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Dissolution of Partnership Firm – Class 12 Accountancy Chapter 4 Notes & NCERT PDF

Class 12AccountancyChapter 4NCERT book: Accountancy: Partnership Accounts - Class 12

Notes and a simple summary of Chapter 4 of the NCERT Class 12 Accountancy book, with the official chapter PDF, flashcards, an MCQ quiz and an AI tutor for your doubts.

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Chapter 4: Dissolution of Partnership Firm

Introduction

Dissolution is the end of the road for a partnership. The book separates two ideas. Dissolution of partnership means the relationship among partners changes, but the firm continues (for example on admission, retirement or death). Dissolution of firm means the business itself closes: assets are sold, liabilities are paid and the books are closed. Dissolution of the firm always dissolves the partnership, but not the other way round. The accounting tool for closing the books is the Realisation Account.

Key Concepts

4.1 Dissolution of Partnership. This happens on a change in profit sharing ratio, admission, retirement, death or insolvency of a partner, completion of a venture, or expiry of a fixed term. The firm may continue.

4.2 Dissolution of a Firm. There are five modes:

  • By agreement: with the consent of all partners, or as the contract provides.
  • Compulsory: when all partners, or all but one, become insolvent; when the business becomes illegal; or when an event makes the partnership unlawful (for example, a partner becoming an alien enemy).
  • On certain contingencies: expiry of a fixed term, completion of a venture, death of a partner, or a partner being adjudged insolvent.
  • By notice: in a partnership at will, any partner can give written notice.
  • By court: a partner's insanity, permanent incapacity, misconduct, persistent breach of the agreement, or transfer of their whole interest; a business that can only run at a loss; or any just and equitable ground.

    • 4.3 Settlement of Accounts (Section 48). Losses, including capital deficiencies, are met first out of profits, then out of capital, and lastly by partners individually in their profit sharing ratio. Assets are applied in this order: (i) outside debts; (ii) partners' loans and advances, proportionately; (iii) partners' capitals, proportionately; (iv) the residue in the profit sharing ratio. Section 49: firm property pays firm debts first, and private property pays private debts first. Only the surplus of each goes to the other side. Garner vs Murray: if a partner is insolvent, the solvent partners bear the deficiency in their capital ratio as on the date of dissolution.

    4.4 Accounting Treatment. All assets except cash, bank and fictitious assets are transferred to the debit of the Realisation Account at book value. All outside liabilities are transferred to its credit. Sale proceeds are credited, and payments of liabilities and expenses are debited. The balance is the profit or loss on realisation, shared in the profit sharing ratio. Partners' loans, reserves and fictitious assets are not taken to the Realisation Account.

    4.4.1 Journal Entries. The book lists 17 entries. Key ones:

  • Assets taken over by a partner: Partner's Capital Dr, To Realisation.
  • A liability taken over by a partner: Realisation Dr, To Partner's Capital.
  • Realisation expenses paid by the firm: Realisation Dr, To Cash.
  • Expenses paid by the firm on behalf of a partner who bears them: that Partner's Capital Dr, To Cash.
  • Remuneration to a partner for doing the realisation work: Realisation Dr, To Partner's Capital.
  • Unrecorded asset sold: Cash Dr, To Realisation. Unrecorded liability paid: Realisation Dr, To Cash.
  • Reserves go to capitals: General Reserve Dr, To Capitals. Fictitious assets: Capitals Dr, To Profit and Loss.
  • Partner's loan paid: Partner's Loan Dr, To Cash. Final settlement: Capital Dr, To Cash (or the reverse if a partner brings in cash).

    • Worked Examples

    Example 1 - Supriya and Monika (Illustration 1), ratio 3:2.

  • Assets transferred to Realisation: Stock 7,500, Debtors 21,500, Fixed Assets 36,500, a total of 65,500. Creditors 48,000 and the provision 500 are credited (48,500).
  • Realised: Debtors 21,500 less 5% = 20,425; Stock 7,000; Fixed Assets 42,000; a total of Rs 69,425.
  • Paid: Creditors 48,000 + expenses 1,500 = 49,500.
  • Profit = 48,500 + 69,425 - 65,500 - 49,500 = Rs 2,925, so Supriya gets 1,755 and Monika 1,170.

    • Example 2 - Final settlement (same firm).

  • General Reserve 13,500 is shared 8,100 : 5,400.
  • Supriya: 32,500 + 1,755 + 8,100 = Rs 42,355. Monika: 11,500 + 1,170 + 5,400 = Rs 18,070.
  • Cash available: 40,500 + 69,425 - 49,500 = 60,425, which equals 42,355 + 18,070.

    • Example 3 - Sita, Rita and Meeta (Illustration 2), ratio 2:2:1.

  • Assets transferred: Stock 2,500, Furniture 1,000, Debtors 2,000, Plant 4,500 (10,000).
  • Realised: Plant 4,250, Stock 3,500, Debtors 1,850, Furniture 750 = 10,350.
  • Creditors of 2,000 are paid 2% less, i.e. Rs 1,960.

