Unit – 4: Dissolution of Partnership Firms
Q.1. What do you mean by Dissolution of Partnership and Dissolution of Partnership Firm? Distinguish between them. 2012, 2015
Ans: Dissolution of a partnership means the termination of connections with the firm by some of the partners of the firm, and remaining partners of the firm continuing the business of the firm under the same firm’s name under an agreement. Hence, admission, retirement and a death of a partner are considered dissolution of partnership. The dissolution of partnership may take place in any of the following ways:
a) Change in existing profit sharing ratio among partners;
b) Admission of a new partner;
c) Retirement of a partner;
d) Death of a partner;
e) Expiry of the period of partnership, if partnership is for a specific period of time;
Dissolution of a firm means discontinuation of the firm’s business and the relationship between the partners. According to Sec. 39 of Indian Partnership Act 1932, “Dissolution of firm means dissolution of partnership between all the partners in the firm."
Therefore when a firm is dissolved, assets of the firm are disposed off, liabilities are paid off and the accounts of all the partners are also settled.
Difference between dissolution of partnership and dissolution of firm.
Basis of distinction
Dissolution of partnership
Dissolution of firm
Relationship among all partners Relation ship among all partners does not come to an end.
Relation ship among all partners does not come to an end.
Continuation of business
Business of the firm may continue.
Business of the firm does not continue.
Dissolution of partnership may or may not result in dissolution of the firm.
Dissolution of the firm necessarily results in dissolution of partnership.
Q.2. What are various mode of dissolution of a Partnership Firm? Explain them briefly. 2011, 2014, 2016
Ans: Modes of Dissolution of a Partnership Firm:
The dissolution of partnership between all the partners of a firm is called the "dissolution of the firm". A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. The Indian Partnership Act, 1932 provides that a partnership firm may be dissolved in any of the following modes:
i. Compulsory dissolution; 2010
ii. Dissolution on the happening of certain contingencies;
iii. Dissolution by notice of partnership at will;
iv. Dissolution by the court. 2013, 2014
i) Compulsory Dissolution: A firm is dissolved compulsorily by the adjudication of all the partners or of all the partners but one as insolvent, or by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.
ii) Dissolution on the Happening of Certain Contingencies: Subject to contract between the partners, a firm is dissolved:
i. if constituted for a fixed term, by the expiry of that term;
ii. if constituted to carry out one or more adventures or undertakings, by the completion thereof;
iii. by the death of a partner; and
iv. By the adjudication of a partner as an insolvent.
iii) Dissolution by Notice of Partnership at Will: Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.
iv) Dissolution by Court: A court may order a partnership firm to be dissolved in the following cases:
i. When a partner becomes of unsound mind
ii. When a partner becomes permanently incapable of performing his/her duties as a partner,
iii. When partner deliberately and consistently commits breach of agreements relating to the management of the firm;
iv. when a partner’s conduct is likely to adversely affect the business of the firm;
v. when a partner transfers his/her interest in the firm to a third party;
vi. When the court regards dissolution to be just and equitable.
Q.3. What is Realisation Account? Distinguish between realisation account and revaluation account.
Ans: Realisation Account is a nominal account. It is prepared to find out profit or loss on realisation of assets and payment of liabilities when a firm is dissolved. Any profit or loss on realisation is transferred to the capital accounts of all the partners in their profit sharing ratio.
Difference between Revaluation Account and Realisation Account
(1) Revaluation account is prepared at the time of admission, retirement of death of a partner. Whereas, Realisation account is prepared at the time of dissolution of a partnership firm.
(2) Revaluation account is prepared in order to work out the profit or loss on revaluation of assets and liabilities at the time of admission, retirement or death of a partner. Whereas, Realisation account is prepared to work out the profit or loss on realisation of assets and payment to liabilities at the time of dissolution of the firm.
(3) After preparing the revaluation account the firm’s business gets going with the same set of books. But, After preparation of Realisation account the firms business comes to an end.
Q.4. How are the accounts settled between partners on the dissolution of a partnership firm? 2015
(a) Losses, including deficiencies of capital, shall be paid first out of profit, next out of capital, and lastly, if necessary, by the partners individually in their profit-sharing ratio.
(b) The assets of the firm including any sums contributed by the partners to make up deficiencies of capital shall be applied.