Partnership Firm Dissolution Accounts -

Last Updated on: 5th July 2024, 01:43 pm

Partnership Firm Dissolution Accounts

Dissolution of Partnership Firm

There are 2 types of Dissolution related to Partnership Firms:-

Dissolution of Partnership – Due to change in relations of the partners. In such case, the firm continues in a reconstituted form. Such dissolution may or may not result in the dissolution of the firm.
Dissolution of Firm – The dissolution of partnership between all the partners of a firm is known as the dissolution of firm. The dissolution of firm necessarily results in the dissolution of partnership. In this case the firms business is closed down and its affairs are wound up. The assets are realised and liabilities are paid off.

Consequences of Dissolution

Realisation of Assets: On the dissolution of a partnership, the assets of the firm, including goodwill, are realized.
- Application of Funds: The amount is applied in following order:
repayment of liabilities to outsides;
loans taken from partners;
capital contributed by partners.

Treatment of Surplus / Deficiency

If there is still surplus available, it is distributed among the partners in their profit-sharing ratio.

Conversely, after payment of liabilities of the firm and repayment of loans from partners, if the assets of the firm left over are insufficient to repay in full the capital contributed by each partner , the deficiency is borne by the partners in their profit sharing ratios.

Upon a dissolution of partnership, the mutual rights of the partners, unless otherwise agreed upon, are settled in the following manner:

Losses including deficiencies of capital are paid, first out profits, next out of capital and lastly, if necessary, by the partners individually in the proportion in which they are entitled to share profits.
The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital have to be applied in the following manner and order:
- in paying the debts of the firm to third parties:
- in paying to each partner reteably what is due to him from the firm respect of advances as distinguished from capital;
- in paying to each partner reteably what is due to him on account of capital; and
- the residue, if any, to be divided among the partners in the proportion in which they are entitled to share profits.

Death or Retirement

The death or retirement of partner would not result in the dissolution of the partnership, if the partnership agreement so provides (Section 42). However, the retiring partner or the representative of a deceased partner can recover his share in the partnership assets (including goodwill), after having them revalued on a proper basis as at the date of his ceasing to be a partner. Appreciation or depreciation determined on such a revaluation is adjusted in his account before the amount due to him is paid.

The amount due to the retiring partner is liability of the firm (except where a partnership agreement provides that upon the retirement or death of a partner, his share in the assets of the firm will be taken over by the continuing partners in profit the proportion of in which they were sharing the profit or losses of the firm). When the continuing partners take over the assets, they also become personally liable to repay the amount due to the retiring partner. (Elliott vs. Elliott.)

Liability of Retiring Partner or estate of Deceased Partner on Dissolution

the retiring partner or the estate of the decreased partner is liable for the whole of the debts due by the firm at the date of retirement or death though, as between the partners, they are responsible to pay only their respective share of liabilities [s.42(2) of Partnership Act].
the retiring partner may also be held liable for debts contracted after his retirement, unless a notice of retirement is published as contemplated by the Law [Section 32(2) of the Partnership Act]; and
the estate of a deceased or a bankrupt partner cannot be held liable for debts contracted by the firm after the death or bankruptcy, as the case may be [Section 34(2) and 35 of the Partnership Act].

Dissolution of Partnership before expiry of a fixed term

A partner who, on admission, pays a premium to the other partners with a stipulation that the firm will not be dissolved before the expiry of a certain term, will be entitled to a suitable refund if the firm is dissolved before the term has expired, except in following situations:

the firm is dissolved due to the death of a partner;
the dissolution is mainly due to the partner’s (claiming refund) own misconduct; and
the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it. [s.50].

The reasonable amount would be repaid having regard to the terms of admission, length of period agreed upon and period already expired. The due amount will be borne by other partners in their profit-sharing ratio.

Example:

A and B were carrying business sharing profits and losses in the ratio of 3: 2. On 1^st July 2023 C was admitted as a partner for 1/4^th share in the firm with the condition that firm would continue at least for 5 years. He paid Rs.12, 000 for goodwill in addition to his capital. Firm is dissolved on 31^st December 2024 (after 1 ½ years).

Solution:

In this case, firm is being dissolved before the minimum period fixed as per agreement. Therefore, C will get refund of goodwill in proportion to unexpired period of 3 ½ years. Amount of refund will be (12,000/5) x 3½ = Rs.8,400.

Closing of Partnership Books on Dissolution

Open a realization Account, and debit thereto the book value of the assets except cash and bank balance, closing off the various asset accounts, also debited thereto the expenses of realization and credit cash.
Debit Cash and Credit Realization Account with the amount on the sale of the assets.

Note: If any of the assets is taken over by a partner at a value mutually agreed to by the partners, debit the partner’s capital account and credit Realization Account with the price of asset taken over.

Pay off the liabilities, crediting cash and debiting the liability accounts, the difference between the book figure and the amount paid being transferred to the Realization Account.

Note: Liabilities to outsiders may also be transferred to the Realization Account. In that case, the amount paid in respect of the liabilities in cash should be debited to the Realization Account, Cash Account being credited. If liability is taken over by a partner, Realization Account should be debited and the partners’ Capital A/Cs credited at the figure agreed upon.

The balance of the Realization Account represents profit / loss on realization. This should be divided between partners in profit sharing ration. In the case of a loss, credit Realization Account and debit various partners’ Capital Account (reverse in case of a profit).
Pay off the partners’ loans or advances, if any (which are separate from the capital) after setting off any debit balance in the capital account of the partner.
The balance of the cash account at the end will be equal to the balance of capital account, Now credit cash and debit the partners’ capital account with the amount payable to them to close their accounts.
If the capital account of a partner is in debit, after his share of loss or profit has been adjusted therein, the firm will not have sufficient cash or assets to pay off the amounts due to the other partners, until the amount is repaid by the partner whose account is in debit. If however, the partner is insolvent, the amount will not be realised. In such case, the deficiency may be borne by the solvent partners in their profit-sharing ratio or in proportion to their capitals (Garner vs. Murray).

Accounting Entries on Dissolution of Partnership Firm

On dissolution of a firm assets will be sold and liabilities will be paid out of the proceeds. For this purpose Realization Account is opened and assets are realized and liabilities paid through this account.