    • Example 4 - Special points in Illustration 2.

  • Sita agrees to bear the expenses. The Rs 450 paid by the firm is debited to Sita's Capital, not to Realisation.
  • Sita's remuneration of Rs 60 is debited to Realisation.
  • The unrecorded asset (250) is taken by Rita at Rs 200, so Rita's Capital is debited and Realisation credited by 200.
  • Profit = (2,000 + 10,350 + 200) - (10,000 + 1,960 + 60) = Rs 530, split 212 : 212 : 106.

    • Key-Facts Sheet

  • Realisation Account is a nominal account prepared only on dissolution of a firm.
  • Cash, bank, partners' loans, reserves and fictitious assets never go to Realisation.
  • Provision for doubtful debts goes to the credit of Realisation.
  • If nothing is said about payment of a liability, assume it is paid in full.
  • Section 48 order: outside debts, then partners' loans, then capitals, then the surplus in the profit sharing ratio.
  • Garner vs Murray: an insolvent partner's deficiency is borne by the solvent partners in their capital ratio.

    • Board Exam Focus

  • There is almost always a 6-mark question: prepare the Realisation Account, partners' capital accounts and the Bank Account.
  • 1-mark MCQs: where a bank overdraft, partner's loan or unrecorded asset goes.
  • Distinguish dissolution of partnership from dissolution of firm (3 marks, five bases).
  • Modes of dissolution and Section 48 order of payment are asked as theory.

    • Key Terms

  • Dissolution of firm - फर्म का विघटन
  • Dissolution of partnership - साझेदारी का विघटन
  • Realisation Account - वसूली खाता
  • Realisation expenses - वसूली व्यय
  • Insolvency - दिवालियापन
  • Partnership at will - ऐच्छिक साझेदारी
  • Creditors - लेनदार
  • Debtors - देनदार
  • Unrecorded asset - अभिलेखित न की गई संपत्ति
  • Partner's loan - साझेदार का ऋण
  • Private debts - निजी ऋण
  • Settlement of accounts - खातों का निपटान
  • Court - न्यायालय
  • Contingency - आकस्मिकता

    • Common Mistakes

  • Transferring a partner's loan to Realisation. It is paid separately after outside liabilities.
  • Debiting realisation expenses to Realisation when a partner has agreed to bear them. Debit that partner's capital instead.
  • Forgetting to credit Realisation for an unrecorded asset taken over by a partner.
  • Putting the provision for doubtful debts on the debit side. It is a credit.
  • Mixing up dissolution of partnership with dissolution of firm.

    • 💡 Key Learning Points

    • ✓Dissolution of partnership changes relations but the firm may continue; dissolution of firm closes the business.
    • ✓A firm is dissolved by agreement, compulsorily, on contingencies, by notice (partnership at will) or by court.
    • ✓Section 48 order: outside debts, then partners' loans, then capitals, then surplus in profit sharing ratio. Section 49 governs firm and private debts.
    • ✓The Realisation Account collects assets (Dr) and outside liabilities (Cr) at book value, then sale proceeds and payments. Its balance is shared in the profit sharing ratio.
    • ✓Special entries cover assets or liabilities taken over by partners, realisation expenses borne by a partner, and unrecorded assets or liabilities.

    👨‍🏫 Teaching Tips

    • →Open with the comparison 'dissolution of partnership vs dissolution of firm' on five bases from the book.
    • →Use a flowchart for the five modes of dissolution, with one real-life scenario for each.
    • →Teach the Section 48 order of payment as a queue: outsiders first, partners' loans next, capital last.
    • →Draw the Realisation Account format (Fig. 4.1) and let students sort items into Dr, Cr or 'not here'.
    • →Solve Illustration 1 step by step, then have students verify that the cash balance equals the capital payouts (60,425).
    • →Use Illustration 2 to practise tricky entries: expenses borne by a partner, remuneration, unrecorded asset.
    • →Give a quick-fire quiz on the Test your Understanding II MCQs.

    📋 Assessment Questions

    1. Can the student distinguish dissolution of partnership from dissolution of firm?
    2. Can the student list the modes of dissolution and the Section 48 order of settlement?
    3. Can the student decide which items go to the Realisation Account and on which side?
    4. Can the student prepare the Realisation, Capital and Bank accounts to close the books?
    5. Can the student pass special entries for expenses, remuneration, and unrecorded assets and liabilities?

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    Keep learning

    All chapters in Accountancy: Partnership Accounts - Class 12

    1. 1. Accounting for Partnership: Basic Concepts
    2. 2. Reconstitution of a Partnership Firm – Admission of a Partner
    3. 3. Reconstitution of a Partnership Firm – Retirement/Death of a Partner
    4. 4. Dissolution of Partnership Firm