Dissolution of partnership firm

Dissolution of a Partnership Firm

When any business goes in heavy losses for consecutive many years the partners decide to put an end to the business. Such ending of a business is called dissolution.

There may be any reason for dissolution of partnership firm.

• The deed might force the business to end the partnership.
• If the firm is of three partners and two of them retire or die then also the partnership may end.
• There may be disputes between the partners which may end the partnership. 

Thus there may be any reason for dissolution of partnership firm but the main reason is losses for consecutive two three years.

Sometimes all the partners become insolvent. In such case third party liabilities are not transferred to Realisation Account. We have to prepare separate account for each third party liability.

Next we have to distribute the balance cash to the third parties in their proportion.

for eg : If the creditors are Rs.20,000, Bills Payable are Rs.10,000 and Bank Overdraft is Rs.10,000 and the balance cash after all other payments is Rs.5,000. Then this cash will be distributed to Creditors, Bills Payable and Bank Overdraft in the ratio of 2 : 1 : 1 which measns out of Rs.5,000, Creditors will get Rs.2,500, Bills Payable will get Rs.1,250 and Bank Overdraft will get Rs.1,250.

Third Party Liability A/c........ Dr.

        To Cash /Bank Account.

After this we have to close the Third Party Liabilites Account and transfer the balance to Deficiency Account. 

Then close the Realisation Account and transfer the loss to Partners Capital Account in their profit sharing ratio.

Lastly the Partners' Capital Account will be closed and the balance will be transferred to Deficiency Account.

Ultimately Deficiency will get tallied.