Learning Objectives
After Studying this unit, the students will be able to understand:
*Meaning of Dissolution
* Distinction between Dissolution of Partnership and Dissolution of
Partnership firm.
* Preparation of Realisation Account
* Procedure of settlement of accounts
* Preparation of Memorandum Balance sheet (to find out missing figures)
* Necessary journal entries to close the books of the firm.
SALIENT POINTS:
v Dissolution: Dissolution of the firm is
different from Dissolution of Partnership.
v Realisation account : It is prepared to
realize the various assets and pay off the liabilities.
v Closure of the Books of Accounts : When the
firm is dissolved, finally all the books of accounts are closed through Bank
Account.
1. Distinguish between Dissolution of
Partnership and Dissolution of Partnership firm
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Dissolution of Partnership
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Dissolution of partnership firm
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a)The Partnership is dissolved but the
business continues. The Business is not terminated
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a)The firm winds up the business.
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b) Assets and liabilities are revalued through
revaluation account and the Balance sheet is prepared
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b)Assets
are sold and the liabilities are paid off through Realisation account.
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c)
The Books of accounts are not closed as the business is not terminated.
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d) The Books of accounts are closed.
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2. State the provisions of Section 48 of the
Partnership Act 1932 regarding settlement of Accounts during the Dissolution of
Partnership firm.
Ans. According to section 48—
a)Losses including the deficiencies of Capitals
are to be paid---
i)
First
out of profits
ii)
Next out
of Capitals of the partners
iii)
Lastly
if required, by the partners individually in their profit sharing ratio(as
their liability is unlimited)
b) The
Assets of the firm and the amount contributed by the partners to make up
the deficiency of capital shall be applied for –
i)
First to
pay the debts of the firm to the third parties.
ii)
Next,
Partners Loan(Partner has advanced to the firm)
iii)
Partners
capitals
iv)
The
residue, if any shall be distributed among the partners in their profit sharing
ratio.
3. Distinguish between
Realisation account and Revaluation account
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Realisation
Account
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Revaluation
Account
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a) It is prepared in the case of Dissolution of Partnership
firm.
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a)It is
prepared in the case of Dissolution of Partnership.
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b) This account is prepared to realise the
assets & pay off the liabilities .
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b) This
Account is prepared to revalue the assets and liabilities during Admission,
Retirement and Death of the partner.
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4.
A and B are partners sharing profits and
losses equally. They decided to dissolve their firm. Assets and Liabilities
have been transferred to Realisation Account. Pass necessary Journal entries
for the following.
a)
A was to
bear all the expenses of Realisation for which he was given a commission of Rs
4000.
b)
Advertisement
suspense account appeared on the asset side of the Balance sheet amounting Rs
28000
c)
Creditors
of Rs 40,000 agreed to take over the stock of Rs 30,000 at a discount of 10%
and the balance in cash.
d)
B agreed
to take over Investments of Rs 5000 at Rs 4900
e)
Loan of
Rs 15000 advanced by A to the firm was paid off.
f)
Bank
loan of Rs 12000 was paid off.
JOURNAL
|
SN
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Particulars
|
LF
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Debit(Rs)
|
Credit(Rs)
|
|
a)
|
Realisation
account –Dr
A’s Capital account
(Being
commission given to A)
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4000
|
4000
|
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b)
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A’s Capital
account –Dr
B’s Capital
account –Dr
Advertisement Suspense account
(Being
Advertisement suspense written off)
|
|
14000
14000
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28000
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c)
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Realisation
account –Dr
Cash account
(Being creditors
paid off)
|
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13000
|
13000
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d)
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B’s Capital
account –Dr
Realisation account
(Being asset
taken over by the partner)
|
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4900
|
4900
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e)
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A’s Loan account
–Dr
Cash account
(Being partners
loan paid off)
|
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15000
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15000
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f)
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Realisation
account -- Dr
Cash account
(Being Bank loan
paid off)
|
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12000
|
12000
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5. X and Y are partners in the firm who decided
to dissolve the firm. Assets and Liabilities are transferred to Realisation
account. Pass necessary journal entries—
a)Creditors were Rs 1,00,000. They accepted
Building valued Rs 1,40,000 and paid cash to the firm Rs 40,000
b) Aman, an old customer whose account of Rs
1000 was written off as bad in the previous year paid 40% of the amount.
c)There were 300 shares of Rs 10 each in ABC
Ltd which were acquired for Rs 2000 were
now valued at Rs 6 each. These were taken over by the partners in the profit
sharing ratio.
d)
Profit
on Realisation Rs 42000 was divided among the partners.
e) Land
and Building (Book value Rs 1, 60,000) was sold for Rs 3,00,000 through a
broker who charged 2% commission on the deal.
f) Plant
and machinery (Book value Rs 60,000) was handed over to the creditor in full settlement
of his claim.
