the unrecorded
assets, after deducting any liabilities and expenses, are distributed among the
partners based on their profit-sharing ratio or any other agreed-upon
distribution method.
Unrecorded
Liabilities:
Identification: Similarly, unrecorded liabilities that were not
included in the firm's books are identified through a thorough review and
assessment of the firm's financial records.
Evaluation: The extent and amount of these unrecorded
liabilities are evaluated to determine their impact on the firm's financial
position.
Provision for Payment: Adequate provisions are made in the realisation
account to account for the payment of these unrecorded liabilities. This
ensures that they are properly settled during the dissolution process.
Settlement: The unrecorded liabilities are then settled
using the available funds from the sale of assets, contributions from partners,
or any other sources of funds that may be available.
It is
important to note that the treatment of unrecorded assets and liabilities may
vary depending on the specific circumstances of each firm and the agreements
between the partners. It is advisable to seek professional advice and follow
the relevant accounting and legal requirements while dealing with unrecorded
assets and liabilities during the dissolution process.
Q.9. How will
you deal with realisation expenses when a firm is dissolved?
Ans. When a
firm is dissolved, realisation expenses are the expenses incurred during the
process of winding up and liquidation. These expenses are typically related to
the sale of assets, settlement of liabilities, and distribution of proceeds to
the partners. The treatment of realisation expenses is as follows:
Identification and Recording: The actual realisation expenses incurred are
identified and recorded in the books of the firm. This includes expenses such
as legal fees, brokerage fees, valuation fees, transportation costs,
advertisement expenses, etc.
Allocation in Realisation Account: A realisation account is prepared to record all
the transactions and adjustments related to the dissolution of the firm. The
realisation expenses are debited to the realisation account, indicating that
these expenses are part of the winding-up process.
Apportionment among Partners: The total amount of realisation expenses
incurred is divided among the partners based on their profit-sharing ratio or
any other agreed-upon allocation method. The respective shares of the expenses
for each partner are credited to their capital accounts.
Settling Realisation Expenses: The realisation expenses allocated to each
partner are then settled by either deducting them from the partner's share in
the proceeds from asset sales or by requesting partners to contribute their
share of expenses separately.
Final Adjustment: After settling the realisation expenses, the
remaining balance in the realisation account should ideally be zero. If there
is any surplus or deficit in the realisation account, it is distributed among
the partners in their profit-sharing ratio or as per the agreed-upon terms.
It is
important to note that the treatment of realisation expenses may vary depending
on the specific circumstances of each firm and the agreements between the
partners. It is advisable to seek professional advice and follow the relevant
accounting and legal requirements while dealing with realisation expenses
during the dissolution process.
Q.10. How will
you treat firm’ s debt and private debts of partners on dissolution of a firm?
Ans. On the dissolution of a firm, both the firm's debts and the private debts
of the partners need to be addressed and settled. Here's how they are treated:
Firm's
Debts:
All the
firm's debts, including loans from banks, outstanding liabilities to creditors,
and any other liabilities, should be paid off from the firm's assets.
The assets
of the firm, including cash, accounts receivable, and any remaining inventory
or fixed assets, are used to settle the firm's debts.
If the
firm's assets are not sufficient to cover all the debts, the partners may need
to contribute additional funds to clear the remaining liabilities.
Once all
the firm's debts are paid, the remaining assets, if any, are distributed among
the partners in accordance with their profit-sharing ratio or any other
agreed-upon method.
Private
Debts of Partners:
Private
debts of partners refer to loans or personal liabilities that individual
partners have incurred outside the firm's operations.
Private
debts of partners are not the responsibility of the firm and should be settled
by the respective partners individually.
Partners
must use their personal resources to repay their private debts, such as
personal savings, investments, or other assets.
The private
debts of partners are separate from the firm's debts and should not be paid
using the firm's assets or funds.
The
settlement of private debts is the personal obligation of each partner and is
independent of the dissolution of the firm.
It is
important to differentiate between the firm's debts and the private debts of
partners to ensure a fair and accurate settlement during the dissolution
process. Proper documentation and communication with creditors and partners are
crucial to ensure a smooth and lawful settlement of all debts. Seeking
professional advice from accountants or legal experts is recommended to
navigate the complexities of debt settlement during firm dissolution.
