1. Dissolution of Partnership vs Dissolution of Firm
| Basis | Dissolution of Partnership | Dissolution of Firm |
|---|---|---|
| Meaning | Change in the existing partnership agreement — firm continues | Complete winding up — firm ceases to exist |
| Business | Business continues under new arrangement | All business activities stop |
| Causes | Admission, retirement, death, change in PSR | Mutual agreement, insolvency, court order, expiry of term |
2. Modes of Dissolution
| Mode | Section (IPA 1932) | Details |
|---|---|---|
| By Mutual Agreement | Sec 40 | All partners consent; most common and amicable method |
| Compulsory Dissolution | Sec 41 | When all partners (or all but one) become insolvent; or if business becomes unlawful |
| On Happening of Contingency | Sec 42 | Expiry of fixed term; completion of specific venture; death of a partner (if deed so provides) |
| By Notice (at will) | Sec 43 | For partnership at will — any partner gives written notice to dissolve |
| By Court Order | Sec 44 | Misconduct; persistent breach of agreement; a partner becomes of unsound mind; just and equitable grounds |
3. Settlement of Accounts — Garner vs Murray Rule
On dissolution, accounts are settled in this order [Section 48, IPA 1932]:
- Pay outside liabilities (creditors, loans)
- Pay partners' loans (loans given by partners to the firm)
- Return partners' capital
- Any remaining surplus — distribute as profit in PSR
4. Realisation Account — Structure and Logic
The Realisation Account is a nominal account opened specifically to record the winding-up process. It replaces every asset and liability account in the books.
| Realisation Account | |||
|---|---|---|---|
| Dr Side | ₹ | Cr Side | ₹ |
| All assets at Book Value (except cash/bank, fictitious assets) | xxx | All outside liabilities at Book Value | xxx |
| Bank A/c (liabilities actually paid off) | xxx | Bank A/c (assets actually realised — cash received) | xxx |
| Realisation Expenses | xxx | Partner takes over asset (at agreed value) | xxx |
| Profit on Realisation (if Cr > Dr) → Partners in PSR | xxx | Loss on Realisation (if Dr > Cr) → Partners in PSR | xxx |
Key Rules
- Cash/Bank balance is NOT transferred to Realisation A/c — it goes directly into the Bank Account.
- Fictitious assets (P&L debit balance, preliminary expenses) are NOT transferred to Realisation A/c — written off to partners' Capital A/cs.
- Provision for Bad Debts (existing) — transferred to Cr side of Realisation A/c (reduces the asset's effective value).
- A partner taking over an asset: Cr Realisation A/c (at agreed value); Dr Partner's Capital A/c.
- A partner taking over a liability: Dr Realisation A/c; Cr Partner's Capital A/c.
5. Complete Worked Example
A and B share profits 3:2. Balance Sheet before dissolution:
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| A's Capital | 50,000 | Land | 40,000 |
| B's Capital | 35,000 | Machinery | 25,000 |
| Creditors | 15,000 | Stock | 15,000 |
| Debtors | 12,000 | ||
| Bank | 8,000 | ||
| Total | 1,00,000 | Total | 1,00,000 |
Assets realised: Land ₹48,000; Machinery ₹18,000; Stock ₹14,000; Debtors ₹10,000. Creditors paid ₹13,000. Realisation expenses ₹2,000.
| Realisation Account | |||
|---|---|---|---|
| Dr | ₹ | Cr | ₹ |
| Land A/c | 40,000 | Creditors A/c | 15,000 |
| Machinery A/c | 25,000 | Bank A/c (assets realised): | |
| Stock A/c | 15,000 | Land 48,000 | |
| Debtors A/c | 12,000 | Machinery 18,000 | |
| Bank A/c (creditors paid) | 13,000 | Stock 14,000; Debtors 10,000 | 90,000 |
| Bank A/c (expenses) | 2,000 | ||
| Loss: A(3/5)=1,200; B(2/5)=800 | 2,000 | ||
| Total | 1,09,000 | Total | 1,09,000 ✓ |
Bank Account (verification):
Opening ₹8,000 + Assets realised ₹90,000 = ₹98,000 in; Expenses ₹2,000 + Creditors ₹13,000 = ₹15,000 out; Available for partners = ₹83,000
A final capital = 50,000 − 1,200 = ₹48,800; B = 35,000 − 800 = ₹34,200; Total = ₹83,000 ✓