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S.N
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Particulars
|
LF
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Debit(Rs)
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Credit(Rs)
|
|
a)
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Cash account –Dr
Realisation account
(Being cash received from the creditor)
|
|
40000
|
40000
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b)
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Cash a/c –Dr
Realisation a/c
(Being cash received from a debtor whose account was written off
earlier)
|
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400
|
400
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c)
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X’s Capital a/c –Dr
Y’s Capital a/c –Dr
Realisation a/c
(Being Investments taken over by the partners)
|
|
900
900
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1800
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d)
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Realisation a/c –Dr
X’s Capital a/c
Y’s capital a/c
(Being profit on Realisation distributed among the partners)
|
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42000
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21000
21000
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e)
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Cash a/c—Dr
Realisation a/c
(Being Land and Building realized)
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294000
|
294000
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f)
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NO JOURNAL ENTRY
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LONG QUESTIONS—6-8 MKS
6) Following is the Balance sheet of Karan and Sandeep who share profits
and losses equally as on 31st march 2010
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Liabilities
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Rs
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Assets
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Rs
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Capitals--
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Bank
|
40,000
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Karan
|
1,00,000
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Debtors
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25,000
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Sandeep
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50,000
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Stock
|
35,000
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Creditors
|
30,000
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Machinery
|
60,000
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Workmen
compensation fund
|
15,000
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Furniture
|
40,000
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Bank loan
|
5000
|
|
|
|
|
2,00,000
|
|
2,00,000
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The firm was dissolved on the above date.
1. Karan
agreed to take over 50% of the stock at 10% less on its book value, the
remaining stock was sold at a gain of 15%. Furniture and machinery realized for
Rs 30,000 and 50,000 respectively.
2. There
was unrecorded Investments which was sold for Rs 25,000.
3. Debtors realized Rs 31,500 (with interest) and
Rs 1200 was recovered for bad debts written off last year.
4. There was an outstanding bill for repairs
which had to be paid Rs 2000.
Prepare necessary Ledger accounts to
close the books of the firm.
Realisation account
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Particulars
|
Rs
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Particulars
|
Rs
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|
Sundry assets
Debtors-25000
Stock-35,000
Furniture-40,000
Machinery-60,000
|
1,60,000
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Liabilities:
Creditors : 30,000
Bank loan : 5000
|
35000
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Bank a/c(outstanding repair bill)
|
2000
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Karan’s Capital a/c
|
15750
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Bank(Creditors & Bank loan)
|
35,000
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Bank a/c(stock)
|
20125
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Capital accounts-
Karan
: 5787.5
Sandeep:
5787.5
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Bank a/c(Assets realized)
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80,000
|
|
|
11575
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Bank a/c(Debtors)
|
32700
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Bank a/c(Investments)
|
25,000
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208575
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|
208575
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Partners Capital accounts
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Particulars
|
Karan
|
Sandeep
|
Particulars
|
Karan
|
Sandeep
|
|
Realisation a/c(stock)
|
15750
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Balance b/d
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1,00,000
|
50,000
|
|
|
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Workmen’s compensation fund
|
7500
|
7500
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Bank account
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97537.5
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63287.5
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Realisation a/c
|
5787.5
|
5787.5
|
|
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113287.5
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63287.5
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|
113287.5
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63287.5
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Bank
account
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Particulars
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Amount
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Particulars
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Amount
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Balance b/d
|
40,000
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Realisation a/c
(repair bill, creditors and bank loan)
|
37000
|
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Realisation a/c( stock)
|
20125
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Karan’s capital
|
97537.5
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Realisation a/c(Machinery & furniture)
|
80,000
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Sandeep’s capital
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63287.5
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Realisation a/c(Debtors)
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32700
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|
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Bank(Investments)
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25,000
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197825
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197825
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6. Following is the Balance sheet of X and Y who
share profits in the ratio of 4:1 as on 31st march 2010
Balance
sheet
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Liabilities
|
Rs
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Assets
|
Rs
|
|
Sundry Creditors
|
8,000
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Bank
|
20,000
|
|
Bank overdraft
|
6,000
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Debtors 17,000
Less provision 2000
|
15,000
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X’s Brother’s loan
|
8,000
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Stock
|
15,000
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Y’s Loan
|
3,000
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Investments
|
25,000
|
|
Investment Fluctuation fund
|
5,000
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Building
|
25,000
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|
Capitals-
X-50,000
y-40,000
|
90,000
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Goodwill
|
10,000
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|
|
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Profit and Loss a/c
|
10,000
|
|
|
1,20,000
|
|
1,20,000
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The firm was dissolved on the
above date and the following was decided—
a)
X agreed
to pay off his brother’s loan
b)
Debtors
of Rs 5000 proved bad.
c)
Other
assets realized as follows—Investments 20% less, and Goodwill at 60%.
d)
One of
the creditors for Rs 5000 was paid only Rs 3000.
e)
Building
was auctioned for Rs 30,000 and the auctioneer’s commission amounted to Rs
1000.
f)
Y took
over part of the stock at Rs 4000(being 20% less than the book value)Balance
stock realized 50%
g)
Realisation
expenses amounted to Rs 2000.
Prepare Realisation account, Partners capital
accounts and Bank account.
