Uday and Prabhakar are partners sharing profit 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.

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 31^st 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

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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.