1 Transfer of book value of all assets & liabilities (except Cash & Bank) to Realisation Account

1. With the book value of various assets, If there is a provision against any asset, such provision should be credited in account and relevant assets should be debited at gross value.	Realization A/c To Assets (individually)	Dr.
2. Entries for transactions as follows With the amount of liabilities payable to outsiders & provision against any asset.	Liabilities (individually) A/c Provision for Assets A/c To Realization a/c	Dr. Dr.
On Sale of Assets.	Bank A/c To Realization A/c	Dr.
On takeover of assets by a partner.	Partner’s Capital A/c To Realization A/c	Dr.
On payment of liability	Realization A/c To Bank A/c	Dr.
On takeover of a liability by a partner.	Realization A/c To Partner’s Capital A/c	Dr.
On payment of Realization Expenses.	Realization A/c To Bank A/c	Dr.
If a partner gets remuneration for realization services.	Realization A/c To Partners Capital A/c	Dr.
On Payment of unrecorded assets.	Realization A/c To Bank A/c	Dr.
On Sale of unrecorded asset.	Bank A/c To Realization A/c	Dr.
For profit on realization. (Reverse entry for Loss)	Realization A/c To Partners Capital A/c (In profit sharing ratio)	Dr.
(2) On payment of partners Loan.	Partner’s Loan A/c To Bank A/c	Dr.
(3) For Balance of Reserve Fund or Credit balance of Profit & Loss A/c (Reverse entry for Debit Balance)	Reserve Fund A/c Profit Loss A/c To Partner’s Capital a/c (In profit sharing ratio)	Dr. Dr.
(4) Balance of Current Accounts of partners will be transferred to respective Capital Accounts.	(a) Credit Balance of Current Account Current Account To Capital Account (b) Debit Balance of Current Account Capital A/c To Current A/c	Dr Dr Dr Dr
(5) Final payment to partners. If Capital account of a partner shows a debit balance, he will bring cash before making payment to other partners.	Capital A/c To Bank A/c	Dr
On payment of credit balance of Partner’s Capital A/c	Cash A/c To Partner’s Capital A/c	Dr.
Loss on realization	Partner’s Capital A/c To Realization A/c	Dr

Treatment of some special accounts on Dissolution of Partnership Firm

Cash & Bank: Normally cash and bank balance should not be transferred to Realization Account. However; if business including cash and bank balance (including Bank Overdraft) has been taken over by a partner (or jointly by two or more partners), these will be transferred to realization account.
Provision for bad and doubtful debts: It is deducted from sundry debtors in the balance sheet and sundry debtors should be debited at gross amount in realization account.
Provision no longer required: If any provision was created by the firm for certain purpose, and such provision is no longer required on dissolution of firm, provision account should be closed by transferring to realization account. Alternatively, this may be credited to partner’s capital accounts in profit sharing ratio.
Assets having no value: On dissolution, if any of the firm’s assets has no realisable value, this should be transferred to realization account. The loss on account of this asset will automatically be adjusted against profits or loss on realization. Alternatively, book value of such asset may be debited to the capital accounts of the partners in their profit sharing ratio.

Take Over of business by Partners on Dissolution

Take Over of Partnership Business by One Partner – Accounting Examples

On dissolution of a firm, business may be taken over by one partner. In such a case his capital account will be debited with the agreed value of business taken over. Journal entry with such agreed value will be:

Capital Account Dr.
To Realisation A/c

– If the partner has taken cash and bankbalance also, this will be transferred to Realisation Account along with other assets.

– The partner who has taken over the business will bring cash equal to debit balance in his capital account to pay other partners.

Take over of Partnership Business jointly by two or More Partners

On dissolution of firm, two or more partners may take over the business (or most of the assets and liabilities) and constitute a new firm. In such a case, a joint account of those partners will be opened with the agreed value of assets taken.

For example, if there are three partners A, B and C and it is decided that B and C will jointly take over the business, entries will be:

For value of Assets taken over:
B & C’s Joint A/c Dr.
To Realisation A/c

For value of Liabilities taken over:
Realisation A/c Dr.
To B and C’s Joint A/c

In this case A will be paid in cash. If cash with the firm is inadequate to pay A in full, B and C will bring cash in the agreed proportion.

However, if it is decided to take A’s balance as a loan in the new firm, balance of A’s capital account will be transferred to Joint Account. Finally, balances of Capital Accounts of B and C will be transferred to Joint Account.

Continuation of existing Books on Partnership Business Dissolution

Some times it is decided to continue same set of books by the new firm. In such case, instead of Realization Account, a Revaluation Account will be prepared. The difference between book values and agreed values of various assets and liabilities will be transferred to Revaluation Account. If the value of an asset increases, Revaluation Account will be credited by debiting relevant assets accounts. Similarly, for decrease in value of asset Revaluation Account will be debited and relevant asset account will be credited. Balance of revaluation account will be transferred to capital accounts of the partners in profit sharing ratio. Partners taking over the business, will pay other partners.

Insolvency of One Partner in Partnership Firm

Garner Vs Murray Rule: If Capital Account of a partner shows a debit balance after all adjustments and he is unable to make-up this debit balance from his private property, he will be treated as insolvent and his deficiency will be borne by other partners. In the absence of any agreement to the contrary, such deficiency should be distributed in the capital ratio as laid down in Garner Vs Murray decision.

Sec 48 of the Partnership Act indicates that deficiency on account of insolvency of a partner will be borne by solvent partners in capital ratio unless there is a specific agreement to bear such loss in a different ratio.

Limitation of Garner Vs Murray Rule: If incidentally, a solvent partner has a debit balance in his capital account, he will escape the liability to bear the loss.

Example : X, Y and Z are partners. X became insolvent. The Capital account balance of partner Y is on the debit side. In such case, Y need not bear loss due to insolvency of partner X.

Insolvency of all the Partners in Partnership Firm

If all the partners of a firm are insolvent, creditors may not be paid in full. In such case, liabilities will be paid on pro-rata basis. However in case of secured creditor, total amount realized from the security will be paid to him and for the balance if any, he will receive along with other unsecured creditors on proportionate basis. Partners’ loan will be transferred to the relevant capital account.

Method I: Creditors will not be transferred to realisation account but a separate account for creditors will be opened. Any amount remaining unpaid to creditors will be transferred to deficiency account. Finally balances of capital accounts will be transferred to deficiency account.

Method II: Creditors will be transferred to realisation account and payment to creditors will be made by debiting realisation account. In this case, capital accounts of the partners will be closed by mutual transfer of balances. The debit and credit balances of capital accounts will be equal.

Piecemeal Payments on Dissolution of Partnership Firm

Generally, the assets sold upon dissolution of partnership are realized only in small installments over a period of time. In such circumstances, the choice is either to distribute whatever is collected or to wait till the whole amount is collected. Usually, the first course is adopted.

As soon as decision to dissolve the firm is taken every claimant of the firm would press for payment. Therefore, second alternative may be adopted by the firm. In this case payment will be made in the following preferential order: (i) Out side creditors (ii) Partner’s loan (iii) Partner’s Capital.

