Dissolution of a Partnership Firm

About this unit

This unit deals with the end of a firm. It distinguishes the dissolution of partnership, where only the relationship among partners changes, from the dissolution of the firm, where business closes and all accounts are settled. You learn how assets are sold, liabilities paid, and the final balances of partners settled through the Realisation Account, partners' capital accounts and the cash or bank account.

Key ideas

• Dissolution of partnership versus dissolution of the firm.
• Modes of dissolution: by agreement, compulsory, on certain contingencies, by notice and by court.
• Order of settlement of accounts under Section 48 of the Act.
• Realisation Account: transfer of assets and outside liabilities, sale of assets, payment of liabilities, realisation expenses.
• Closing partners' capital accounts and the cash or bank account.

How to prepare

Memorise which items are debited and credited to the Realisation Account, and practise the entries for an asset taken over by a partner or a liability settled by transfer of an asset. Questions usually ask for realisation profit or loss and the final payment to a partner.