Dissolution of Firm Accounting

Dissolution of Firm Accounting

In this article we would briefly explain the dissolution of firm accounting. Partner may decide to cease or liquidate the firm. The process of liquidation the firm is known dissolution of the firm. Once this process is completed, the firm stands dissolved or liquidated. This dissolution process involves following

a)    Assets are sold.

b)   Some assets are taken by the partners.

c)    Either liabilities are paid or partner takes responsibilities for paying them.

d)   Finally either partner is paid the balance or contributes to settle liabilities.

Realisation Account in partnership

All assets are transferred to the realisation account & proceeds against those assets also accounted for in the realisation account.

a)    All assets (Except Cash) are transferred to the realisation account.

b)   Non current asset are transferred at carrying amount.

c)    Current asset are transferred at cost.

d)   Cost of dissolution is also charged to Realisation Account.

e)    Profit or loss is transferred to capital of partners.

Example of Realisation Account

Two partners A and B equally share profits

Plant & Machinery carrying amount= 200,000

Inventory = 100,000

Sale of plant & machinery      = 300,000

Assets Transferred to partner = 100,000

Prepare a realisation account and calculate profit with help of realisation account?

Solution

Asset shall be transferred to the left side of realisation T Account shown below, while the proceed from sale is recorded on the right side. The net profit of realisation account is transferred to the partner capital account. The more details entries are shown below the realisation account.

                                         Realisation Account

Particulars	Dr.	Particulars	Cr.
Plant & Machinery	200,000	Cash (Sales)	300,000
Inventory	100,000	Capital A (Transfer)	100,000
A Capital (50% x100,000)	50,000
B Capital (50% x100,000)	50,000
	400,000		400,000

Journal Entries in Realisation Account

Journal entries in realisation account can be classified into following

1. Transfer of asset to realisation account.
2. Sale of asset.
3. Transfer of asset to partner.
4. Profit or loss transfer to capital accounts.

The above mentioned entries have been briefly explained below

   Transferred of Asset to Realisation Account

Date	Particulars	Dr	Cr
	Realisation Ac/	200,000
	Plant & machinery A/c		200,000

Sale of Assets

Date	Particulars	Dr	Cr
	Cash A/c	300,000
	Realisation (Sale) A/c		300,000

Transfer of Assets to partner

Date	Particulars	Dr	Cr
	A Capital A/c	100,000
	Realisation A/c		100,000

Transfer of profit to partner

Date	Particulars	Dr	Cr
	Realisation A/c	100,000
	A Capital A/c		50,000
	B Capital A/c		50,000

Accounting Treatment of Dissolution of Firm

The following accounting process is adopted to record the dissolution of a firm. This process has been explained with an example below;

a)    Current Accounts are eliminated by transferring them into capital account.

b)   Asset is transferred to Realisation account.

c)    Asset Disposal and transfer to partner is also recorded in realisation account.

d)   Paid liabilities from the cash.

e)    Finally partners are paid from the remaining cash.

Examples

Plant & machinery	200,000
Inventory	100,000
	300,000
Capital
A	70,000
B	50,000
Current
A	30,000
B	30,000
Liabilities	120,000
	300,000

Sale of plant & machinery= 300,000

Transferred to partner = 100,000

Partner has decided to dissolve the partnership. Explain the process with help of account (books of accounts).

Solution

                                             Realisation Account

Particulars	Dr.	Particulars	Cr.
Plant & Machinery	200,000	Cash (Sales)	300,000
Inventory	100,000	Capital A (Transfer)	100,000
A Capital	50,000
B Capital	50,000
	400,000		400,000

                                              A, Capital Account

Particulars	Dr.	Particulars	Cr.
Realization A/c (Transfer)	100,000	Balance B/F	70,000
Cash	50,000	Current A/C	30,000
		Realisation (profit)	50,000
	150,000		150,000

                                              B, Capital Account

Particulars	Dr.	Particulars	Cr.
Cash	130,000	Balance B/F	50,000
		Current A/C (Transfer)	30,000
		Realisation (Profit)	50,000
	130,000		130,000

                                              Cash Account

Particulars	Dr.	Particulars	Cr.
Realization	300,000	Liabilities	120,000
		B, Capital	130,000
		A, Capital	50,000
	300,000		300,000

                                              Liabilities A/C

Particulars	Dr.	Particulars	Cr.
Cash	120,000	Liabilities	120,000
	120,000		120,000