Payment to Creditors on Dissolution of Partnership Firm

Existing cash and bank balance and realization from assets will first be used for paying creditors. If any creditor is secured against the assets of the firm, any realization from such asset will be fully utilized to pay secured creditor. If any other asset is realized, which has not been given as a security, the proceeds will be distributed in proportion to amount due to various creditors including secured creditors. Thus, secured creditors will be treated as unsecured for other assets. If there are contingent liabilities, proportionate amount should be retained for such liabilities while paying creditors. If contingent liabilities do not mature, amount retained will become free and will be available for distribution to other claimants.

Expenses of Realization on Dissolution of Partnership Firm

If expenses of realization are given for each realization, net proceeds after deducting expenses will be distributed. However, if estimated total expenses are given, this amount should be retained out of the existing cash and bank balance and first realization. In case first realization is from an asset which has been given as security, amount for expenses should be retained out of subsequent realization. Any difference between the actual expenses and estimated expenses will be adjusted against last realization.

Payment to Partners Loan on Dissolution of Partnership Firm

After payment to outside creditors, payment will be made to partners for their loan. If more than one partner has given loan to the firm, amount will be distributed to all partners in proportion to their loan.

Payment for Partners Capital on Dissolution of Partnership Firm

Payment to partners for their capital will be made in such a manner that any amount remaining unpaid at the end should be in their profit sharing ratio. This unpaid amount will represent loss on realization, which will be borne by partners in their profit sharing ratio. It partners capitals are in their profit sharing ratio, distribution of cash among partners will not pose any difficulty. In such a case each realization will be distributed in the profit sharing ratio. If capitals are not in profit sharing ratio, following methods of distribution will be adopted.

Payment for Partners on Dissolution Accounting – Maximum Loss Method

Each installment realized is considered to be the final payment i.e., outstanding assets and claims are considered valueless and partners’ accounts are adjusted on that basis each time a distribution is made (following either Garner vs. Murray Rule or the profit-sharing ratio rule).

Payment for Partners on Dissolution Accounting – Highest Relative Capital Method

According to this method, the partner who has the higher relative capital, that is, whose capital is greater in proportion to his profit-sharing ratio, is first paid off. This method is also called as proportionate capital method.

Payment for Partners on Dissolution – Practical Example

	A	B	C
Capital	15,000	18,000	9,000
Profit-sharing ratio	2	2	1
Capital divided by the profit-sharing ratio	7,500	9,000	9,000
Proportionate Capital of B and C, taking A’s capital as the base	15,000	15,000	7,500
Excess of actual over proportionate capital	nil	3,000	1,500

On the basis of the above, piecemeal payments would be done as follows:

A should not get anything till Rs.3,000 is paid to B and Rs.1,500 is paid to C. Since capital of B and C are already according to their mutual profit-sharing ratio (2 : 1), they will share the available cash in this ratio.

After paying off creditors and A’s loan, the available amount will be distributed as below in this method:

	Total	A	B	C
Third Installment	900	–	600	300
Fourth Installment (i) (ii)	3,600 2,400	– 960	2,400 960	1,200 480
Fifth Installment	20,100	8,040	8,040	4,020
Total	27,000	9,000	12,000	6,000

Total payment made to each partner will be same under both the methods.

Dissolution of Partnership Accounts – Practical Problems -1

M and N were equal partners in a firm. They decided to dissolve the partnership on. On that date, their financial position was as follows:

	Rs.		Rs.
Sundry Creditors	3,700	Cash at Bank	4,000
Reserve Fund	4,000	Sundry Debtors	900
N’s Loan Account	4,000	Plant	5,700
Capital: M Capital: N	13,000 13,000	Stock Lease	16,100 7,000
		Furniture & Fittings	4,000
	37,700		37,700

Lease was sold Rs.7,360, Furniture and Fittings for Rs.4,300 and stock for Rs.14,800. Debtors realised only Rs.800 and Plant realised Rs.5,800. Creditors were paid Rs.3,660 final settlement. Expenses of realization amounted Rs.600.

Make necessary journal entries to close the books of firm and prepare Realisation A/c, Bank A/c and Capital Accounts of partners.

Solution:

Steps involved for solution:

Step 1- Calculation of Assets Realised.

Step 2- Passing Journal Entries.

Step 3- Creation of Realisation Account.

Step 4- Creation of Bank Account.

Step 5- Creation of M’s Capital Account.

Step 6- Creation of N’s Capital Account.

Working Details:

Calculation of Assets Realised:

	Rs.
Lease	7,360
Furniture and Fixture	4,300
Stock	14,800
Book Debts	800
Plant	5,800
	33,060

Journal

Realisation Account

	Rs.		Rs.
To Sundry Debtors	900	By Sundry Creditors	3,700
To Plant a/c	5,700	By Bank A/c (Assets realised)	33,060
To Stock A/c To Lease A/c	16,100 7,000	By M’s Capital A/c (Loss on realisation) By N’s Capital A/c (Loss on realisation)	600 600
To Furniture and fitting A/c To Bank A/c (Creditors paid)	4,000 3,660
To Bank A/c (Expenses)	600
	37,960		37,960

Bank Account

	Rs.		Rs.
To Balance b/d	4,000	By Realisation A/c	600
To Realisation A/c	33,060	By Realisation A/c	3,660
		By N’s Loan A/c	4,000
		By M’s Capital A/c	14,400
		By N’s Capital A/c	14,400
	37,060		37,060

M’s Capital Account

	Rs.		Rs.
To Realisation A/c	600	By Balance b/d	13,000
To Bank A/c	14,400	By Reserve Fund A/c	2,000
	15,000		15,000

N’s Capital Account

	Rs.		Rs.
To Realisation A/c	600	By Balance b/d	13,000
To Bank A/c	14,400	By Reserve Fund A/c	2,000
	15,000		15,000

Dissolution of Partnership Accounts – Practical Problems -2

K, L and B are engaged in a manufacturing business. They share profits & losses in the ratio of 3: 2: 1 respectively. On 31^st Dec., 2024, their Balance Sheet was as follows:

Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
Sundry Creditors		16,000	Plant & Machinery		17,000
Mrs. K’s Loan		14,000	Stock		16,000
Repairs & Renewal Reserve Capital:		1,200	S. Debtors Less Provision	22,000 2,000	20,000
K L B	12,000 16,000 3,000	31,000	Prepaid Insurance Investments Bank		600 5,000 3,600
		62,200			62,200

On the above date firm was dissolved. Assets realised as follows:

Plant and Machinery Rs.11,000; Stock Rs.13,000; Sundry Debtors Rs.17,000.

