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Partnership Dissolution Guide

A partnership may be dissolved either without court intervention through agreement of the partners, compulsory events like insolvency of a partner, or expiration of the partnership term. Or a court may order dissolution if a partner becomes incapacitated, transfers their interest, or other circumstances render dissolution equitable. Upon dissolution, partnership accounts are settled by paying debts, amounts owed to partners other than capital, and amounts owed to partners for capital. Any remaining assets are divided according to partner sharing ratios. The accounting process closes all asset and liability accounts by transferring balances to a realization account. Assets are then sold or used to pay creditors, with any remaining balance in realization showing overall gain or loss on dissolution. Partner capital accounts are

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101 views3 pages

Partnership Dissolution Guide

A partnership may be dissolved either without court intervention through agreement of the partners, compulsory events like insolvency of a partner, or expiration of the partnership term. Or a court may order dissolution if a partner becomes incapacitated, transfers their interest, or other circumstances render dissolution equitable. Upon dissolution, partnership accounts are settled by paying debts, amounts owed to partners other than capital, and amounts owed to partners for capital. Any remaining assets are divided according to partner sharing ratios. The accounting process closes all asset and liability accounts by transferring balances to a realization account. Assets are then sold or used to pay creditors, with any remaining balance in realization showing overall gain or loss on dissolution. Partner capital accounts are

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deo omach
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DISSOLUTION OF PARTNERSHIP

1. WHEN IS A PARTNERSHIP DISSOLVED?


A partnership may be dissolved in any of these two ways:
i. Without court intervention
a. By agreement among all partners
b. Compulsory dissolution e.g. when all but one partner are declared insolvent or
bankrupt
c. When On the happening of a event e.g.
a. expiry of term,
b. completion of adventure,
c. death of a partner,
d. declarations of a partner as an insolvent
e. By notice when partnership is at will
ii. By order of court. The court may on application by a partner intervene where a partner
has:
a. become of unsound mind
b. become permanently incapable of performing his/her duty as a partner
c. transferred the whole of his/her interest in the firm
d. the business of the firm cannot be carried on save at a loss
e. the court is satisfied as to grounds which render it just and equitable to dissolve the
relation,
f. When in any case a circumstance has happened that negates the purpose for the
partnership
g. When the partner’s conduct becomes damaging to the purpose of the partnership
contract
h. any event which makes its operations become illegal

2. SETTLEMENT OF PARTNERSHIP ACCOUNTS


In the absence of any specific agreement between the partners over the same, the
provisions in the Act stipulates the following:
i. Loss and deficiencies of capital shall be paid first out of profits, next out of capital and
lastly, if necessary, the individual partners in their sharing ratios
ii. The assets of the partners including any remedial contribution from any partner, shall be
applied as thus:
a. Paying debts of the firm to third parties
b. Payment rateably what is due to partners on the firm other than capital
c. Payment of partner what is due to them on account of capital
d. Residue if any is divided among partners in their sharing ratios

3. ACCOUNTING TREATMENT ON DISSOLUTION OF PARTNERSHIP.


1. Open Realization a/c to:
 Close all asset account by transferring all the assets balances at book value to the
newly opened realization (nominal) a/c
Dr. Realization a/c
Cr. Asset a/c

Cash a/c and Bank a/c are not transferred


 Close all liability a/cs by transferring all their balances to the realization a/c b
Dr. Liability a/c
Cr. Realization a/c
2. Realize/Sell out all the assets
 When asset is realized/sold for cash
Dr. Cash a/c
Cr Realization a/c
 When asset is given away to creditor for settlement of debt
Dr Creditor a/c
Cr Realization a/c
3. Discharge all liabilities by;
Dr. Realization a/c
Cr. Cash a/c
When paid in cash
Dr. Realization a/c
Cr. Partners’ Current a/c
When a partners agrees to personally settle a creditor
Dr. Realization a/c
Cr. Cash a/c
4. Closing Realization A/c
Realization a/c discloses with gains or losses on dissolution of the partnership.
If the Debit side of the a/c is greater (Debit balance), then there is a gain/profit achieved on
Realization
When the Credit side of the account is greater (Credit Balance), then a loss has occurred on
Realization.
5. Closing Profit/Loss Reserve A/cs
The balances in the reserves of P/L are closed by transferring them to the capital a/c in
the profit sharing ratios
6. Closing Partners Current A/cs
Current account are also closed by transferring the balances directly to the partners’
Capital a/c
4. Closing Partners Capital A/cs
Lastly Capital a/c is closed by paying off the balances in the capital account by cash to
close both the Capital a/c and Cash a/c.

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