Dissolution Of Partnership Firm Journal Entriesv

Dissolution Of Partnership Firm Journal Entries

Reasons for dissolution of a firm:

  • Due to continued losses.
  • When the court orders dissolution.
  • At the will of any partner in case of a general partnership.
  • On the insolvency of all the partners.
  • On the expiry of term or objectives.

Difference between the dissolution of a firm and a partnership

S.No.Dissolution of firmDissolution of partnership
1.It means the end of all contractual relationships among the partners.It means a change in the relationship between partners.
2.The firm's business is closed by realizing all assets and discharging all liabilities.The firm's business is not closed only the assets and liabilities are revalued.
3.It happens only once in the life of a firm.It may happen any number of times in the life of a firm.
4.It is a wider term and includes the dissolution of a partnership.It is a narrow term and does not include the dissolution of the firm.
5.Accounts required are realization account capital account
  and cash or bank account.
Revaluation accounts, capital accounts, and balance sheets are prepared.

Journal  Entries

1. For transferring the assets

Transfer to the debit of realization account at their gross book values of all accounts of assets excluding cash, bank, and fictitious assets.


Realization a/c Dr.

To Assets a/c(individually)

It is to be noted that debit balances such as accumulated losses and deferred expenses are not transferred to the realization account. These are transferred to the partners’ capital account in their profit sharing ratio by recording the following entry :


Partners’ capital a/c Dr.

To Fictitious assets a/c

2. For transferring the liabilities

All external liability accounts including provisions, if any, in respect of assets that have been transferred to the realization account are closed by transferring them to the credit of realization account at their book values.


External liabilities a/c(Individually) Dr.

To Realization a/c

The partner's capital account and loan account of the partner are prepared separately and are not transferred to the realization account.


3. For the sale of assets

Bank a/c(realized price) Dr.

To Realization a/c

4. For an asset taken over by a partner

Partner’s capital a/c Dr.

To Realization a/c(Agreed price)

5. For payment to creditors

Any amount paid in cash to creditors, realization account is debited and cash/bank account is credited.


Realization a/c Dr.

To Bank a/c

6. Settlement with the creditors through the transfer of asset 

When a creditor accepts an asset in part payment no entry is recorded. It is because the liability due to the creditors has already been transferred to the credit of realization account and the asset taken over by the creditor is appearing on the debit side of the realization account. Thus, the debit of the asset cancels the credit of the corresponding liability in the realization account. Sometimes, a creditor may accept part of his payment in cash and part of his payment by taking over an asset. In this case, the entry will be recorded for cash payment only. 


For example, a creditor to whom Rs. 10,000 was due accepted office equipment worth Rs. 8,000. He will be paid Rs. 2,000 in cash by recording the following entry :


Realization a/c Dr. Rs. 2,000

To Bank a/c Rs. 2,000

Whenever a creditor takes over an asset, there may be two situations :


(a) When a creditor accepts an asset whose value is more than the amount due to him, he will pay cash. It is recorded as :

Bank a/c Dr.

To Realization a/c

(b) When a creditor accepts an asset as a full and final settlement, no journal entry is recorded.


7. Expenses of realization

(a) When realization expenses are paid by the firm

Realization a/c Dr.

To Bank a/c

(b) When a firm has agreed to pay the partner a fixed amount towards realization expenses irrespective of the actual realization expenses

Realization a/c Dr.

To Partners’ capital a/c

(c) When the actual expenses are paid by the firm on behalf of a partner, the following entry will be recorded :

Partners’ capital a/c Dr.

To Bank a/c

(d) However, if a partner himself pays and agreed not to get them reimbursed, no journal entry is recorded.

(e) When the partner agrees to pay the expenses on behalf of the firm, the entry to be recorded :


Realization a/c Dr.

To Partners’ capital a/c

8. When liabilities are paid off

Realization a/c Dr.

To Bank a/c

9. When a partner discharges a liability

The liability account is transferred from the realization account to the partner’s capital account by recording the following entry :

Realization a/c Dr.

Partners’ capital a/c


10. For the realization of any unrecorded assets

Bank a/c Dr.

To Realization a/c

11. Unrecorded asset is taken over by a partner

Partners’ capital a/c Dr.
To Realization a/c


12. For settlement of any unrecorded liability

Realization a/c Dr.

To Bank a/c

13. Unrecorded liability is taken over by a partner

Realization a/c Dr.

To Partners’ Capital a/c

14. When the profit (loss) on realization is transferred to partners’ capital account in their respective profit sharing ratio :

(a) In case of profit on realization

Realization a/c Dr.

To Partners’ Capitals a/c(individually)

(b) In case of loss of realization

Partners’ Capitals a/c (individually) Dr.

To Realization a/c

15. For transferring accumulated profits and reserve

All accumulated profits and reserves are transferred to the partners’ capital account in their respective profit sharing ratios:


Accumulated profit/reserves Dr.

To Partners’ capitals a/c (Individually)

16. Transfer of fictitious assets

All accumulated losses and fictitious assets are debited to the partners’ capital accounts in their profit sharing ratio :


Partners’ capitals a/c (Individually) Dr.

To Accumulated losses/Fictitious Assets a/c

17. Payment of loans

Any loans due to partners are paid off :

Partner’s loan a/c Dr.
To Bank a/c


18. Settlement of capital accounts

(a) If the partner’s capital account shows a debit balance, he is to bring in the necessary cash :

Bank a/c Dr.

To Partners’ capital a/c

(b) In the case of partners whose accounts show credit balance, the same is paid off :

Partners’ capitals a/c Dr.

To Bank a/c

It may be noted that the aggregate amount finally payable to the partners must equal to the amount available in the bank and cash accounts. Thus, all accounts of a firm are closed in case of dissolution. At times, the Balance Sheet of the firm may not be available during the dissolution of the partnership firm. In such a situation, first of all, all the relevant ledger balances are worked out and then the Balance Sheet of the firm on the date of its dissolution is prepared. Thereafter, the process of dissolution is undertaken in the same manner as discussed above.



Created & Posted by Garima 
Assistant Article  at TAXAJ

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