K agreed to take investments for Rs.3,000. He also agreed to discharge Mrs. K’s Loan. At the time of realisation, it was found that a bill for Rs.6,000, which was discounted by the firm, was dishonoured and had to be paid. Expenses of realization amounted Rs.1,000. Prepare necessary ledger accounts to close the books of the firm. B was admitted on 1^st Jan. 2025, with the undertaking that firm will run atleast for a period of 5 years. He paid Rs.10,000 for goodwill.

Solution:

Steps involved for solution:

Step 1- Calculation of Asset Realised.

Step 2- Creation of Realisation Account.

Step 3- Creation of Bank Account.

Step 4- Creation of Repair’s and Renewals Reserve Account.

Step 5- Creation of K’s Capital Account.

Step 6- Creation of L’s Capital Account.

Step 7- Creation of B’s Capital A/c.

Step 8- Note.

Working Details:

Calculation of Asset Realised:-

	Rs.
Plant and Machinery	11,000
Stock	13,000
Sundry Debtors	17,000
	41,000

Realisation Account

Bank Account

Particulars	Rs.	Particulars	Rs.
To Balance b/d To Realisation Account-	3,600	By Realisation Account- Creditors & Bills dishonoured	22,000
Assets realized (W.N.1)	41,000	By Realisation Account- Expenses By K’s Capital A/c (W.N.5)	1,000 10,400
		By L’s Capital A/c (W.N.6)	7,600
		By B’s Capital A/c (W.N.7)	3,600
	44,600		44,600

Repairs and Renewals Reserve Account

Particulars		Rs.	Particulars	Rs.
To Capital Account- K (1,200 x 3/6) L (1,200 x 2/6) B (1,200 x 1/6)	600 400 200	1,200	By Balance b/d	1,200
		1,200		1,200

K’s Capital Account’s

Particulars	Rs.	Particulars	Rs.
To Realisation Account (Investment) To Realisation Account-	3,000	By Balance b/d By Repairs and Renewals	12,000
Loss on realization (W.N.2) To B’s Capital [(4,000 x 3/5) – (W.N.8)]	10,800 2,400	Reserve Account (W.N.4) By Realisation Account-	600
To Bank Account (Balancing fig.)	10,400	(Mrs. K’s Loan)	14,000
	26,600		26,600

L’s Capital Account

Particulars	Rs.	Particulars	Rs.
To Realisation Account -(Loss on realization) (W.N.2) To B’s Capital [(4,000 x 2/5) – (W.N.8)]	7,200 1,600	By Balance b/d By Repairs and Renewals Reserve (W.N.4)	16,000 400
To Bank Account (Balancing fig.)	7,600
	16,400		16,400

B’s Capital Account

Particulars	Rs.	Particulars	Rs.
To Realisation Account- Loss on realization (W.N.2) To Bank Account (Balancing fig.)	3,600 3,600	By Balance b/d By Repairs and Renewal Reserve (W.N.4)	3,000 200
		By K’s Capital (W.N.8)	2,400
		By L’s Capital (W.N.8)	1,600
	7,200		7,200

Note:
- There is no liability against Repairs and Renewal Reserve, therefore this been transferred to Capital Accounts.
- Partnership is for a minimum period of 5 years and B has paid Rs.10,000 for goodwill, therefore, he will get refund for the unexpired period i.e. Rs.[(10,000/5) x 2] = Rs.4,000. This amount will be debited to K and L in the ratio of 3 : 2 and credited to B.

Dissolution of Partnership Accounts – Practical Problems -3

Take over of business by one partner and Application of Garner Vs. Murray

Ajay, Vijay, Ram and Shyam are partners in a firm sharing profits and losses in the ratio of 4:1:2:3. The following is their Balance Sheet as at 31^st March, 2024:

Liabilities		Rs.	Assets		Rs.
Sundry Creditors		3,00,000	Sundry Debtors	3,50,000
Capital A/cs:			Less: Doubtful Debts	50,000	3,00,000
Ajay	7,00,000		Cash in hand		1,40,000
Shyam	3,00,000	10,00,000	Stocks		2,00,000
			Other Assets		3,10,000
			Capital A/cs:
			Vijay	2,00,000
			Ram	1,50,000	3,50,000
		13,00,000			13,00,000

On 31^st March 20024, the firm is dissolved and the following points are agreed upon:

Ajay is to takeover sundry debtors at 80% of book value.

Shyam is to takeover the stocks at 95% of the value and

Ram is to discharge sundry creditors.

Other assets realize Rs.3,00,000 and the expenses of realization come to Rs.30,000.

Vijay is found insolvent and Rs.21,900 is realized from his estate.

Prepare Realisation Account and Capital Accounts of the partners. Show also the Cash A/c.

The loss arising out of capital deficiency may be distributed following the decision in Garner vs Murray.

Solution:

Steps involved in solving the above problem-

Step 1- Preparing Realisation Account.

Step 2- Preparing Partners Capital Accounts.

Step 3- Preparing Cash Accounts.

Step 4- Note.

Dr. Realistaion Account Cr.

Particulars	Rs.	Particulars	Rs.
To Sundry Debtors	3,50,000	By Sundry Creditors	3,00,000
To Stock	2,00,000	By Provision for Doubtful Debts	50,000
To Other assets	3,10,000	By Ajay’s Capital A/c (Debtors) [Note]	2,80,000
To Cash (Expenses on realization)	30,000	By Shyam’s Capital A/c (stock)	1,90,000
To Ram’s Capital A/c (Creditors) [Note]	3,00,000	By Cash (Other assets)	3,00,000
		By Ajay’s Capital A/c	28,000
		By Vijay’s Capital A/c	7,000
		By Ram’s Capital A/c	14,000
		By Shyam’s Capital A/c (Loss on realisation)	21,000
	11,90,000		11,90,000

2. Dr. Partners Capital Accounts Cr.

Dr. Cash Accounts Cr.

Particulars	Rs.	Particulars		Rs.
To Balance b/d	1,40,000	By Realisation A/c (expenses)		30,000
To Realisation A/c	3,00,000	By Capital A/c
To Vijay’s Capital A/c	21,900	Ajay	2,90,430
To Ajay’s Capital A/c	28,000	Ram	1,36,000
To Shyam’s Capital A/c	21,000	Shyam	54,470	4,80,900
	5,10,900			5,10,900

Note
- Since creditors are taken over by Ram as per Balance Sheet figures, a direct entry for the same in Ram’s Capital A/c is also correct.
- Ajay takes Debtors at 80% of Rs.3,50,000 i.e. Rs.2,80,000.
- Vijay’s deficiency will be borne by Ajay and Shyam in the ratio of 7 : 3 i.e. on opening capitals of Rs.7,00,000 and Rs.3,00,000. Ram will not bear any portion of the loss since at the time of dissolution he had a debit balance in his capital account.

