DISSOLUTION OF PARTNERSHIP FIRM JOURNAL ENTRIES

1. For transferring the assets

Transfer to the debit of realization account at their gross book values of all accounts of assets excluding cash, bank and the fictitious assets.


Realization a/c Dr.

To Assets a/c(individually)

It is to be noted that debit balance such as accumulated losses deferred expenses are not transferred to the realization account. These are transferred to the partners’ capital account in their profit sharing ratio by recording the following entry :


Partners’ capital a/c Dr.

To Fictitious assets a/c

2. For transferring the liabilities


All external liability accounts including provisions, if any, in respect of assets which have been transferred to the realization account are closed by transferring them to the credit of realization account at their book values.


External liabilities a/c(Individually) Dr.

To Realization a/c

Partners’ capital account and loan account of the partner are prepared separately and are not transferred to realization account.


3. For sale of assets


Bank a/c(realized price) Dr.

To Realization a/c

4. For an asset taken over by a partner


Partner’s capital a/c Dr.

To Realization a/c(Agreed price)

5. For payment to creditors


Any amount paid in cash to creditors, realization account is debited and cash/bank account is credited.


Realization a/c Dr.

To Bank a/c

6. Settlement with the creditors through transfer of asset 


When a creditor accepts an asset in part payment no entry is recorded. It is because the liability due to the creditors has already been transferred to the credit of realization account and the asset taken over by the creditor is appearing on the debit side of the realization account. Thus, the debit of the asset cancels the credit of the corresponding liability in the realization account. Sometimes, a creditor may accept part of his payment in cash and part of his payment by taking over an asset. In this case, the entry will be recorded for cash payment only. 


For example, a creditor to whom Rs. 10,000 was due accepted office equipment worth Rs. 8,000. He will be paid Rs. 2,000 in cash by recording the following entry :


Realization a/c Dr. Rs. 2,000

To Bank a/c Rs. 2,000

Whenever a creditor takes over an asset, there may be two situations :


(a) When a creditor accepts an asset whose value is more than the amount due to him, he will pay cash. It is recorded as :


Bank a/c Dr.

To Realization a/c

(b) When a creditor accepts an asset as full and final settlement, no journal entry is recorded.


7. Expenses of realization


(a) When realization expenses are paid by the firm


Realization a/c Dr.

To Bank a/c

(b) When firm has agreed to pay partner a fixed amount towards realization expenses irrespective of the actual realization expenses


Realization a/c Dr.

To Partners’ capital a/c

(c) When the actual expenses are paid by the firm on behalf of a partner, the following entry will be recorded :


Partners’ capital a/c Dr.

To Bank a/c

(d) However, if a partner himself pays and agreed not to get them reimbursed, no journal entry is recorded.


(e) When the partner agrees to pay the expenses on behalf of the firm, the entry to be recorded :


Realization a/c Dr.

To Partners’ capital a/c

8. When liabilities are paid off


Realization a/c Dr.

To Bank a/c

9. When partner discharges a liability


The liability account is transferred from realization account to partner’s capital account by recording the following entry :


Realization a/c Dr.

Partners’ capital a/c


10. For realization of any unrecorded assets


Bank a/c Dr.

To Realization a/c

11. Unrecorded asset taken over by a partner


Partners’ capital a/c Dr.


To Realization a/c

12. For settlement of any unrecorded liability


Realization a/c Dr.

To Bank a/c

13. Unrecorded liability taken over by a partner


Realization a/c Dr.

To Partners’ Capital a/c

14. When the profit (loss) on realization is transferred to partners’ capital account in their respective profit sharing ratio :


(a) In case of profit on realization


Realization a/c Dr.

To Partners’ Capitals a/c(individually)

(b) In case of loss on realization


Partners’ Capitals a/c (individually) Dr.

To Realization a/c

15. For transferring accumulated profits and reserve


All accumulated profits and reserves are transferred to the partners’ capital account in their respective profit sharing ratio :


Accumulated profit/reserves Dr.

To Partners’ capitals a/c (Individually)

16. Transfer of fictititous assets


All accumulated losses and fictitious assets are debited to the partners’ capital accounts in their profit sharing ratio :


Partners’ capitals a/c (Individually) Dr.

To Accumulated losses/Fictitious Assets a/c

17. Payment of loans


Any loans due to partners are paid off :


Partner’s loan a/c Dr.


To Bank a/c

18. Settlement of capital accounts


(a) If the partner’s capital account shows debit balance, he is to bring in the necessary cash :


Bank a/c Dr.

To Partners’ capital a/c

(b) In case of partners whose accounts show credit balance, the same is paid off :


Partners’ capitals a/c Dr.

To Bank a/c

It may be noted that the aggregate amount finally payable to the partners must equal to the amount available in the bank and cash accounts. Thus, all accounts of a firm are closed in case of dissolution. At times, the Balance Sheet of the firm may not be available on dissolution of partnership firm. In such a situation, first of all, all the relevant ledger balances are worked out and then Balance Sheet of the firm on the date of its dissolution is prepared. Thereafter, the process of dissolution is undertaken in the same 
manner as discussed above.