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Partnership Accounts : Dissolution of Firm

ICSE · Class 12 · Accountancy

Quick revision notes for Partnership Accounts : Dissolution of Firm — ICSE Class 12 Accountancy. Key concepts, formulas, and definitions for last-minute revision.

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Key Topics to Revise

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1. Meaning and Types of Dissolution

  • Dissolution of Firm: Complete discontinuance of business relationship among all partners; the entire firm ceases to exist (Section 39, Indian Partnership Act, 1932)
  • Dissolution of Partnership: Termination of partnership relationship between specific partners while the firm continues with remaining partners
  • Key Distinction: Dissolution of firm involves closure of all business activities, whereas dissolution of partnership allows business continuation
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2. Modes of Dissolution of Firm

  • Mode 1 - Dissolution by Agreement: Partners mutually agree to dissolve; can be done anytime as per partnership deed
  • Mode 2 - Compulsory Dissolution: Occurs automatically when all or all-except-one partners become insolvent/insane; business becomes illegal; all partners except one decide to retire; expiry of partner
  • Mode 3 - Dissolution by Notice: In partnership-at-will, any partner can dissolve by written notice to others
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3. Settlement of Accounts on Dissolution - Rules

  • Rule 1 - Treatment of Losses: Losses paid first from profits, then from capital, finally by partners individually in profit-sharing ratio
  • Rule 2 - Application of Assets: Realised amounts applied in strict order: (1) Firm's debts to third parties (secured creditors first), (2) Loans from partners, (3) Partners' capitals, (4) Surplus dist
  • Rule 3 - Priority of Claims: External liabilities before partner loans; partner loans before capitals; capitals in ratio specified in partnership deed
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4. Accounting Treatment: Realisation Account

  • Realisation Account is a nominal account (debit-credit format) showing profit/loss on asset realization
  • Debit side includes: All assets (except cash/bank), realisation expenses, cash paid for liabilities
  • Credit side includes: All external liabilities (except bank overdraft), proceeds from asset sales, assets taken by partners, provisions reversed

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Full Notes

Key Concepts

Dissolution of firm means the completeDissolution of partnership means terminationThe Realisation Account is a nominalPartner's Loan Accounts must be paidPartner's Capital Accounts show the final

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