Vijay’s deficiency = Rs.(2,07,000 – 21,900) = Rs.1,85,100.

As per Garner vs. Murray the solvent partner have to bring in cash to the extent of their respective shares of loss on realisation.

Dissolution of Partnership Accounts – Practical Problems -4

(Insolvency of one partner)

Neptune, Jupiter, Venus and Pluto had been carrying on business in partnership sharing profits and losses in the ratio of 3:2:1:1. They decided to dissolve the partnership on the basis of the following Balance Sheet as on 30^th April, 2024:

Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
Capital Account:			Premises		1,20,000
Neptune	1,00,000		Furniture		40,000
Jupiter	60,000	1,60,000	Stock		1,00,000
General Reserve		56,000	Debtors		40,000
Capital Reserve		14,000	Cash		8,000
Sundry Creditors		20,000	Capital Overdrawn:
Mortgage Loan		80,000	Venus	10,000
			Pluto	12,000	22,000
		3,30,000			3,30,000

The assets were realized as under:

	Rs.
Debtors	24,000
Stock	60,000
Furniture	16,000
Premises	90,000

Expenses of dissolution amounted to Rs.4,000.
Further Creditors of Rs.12,000 had to be met.
General Reserve unlike Capital Reserve was built up by appropriation of Profits.

You are required to draw up the Realisation Account, Partners’ Capital Accounts and the Cash Account assuming that Venus became insolvent and nothing was realized from his private estate. Apply the principles laid down in Garner vs Murray.

Solution:

Steps involved in solving the above problem-

Step 1- Preparing Realisation Account.

Step 2- Preparing Partners’ Capital Accounts.

Step 3- Preparing Cash Account.

Dr. Realisation Account Cr.
Particulars	Rs.	Particulars		Rs.
To Sundry assets A/c (transfer):		By Sundry Creditors A/c		20,000
Premises	1,20,000	By Cash A/c (assets realised):
Furniture	40,000	Premises	90,000
Stock	1,00,000	Furniture	16,000
Sundry Debtors	40,000	Stock	60,000
To Cash A/c (creditors paid) (Rs.20,000 + Rs.12,000)	32,000	Debtors	24,000	1,90,000
To Cash A/c (expenses)	4,000	By Loss transferred to Capital Accounts:
		Neptune (Rs.1,26,000 x 3/7)	54,000
		Jupiter (Rs.1,26,000 x 2/7)	36,000
		Venus (Rs.1,26,000 x 1/7)	18,000
		Pluto (Rs.1,26,000 x 1/7)	18,000	1,26,000
	3,36,000			3,36,000

2. Dr. Partners’ Capital Accounts Cr.

Note:

Venus in unable to pay Rs.18,000. Capital account of Pluto is showing a debit balance (before the realization) therefore he will not be liable to bear any portion of this loss and it will be borne by Neptune and Jupiter in the proportion of 130:80 or 13:8, i.e. in the ratio of capital before dissolution but after transfer of reserves.
No distinction need be made between general reserve and capital reserve.

As per the Garner Vs. Murray Rule:-

First, the solvent partners should bring in cash equal to their respective share of the loss on realization; and
Therefore, the loss due to the insolvency of a partner should be divided among the other partners in the ratio of their capitals then standing.

Dr. Cash Account Cr
Particulars		Rs.	Particulars	Rs.
To Balance b/d		8,000	By Realisation A/c (creditors)	32,000
To Realisation A/c (assets realised)		1,90,000	By Realisation A/c (expenses)	4,000
To Capital A/c (realization loss made good):			By Mortgage loan	80,000
Neptune	54,000		By Neptune’s Capital A/c (W.N.2)	1,18,857
Jupiter	36,000		By Jupiter’s Capital A/c (W.N.2)	73,143
Pluto	18,000	1,08,000
To Pluto’s Capital A/c (W.N.2)		2,000
		3,08,000		3,08,000

Dissolution of Partnership Accounts – Practical Problems -5

(Insolvency of one partner)

The firm of Kapil and Dev has four partners and as on 31^st March, 2024, its Balance Sheet stood as follows:

Liabilities	Rs.	Assets	Rs.
Capital A/cs:		Land	50,000
F. Kapil	2,00,000	Building	2,50,000
S. Kapil	2,00,000	Office equipment	1,25,000
R. Dev	1,00,000	Computers	70,000
Current A/cs		Debtors	4,00,000
F. Kapil	50,000	Stocks	3,00,000
S. Kapil	1,50,000	Cash at Bank	75,000
R. Dev	1,10,000	Other Current Assets	22,600
Loan from NBFC	5,00,000	Current A/c:
Current Liabilities	70,000	B. Dev	87,400
	13,80,000		13,80,000

The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to dissolve the firm on 1.4.1924 on the basis of the following understanding:

The following assets are to be adjusted to the extent indicated with respect to the book values:

Land	200%
Building	120%
Computers	70%
Debtors	95%
Stocks	90%

In the case of the loan, the lender’s are to be paid at their insistence a prepayment premium of 1%.
B. Dev is insolvent and no amount is recoverable from him. His father, R. Dev, however, agrees to bear 50% of his deficiency. The balance of the deficiency is agreed to be apportioned according to law.

Assuming that the realiastion of the assets and discharge of liabilities is carried out immediately show the Cash A/c, Realisation Account and the Partners’ Accounts.

Solution:

Steps involved in solving the above problem-

Step 1- Preparing Realisation Account.

Step 2- Preparing Cash Account.

Step 3- Preparing Partners’ Capital Account.

Step 4- Preparing Partner’s Current Accounts.

Dr. Realisation Account Cr.

Particulars	Rs.	Rs.	Particulars	Rs.	Rs.
To Land		50,000	By Current Liabilities		70,000
To Building		2,50,000	By Loan from NBFC		5,00,000
To Office equipments		1,25,000	By Cash A/c:
To Computers		70,000	Land	1,00,000
To Debtors		4,00,000	Building	3,00,000
To Stocks		3,00,000	Office Equipment	1,25,000
To Other Current Assets		22,600	Computers	49,000
To Cash A/c:			Debtors	3,80,000
Current liabilities	70,000		Stocks	2,70,000
Loan from NBFC	5,05,000	5,75,000	Other Current Assets	22,600	12,46,600
To Partner’s Current A/cs:
(Profit on realization)
F. Kapil	9,600
S. Kapil	9,600
R. Dev	2,400
B. Dev	2,400	24,000
		18,16,600			18,16,600

In the books of M/s. Kapil and Dev

Dr. Cash Account (Bank Column) Cr.