Realisation
account
|
Particulars
|
Amt(Rs)
|
Particulars
|
Amt(Rs)
|
|
Sundry
Assets
Debtors 17,000
Stock 15,000
Investments 25,000
Building 25,000
Goodwill 10,000
|
92,000
|
Sundry
Liabilities
Creditors
– 8000
Bank overdraft -
6000
X’s Brothers loan-
8000
Investment Fluctuation fund – 5,000
Provision for doubtful debts - 2000
|
29000
|
|
X’s
Capital(Brothers loan)
|
8000
|
Bank a/c
(Assets realized)
|
72,000
|
|
Bank(Liabilities
paid off)
Creditors-
6000
Bank
overdraft 6000
|
12000
|
Y’s
Capital(stock)
Loss
transferred to capitals
X- 7200
Y- 1800
|
4000
9000
|
|
Bank(Realisation
expenses)
|
2000
|
|
|
|
|
1,14000
|
|
1,14,000
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Partner’s Capital Accounts
|
Particulars
|
X
|
Y
|
Particulars
|
X
|
Y
|
|
Profit
& Loss a/c
|
8,000
|
2,000
|
Balance b/d
|
50,000
|
40,000
|
|
Realisation
a/c
|
|
4,000
|
Realisation
a/c
|
8,000
|
|
|
Realisation
a/c(loss)
|
7,200
|
1,800
|
|
|
|
|
Bank a/c
|
42,800
|
32,200
|
|
|
|
|
|
58,000
|
40,000
|
|
58,000
|
40,000
|
Bank account
|
Particulars
|
Amt (Rs)
|
Particulars
|
Amt(Rs)
|
|
Balance b/d
|
20,000
|
Y’s loan
a/c
|
3,000
|
|
Realisation
a/c(assets realized)
|
72,000
|
Realisation
a/c(liabilities paid off)
|
12,000
|
|
|
|
Realisation
a/c(expenses)
|
2,000
|
|
|
|
X’s Capital
a/c
|
42,800
|
|
|
|
Y’s capital
a/c
|
32,200
|
|
|
92,000
|
|
92,000
|
7. A, B and C commenced business on 1st
January 2008 with capitals of Rs 50,000, 40,000 and Rs 30,000 respectively.
Profits and losses are shared in the ratio of 4:3:3. During 2008 and 2009 they
made profit of Rs 20,000 and Rs 25000 respectively. Each partner withdrew Rs
5000 per year.
On 31st December 2009,
they decided to dissolve the firm.
Creditors and cash on that date were Rs 12,000
and Rs 2000 respectively. The Assets realized Rs 1,50,000. Creditors
were settled for Rs 11,500 and realization expenses were Rs 500.
Prepare Realisation a/c,
Capital accounts and Cash account.
Realisation
account
|
Particulars
|
Rs
|
Particulars
|
Rs
|
|
Sundry Assets
|
1,45,000
|
Creditors
|
12,000
|
|
Cash a/c(Creditors)
|
11,500
|
Cash a/c(Assets realized)
|
1,50,000
|
|
Cash a/c(Expenses)
|
500
|
|
|
|
Capital Accounts-
A- 2,000
B- 1,500
C- 1,500
|
5,000
|
|
|
|
|
1,62,000
|
|
1,62,000
|
Partners Capital Accounts
|
Particulars
|
A
|
B
|
C
|
Particulars
|
A
|
B
|
C
|
|
Cash a/c
|
60,000
|
45,000
|
35,000
|
Balance b/d
|
58,000
|
43,500
|
33,500
|
|
|
|
|
|
Realisation a/c
|
2,000
|
1,500
|
1,500
|
|
|
60,000
|
45,000
|
35,000
|
|
60,000
|
45,000
|
35,000
|
Cash account
|
Particulars
|
Rs
|
Particulars
|
Rs
|
|
Balance b/d
|
2,000
|
Realisation(Creditors)
|
11,500
|
|
Realisation a/c
|
1,50,000
|
Realisation a/c(expenses)
|
500
|
|
|
|
A’s Capital a/c
|
60,000
|
|
|
|
B’s Capital a/c
|
45,000
|
|
|
|
C’s Capital a/c
|
35,000
|
|
|
1,52,000
|
|
1,52,000
|
Working Note: Calculation of
Closing capital(Capital as on 31/12/2009)
|
Particulars
|
A
|
B
|
C
|
|
Opening Capital
|
50,000
|
40,000
|
30,000
|
|
Add Profits(of two yrs)
|
18,000
|
13,500
|
13,500
|
|
Less Drawings(of 2 yrs)
|
10,000
|
10,000
|
10,000
|
|
Closing Capital
|
58,000
|
43,500
|
33,500
|
Memorandum Balance sheet as
on 31/12/2009
|
Liabilities
|
Rs
|
Assets
|
Rs
|
|
Capitals-
X-58000
Y-43500
Z-33500
|
1,35,000
|
Cash
|
2000
|
|
Creditors
|
12,000
|
Sundry Assets(Balancing fig)
|
1,45,000
|
|
|
1,47,000
|
|
1,47,000
|
