Dissolution of a Partnership Firm
A Comprehensive Accounting Problem with Journal Entries
The Problem
Uday and Prabhakar are partners sharing profits and losses in the proportion of 3/5 and 2/5 respectively. They dissolved their partnership firm on 31st March, 2012 when their financial position was as under.
Balance Sheet as on 31st March, 2012
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Sundry Creditors | 15,000 | Cash at Bank | 3,000 |
| Uday’s Wife’s Loan | 30,000 | Debtors | 67,500 |
| Capital Accounts: | (-) R.D.D. | (7,500) | |
| Uday | 1,38,000 | 60,000 | |
| Prabhakar | 90,000 | Stock | 1,35,000 |
| Machinery | 45,000 | ||
| Furniture | 30,000 | ||
| Total | 2,73,000 | Total | 2,73,000 |
Additional Information:
- The assets were realised as under: Goodwill ₹15,000, Stock ₹1,20,000 and Debtors ₹54,000.
- Machinery was taken over by Prabhakar at ₹40,000 and Furniture by Uday at book value.
- Uday agreed to discharge his wife’s loan.
- The creditors were paid at a rebate of ₹3,000.
- The expenses of dissolution amounted to ₹6,000.
Required: Pass necessary Journal Entries in the books of the firm.
Solution: Journal Entries
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Mar 31, 2012 | Realisation A/c Dr. | 2,77,500 | ||
| To Debtors A/c | 67,500 | |||
| To Stock A/c | 1,35,000 | |||
| To Machinery A/c | 45,000 | |||
| To Furniture A/c | 30,000 | |||
| (Being sundry assets transferred to Realisation Account at book value) | ||||
| Mar 31, 2012 | Sundry Creditors A/c Dr. | 15,000 | ||
| Uday’s Wife’s Loan A/c Dr. | 30,000 | |||
| R.D.D. A/c Dr. | 7,500 | |||
| To Realisation A/c | 52,500 | |||
| (Being external liabilities and provisions transferred to Realisation Account) | ||||
| Mar 31, 2012 | Bank A/c Dr. | 1,89,000 | ||
| To Realisation A/c | 1,89,000 | |||
| (Being assets realised for cash: Goodwill 15k + Stock 120k + Debtors 54k) | ||||
| Mar 31, 2012 | Prabhakar’s Capital A/c Dr. | 40,000 | ||
| Uday’s Capital A/c Dr. | 30,000 | |||
| To Realisation A/c | 70,000 | |||
| (Being Machinery taken by Prabhakar and Furniture by Uday) | ||||
| Mar 31, 2012 | Realisation A/c Dr. | 30,000 | ||
| To Uday’s Capital A/c | 30,000 | |||
| (Being Uday’s wife’s loan discharged by Uday) | ||||
| Mar 31, 2012 | Realisation A/c Dr. | 18,000 | ||
| To Bank A/c | 18,000 | |||
| (Being creditors paid (15k - 3k rebate) and dissolution expenses paid (6k)) | ||||
| Mar 31, 2012 | Uday’s Capital A/c Dr. | 8,400 | ||
| Prabhakar’s Capital A/c Dr. | 5,600 | |||
| To Realisation A/c | 14,000 | |||
| (Being loss on realisation transferred to partners' capital accounts in 3:2 ratio) | ||||
| Mar 31, 2012 | Uday’s Capital A/c Dr. | 1,29,600 | ||
| Prabhakar’s Capital A/c Dr. | 44,400 | |||
| To Bank A/c | 1,74,000 | |||
| (Being final settlement made to partners) | ||||
Working Notes
1. Realisation Account (T-Account)
| Debit (Dr.) | Amount (₹) | Credit (Cr.) | Amount (₹) |
|---|---|---|---|
| To Sundry Assets | 2,77,500 | By Sundry Liabilities & RDD | 52,500 |
| To Uday's Capital (Wife's Loan) | 30,000 | By Bank A/c (Assets Realised) | 1,89,000 |
| To Bank A/c (Payments) | 18,000 | By Partners' Capital (Assets Taken) | 70,000 |
| By Partners' Capital (Loss) | 14,000 | ||
| Total | 3,25,500 | Total | 3,25,500 |
Distribution of Realisation Loss (Ratio 3:2)
Total Debits: ₹3,25,500 | Total Credits (before loss): ₹3,11,500
Loss = ₹3,25,500 - ₹3,11,500 = ₹14,000
Uday's Share: (3/5) × 14,000 = ₹8,400
Prabhakar's Share: (2/5) × 14,000 = ₹5,600
2. Partners' Capital Accounts (T-Account)
| Particulars | Uday (₹) | Prabhakar (₹) | Particulars | Uday (₹) | Prabhakar (₹) |
|---|---|---|---|---|---|
| To Realisation A/c (Assets) | 30,000 | 40,000 | By Balance b/d | 1,38,000 | 90,000 |
| To Realisation A/c (Loss) | 8,400 | 5,600 | By Realisation A/c (Loan Paid) | 30,000 | - |
| To Bank A/c (Final Pmt) | 1,29,600 | 44,400 | |||
| Total | 1,68,000 | 90,000 | Total | 1,68,000 | 90,000 |
Key Takeaways for Students
- Realisation Account: At the time of dissolution, all assets (except cash/bank) and all external liabilities are first transferred to a "Realisation Account" at their book values.
- Partner's Wife's Loan: A loan from a partner's spouse is treated as an external liability and must be transferred to the Realisation Account, unlike a loan from a partner himself.
- R.D.D. Transfer: Provision for Doubtful Debts (R.D.D.) is transferred to the credit side of the Realisation Account. Assets (Debtors) are always transferred at their gross value.
- Asset Takeover: When a partner takes over an asset, their Capital Account is debited, and the Realisation Account is credited with the agreed value.
- Liability Payment by Partner: When a partner agrees to pay a firm's liability, the Realisation Account is debited, and the partner's Capital Account is credited.
- Final Settlement: The final step is to close the Capital Accounts. The balancing figure is the final cash paid to (or brought in by) the partners, closing the Bank Account simultaneously.