Particulars	Rs.	Particulars	Rs.	Rs.
To Balance b/d To Realisation A/c	75,000	By Realisation A/c- (Payment of sundry liabilities)		5,75,000
(Realisation of Sundry assets)	12,46,600	By Partners’ Capital A/cs: F. Kapil	2,42,600
		S. Kapil	3,42,600
		R. Dev	1,61,400	7,46,600
	13,21,600			13,21,600

3. Dr. Partners’ Capital Accounts Cr .

4. Dr. Partners’ Current Accounts Cr.

Note:
- In the absence of specific information, it is assumed that the assets are realized at the agreed values.
- Balance of deficiency is borne by other partners in their capital ratio (2:2:1) according to Partnership Act, 1932.

Dissolution of Partnership Accounts – Practical Problems -6

Issue of shares for discharging the purchase price on dissolution of firm

‘X’ and ‘Y’ carrying on business in partnership sharing Profits and Losses equally, wished to dissolve the firm and sell the business to ‘X’ Limited Company , when the firm’s position was as follows:

Liabilities	Rs.	Assets	Rs.
X’s Capital	1,50,000	Land and Building	1,00,000
Y’s Capital	1,00,000	Furniture	40,000
Sundry Creditors	60,000	Stock	1,00,000
		Debtors	66,000
		Cash	4,000
	3,10,000		3,10,000

The arrangement with X Limited Company was as follows:

Land and Building was purchased at 20% more than the book value.
Furniture and stock were purchased at book values less 15%.
The goodwill of the firm was valued at Rs.40,000.
The firm’s debtors, cash and creditors were not to be taken over, but the company agreed to collect the book debts of the firm and discharge the creditors of the firm as an agent, for which services, the company was to be paid 5% on all collections from the firm’s debtors and 3% on cash paid to firm’s creditors.
The purchase price was to be discharged by the company in fully paid equity shares of Rs.10 each at a premium of Rs.2 per share.

The company collected all the amounts from debtors. The creditors were paid off less by Rs.1,000 allowed by them as discount. The company paid the balance due to the vendors in cash.

Prepare the Realisation Account, the Capital Accounts of the partners and the Cash account in the books of partnership firm.

Solution:

Steps involved in solving the above problem-

Step 1- Computation of Purchase consideration

Step 2- Computation of number of shares received from X Ltd.

Step 3- Computation of net amount received from X Ltd.

Step 4- Preparing Realisation A/c

Step 5- Preparing Partner’s Capital Accounts

Step 6- Preparing Cash Accounts

Working Details:

Computation of Purchase Consideration	Rs.
Land and Building	1,20,000
Furniture	34,000
Stock	85,000
Goodwill	40,000
	2,79,000

Computation of number of shares received from X Ltd.

The amount of shares received from X Ltd. have been distributed between the two partners X and Y in the ratio of their final claim i.e. 1,67,465 : 1,17,465.

Number of shares received from X Ltd. = Rs.2,79,000/ Rs.(10+2) = 23,250

X gets = 23,250 x 1,67,465 / 2,84,930 = 13,665 shares

Its value is 13,665 x Rs.12 = Rs.1,63,980

Y gets = 23,250 x 1,17,465 / 2,84,930 = 9,585 shares

Its value is 9,585 x Rs.12 = Rs.1,15,020.

Computation of net amount received from X Ltd. on amount realised from debtors less amount paid to creditors

	Rs.
Amount realised from Debtor’s	66,000
Less: Commission (5% on Rs.66,000)	3,300
	62,700
Less: Amount paid to Creditors [Rs.(60,000 – 1,000)]	59,000
	3,700
Less: Commission (3% on Rs.59,000)	1,770
Net amount received	1,930

In the books of Firm Dr. Realisation A/c Cr.
Particulars		Rs.	Particulars		Rs.
To Land and Building		1,00,000	By Sundry Creditors		60,000
To Furniture		40,000	By X Ltd. (W.N.1)		2,79,000
To Stock		1,00,000	By X Ltd.
To Debtors		66,000	Sundry Debtors	66,000
To Creditors (X Ltd)		59,000	Less: Commission 5% on 66,000	3,300	62,700
To Commission (Y Ltd.) @ 3% on Rs.59,000		1,770
To Profit transferred to
A’s Capital A/c	17,465
B’s Capital A/c	17,465	34,930
		4,01,700			4,01,700

Dr. Partner’s Capital Account Cr.
Particulars	X Rs.	Y Rs.	Particulars	X Rs.	Y Rs.
To Share in X Ltd (W.N.2)	1,63,980	1,15,020	By Balance b/d	1,50,000	1,00,000
To Cash (final settlement) (Balancing figure)	3,485	2,445	By Realisation A/c (Profit)	17,465	17,465
	1,67,465	1,17,465		1,67,465	1,17,465

6.	Cash Account
Dr.			Cr.
Particulars	Rs.	Particulars	Rs.
To Balance b/d	4,000	By A’s Capital A/c	3,485
To X Ltd (W.N.3)	1,930	By B’s Capital A/c	2,445
	5,930		5,930

Dissolution of Partnership Accounts – Practical Problems -7

(Dishonour of Bill on Dissolution of firm)

Ram, Rahim and Antony were in partnership sharing profits and losses in the ratio of ½, 1/3 and 1/6 respectively. They decided to dissolve partnership firm on 31.3.2024, when the Balance Sheet of the firm appeared as under:

Balance Sheet of the firm as on 31.3.2024

Liabilities		Rs.	Assets	Rs.
Sundry Creditors		5,67,000	Goodwill A/c	4,56,300
Bank Overdraft		6,06,450	Plant and Machinery	6,07,500
Joint Life Policy Reserve		2,65,500	Furniture	64,650
Loan from Mrs. Ram		1,50,000	Stock	2,36,700
Capital Accounts:			Sundry Debtors	5,34,000
Ram	4,20,000		Joint Life Policy	2,65,500
Rahim	2,25,000		Commission Receivable	1,40,550
Auntony	1,20,000	7,65,000	Cash on Hand	48,750
		23,53,950		23,53,950

The following details are relevant for dissolution:

The joint life policy was surrendered for Rs.2,32,500.
Ram took over goodwill and plant and machinery for Rs.9,00,000.
Ram also agreed to discharge bank overdraft and loan from Mrs. Ram.
Furniture and stocks were divided equally between Ram and Rahim at an agreed valuation of Rs.3,60,000.
Sundry debtors were assigned to firm’s creditors in full satisfaction of their claims.
Commission receivable was received into in time.
A bill discounted was subsequently returned dishonoured and proved valueless Rs.30,750 (including Rs.500 noting charges).
Ram paid the expenses of dissolution amounting to Rs.18,000.
Antony agreed to receive Rs.1,50,000 in full satisfaction of his rights, title and interest in the firm.

You are required to show the accounts relating to closing of books, on dissolution of the firm.

Solution:

Steps involved in solving the above problem-

Step 1- Preparing Realisation Account.

Step 2- Preparing Capital Account.

Step 3- Preparing Bank Account.

Dr. Realisation Account Cr.

Particulars		Rs.	Particulars		Rs.
To Goodwill A/c		4,56,300	By Sundry Creditors A/c		5,67,000
To Plant & machinery A/c		6,07,500	By Joint Life Policy Reserve A/c		2,65,500
To Furniture A/c		64,650	By Cash A/c:
To Stock A/c		2,36,700	Joint Life Policy		2,32,500
To Sundry Debtors A/c		5,34,000	By Ram’s Capital A/c:
To Joint Life Policy A/c		2,65,500	Goodwill, Plant & Machinery	9,00,000
To Dissolution Expenses		18,000	Furniture, Stock	1,80,000	10,80,000
To Cash A/c:			By Rahim’s Capital A/c:
Bill dishonoured		30,750	Furniture, Stocks		1,80,000
To Partners Capital A/c
(Profit on Realisation)
Ram	55,800
Rahim	37,200
Antony	18,600	1,11,600
		23,25,000			23,25,000

2. Dr. Capital Accounts Cr.

Dr. Bank Account Cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/d	48,750	By Realisation A/c
To Realisation A/c:		Bill dishonoured	30,750
Joint Life Policy	2,32,500	By Partner’s Capital Account
To Commission Receivable A/c	1,40,550	Ram	1,63,410
		Rahim	77,640
		Auntony	1,50,000
	4,21,800		4,21,800

Notes:

No entry is required regarding assignment of sundry debtors to sundry creditors in full satisfaction of their Claims.
The amount of excess payment to Auntony (Rs.1,50,000 – Rs.1,38,600 i.e. Rs.11,400) has been debited to Ram & Rahim in the ratio of 3:2.

Dissolution of Partnership Accounts – Practical Problems -8

(Preparation of Statement of Distribution of Cash)

A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs.9,600; Rs.6,000 and Rs.8,400 respectively.

After paying creditors, the liabilities and assets of the firm were:

The assets realised in full in the order in which they are listed above. B is insolvent.

You are required to prepare a statement showing the distribution of cash as and when available, applying maximum possible loss procedure.

Solution:

1. Statement of Distribution of Cash

Dissolution of Partnership Accounts – Practical Problems -9

(Preparation of Realization Account, Cash and Capital A/c) – Garner vs. Murray Rule

Ram, Rahim and Robert and partners of the firm ‘RR Traders’ for the past 5 years. The partners decided to dissolve the firm consequent to insolvency of partner Robert in October, 2002. The Balance Sheet of the firm as on 31.10.2024 is furnished below. They share profit and losses equally:

Liabilities	Rs.	Assets	Rs.
Capital Accounts:		Land and Building	5,00,000
Ram	4,50,000	Plant and Machinery	2,00,000
Rahim	4,50,000	Furniture and Fittings	50,000
Robert	2,00,000	Stock in trade	3,00,000
General Reserve	2,10,000	Debtors	5,00,000
Creditors	2,90,000	Cash at Hand / Bank	50,000
	16,00,000		16,00,000

The partners Ram and Rahim decided to form a new ‘RR Enterprises’ and takeover all the assets and liabilities of the firm at values given below:

Land and Building	Rs.3,50,000
Plant and Machinery	Rs.1,50,000
Furniture and Fittings	Rs.20,000
Stock in trade	Rs.2,00,000

Debtors include Rs.3,00,000 due from SK & Co. owned by Robert. (Nothing is recoverable from the said concern).

Other debtors can be recovered fully.

Realisation account, Partners capital account in the books of RR Traders; and
The Balance Sheet of RR Enterprises (immediately after commencement).

Solution:

Steps involved in solving the above problem-

Step 1- Computation of agreed value of assets taken over by RR Enterprises.

Step 2- Computation of Cash in hand/bank balance of RR Enterprises as on 31.10.2024.

Step 3- Preparing Realisation Account.

Step 4- Preparing Partner’s Capital Accounts.

Step 5- Preparing Balance Sheet of RR Enterprises.

Working Details:

Computation of agreed value of assets taken over by RR Enterprises

	Rs.
Land and building	3,50,000
Plant and machinery	1,50,000
Furniture and fittings	20,000
Stock in trade	2,00,000
Debtors (5,00,000 – 3,00,000)	2,00,000
Cash at hand/bank	50,000
	9,70,000

Computation of Cash in hand/bank balance of RR enterprises as on 31.10.2024

	Rs.
Opening Balance	50,000
Add: Ram’s and Rahim’s contribution (Rs.1,10,000 + Rs.1,10,000)	2,20,000
	2,70,000

In the Books of RR Traders

Dr. Realisation Account Cr.

Particulars	Rs.	Particulars		Rs.
To Sundry assets:		By Creditors		2,90,000
Land and building	5,00,000	By RR Enterprises (W.N.1)		9,70,000
Plant and Machinery Furniture and fittings	2,00,000 50,000	By Loss transferred to Partners’ Capital Accounts (Balancing figure)
Stock	3,00,000	Ram	1,10,000
Debtors	2,00,000	Rahim	1,10,000
Cash at hand/bank	50,000	Robert	1,10,000	3,30,000
To RR Enterprises (liability taken over)	2,90,000
	15,90,000			15,90,000

Dr. Partners’ Capital Account Cr.

As per Garner Vs. Murray Rule, solvent partners bring cash to the extent of loss, arising upon realization of assets of the firm.

Balance Sheet of RR Enterprises (as on 31.10.2024)

(immediately after commencement)

Liabilities	Rs.	Asets	Rs.
Capital Accounts:		Land and building	3,50,000
Ram	4,50,000	Plant and machinery	1,50,000
Rahim	4,50,000	Furniture and fittings	20,000
Creditors	2,90,000	Stock in trade	2,00,000
		Debtors	2,00,000
		Cash at hand/bank (W.N.2)	2,70,000
	11,90,000		11,90,000

Dissolution of Partnership Accounts – Practical Problems -10

(Insolvency of all the partners)

A and B partners in a firm. Profit sharing ratio is 3: 2. The Balance Sheet as on Jan. 1, 2025 was as follows:

		Rs.			Rs.
Sundry Creditors		12,000	Stock		8,000
Capitals- A	3,500		Debtors Less Reserve	10,000 1,000	9,000
B	2,500	6,000	Furniture		600
			Cash		400
		18,000			18,000

Firm was dissolved on the above date. Assets of the firm realized only Rs.9,000. Realisation expenses amounted to Rs.500. A could pay only 800 from his private property when B was unable to pay anything. Prepare necessary accounts to close the books.

Solution:

Steps involved in solving the above problem-

Step 1- Creation of Realisation A/c.

Step 2- Creation of Cash A/c.

Step 3- Calculation of A’s Capital A/c.

Step 4- Calculation of B’s Capital A/c.

Step 5- Calculation of Sundry Creditors A/c.

Step 6- Calculation of Deficiency A/c.

Working Details:

Realisation Account

Particulars	Rs.	Particulars		Rs.
To Stock A/c	8,000	By Reserve for Bad Debts		1,000
To Debtors	10,000	By Cash A/c – assets realised		9,000
To Furniture To Cash A/c-expenses	600 500	By Capital A/c-Loss tfd. A (3/5 x 9,100) B (2/5 x 9,100)	5,460 3,640	9,100
	19,100			19,100

Cash Account

Particulars	Rs.	Particulars	Rs.
To Balance b/d	400	By Realisation A/c-Expenses	500
To Realisation A/c	9,000	By Sundry Creditors (Bal. fig.)	9,700
To A’s Capital A/c	800
	10,200		10,200

A’s Capital Account

Particulars	Rs.	Particulars	Rs.
To Realisation A/c- Loss	5,460	By Balance b/d	3,500
		By Cash A/c	800
		By Deficiency A/c	1,160
	5,460		5,460

B’s Capital Account

Particulars	Rs.	Particulars	Rs.
To Realisation A/c- Loss	3,640	By Balance b/d	2,500
		By Deficiency A/c	1,140
	3,640		3,640

Sundry Creditors Account

Particulars	Rs.	Particulars	Rs.
To Cash A/c	9,700	By Balance b/d	12,000
To Deficiency A/c	2,300
	12,000		12,000

Deficiency Account

Particulars	Rs.	Particulars	Rs.
To A’s Capital A/c	1,160	By Sundry Creditors A/c	2,300
To B’s Capital A/c	1,140
	2,300		2,300

Dissolution of Partnership Accounts – Practical Problems -11

Piecemeal Payments – Maximum Loss Method

Rama, Eena and Meena were in partnership sharing profits and losses equally. Their Balance Sheet dated 31.12.24 are given below.

Liabilities	Rs.	Assets	Rs.
Capital A/c:		Plant and Machinery	6,52,000
Rama	1,75,000	Stock	2,20,000
Eena	2,30,000	Debtors	32,000
Meena	1,30,000	Cash and Bank	31,000
Loan A/c: Meena	1,15,000
Sundry Creditors	75,000
Bank Loan (Secured by Plant and Machinery)	2,10,000
	9,35,000		9,35,000

Rama, Eena and Meena dissolved the firm w.e.f. 1.1.2025. The assets were realized as follows:

Months
Jan	Plant & Machinery (Realised by bank authority)	5,02,000 net
Feb.	Stock	1,18,000; expenses 5,700
	Debtors	26,000; expenses 1,200
Mar	Stock	1,06,000 net
	Debtors	5,000 net

Meena agreed to take over the balance of stock for 7,500 and books of accounts were closed on 31.03.25.

You are required to prepare

Statement showing the distribution of Cash;
Realisation Account;
Cash/Bank Account;
Partners Capital Account.

Solution:

Steps involved in solving the above problem-

Step 1- Preparing Statement Showing Distribution of Cash.

Step 2- Preparing Cash and Bank Account.

Step 3- Preparing Realisation Account.

Step 4- Preparing Partners Capital Account.

Statement Showing Distribution of Cash

Dr. Cash and Bank Account Cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/d	31,000	By Sundry Creditors – First Payment	31,000
To Plant & Mach. A/c (after Bank Loan)	2,92,000	By Sundry Creditors – Second Installment	44,000
To Realisation A/c – Debtors Realized	26,000	By Meena Loan A/c	1,15,000
To Realisation A/c – Stock Realized To Realisation A/c – Stock and Debtors	1,18,000 1,11,000	By Disbursement to Partners on Sale of Plant and Machinery:
		Rama Capital A/c	39,272
		Eena Capital A/c	93,728
		By Expenses on Realisation	6,900
		By Disbursement to Partners on Sale of Stock and Debtors – 1^st Installment:
		Rama Capital A/c	47,428
		Eena Capital A/c	47,972
		Meena Capital A/c	41,700
		By Disbursement to Partners on Sale of Stock and Debtors – 2^nd Installment:
		Rama Capital A/c	39,500
		Eena Capital A/c	39,500
		Meena Capital A/c	32,000
	5,78,000		5,78,000

Dr. Realisation Account Cr.

Particulars	Rs.	Particulars		Rs.
To Plant and Machinery	1,50,000	By Bank		26,000
To Debtors	32,000	By Bank		1,18,000
To Stock	2,20,000	By Bank		1,11,000
To Expenses	6,900	By Meena Capital A/c		7,500
		By Capital A/c – Loss Transf
		Rama	48,800
		Eena	48,800
		Meena	48,800	1,46,400
	4,08,900			4,08,900

Dr. Partners Capital Account Cr.

Particulars	Rama	Eena	Meena	Particulars	Rama	Eena	Meena
To Bank	39,272	93,728	–	By Balance c/d	1,75,000	2,30,000	1,30,000
To Bank	47,428	47,972	41,700
To Bank	39,500	39,500	32,000
To Realisation A/c	–	–	7,500
To Realisation A/c	48,800	48,800	48,800
	1,75,000	2,30,000	1,30,000		1,75,000	2,30,000	1,30,000

10.12 Dissolution of Partnership Accounts – Practical Problems -12 / h3

(Highest Relative Capital Method)

The firm of LMS was dissolved on 31.3.25, at which date its Balance Sheet stood as follows:

Liabilities	Rs.	Assets	Rs.
Creditors	2,00,000	Fixed Assets	45,00,000
Bank Loan	5,00,000	Cash and Bank	2,00,000
L’s Loan	10,00,000
Capital
L	15,00,000
M	10,00,000
S	5,00,000
	47,00,000		47,00,000

Partners share profits equally. A firm of Chartered Accountants is retained to realize the assets and distribute the cash after discharge of liabilities. Their fees which are to include all expenses is fixed at Rs.1,00,000. No loss is expected on realisation since fixed assets include valuable land and building.

Realisations are:

S. No.	Amount
1	5,00,000
2	15,00,000
3	15,00,000
4	30,00,000
5	30,00,000

The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You are required to prepare a statement showing distribution of cash with necessary workings.

Solution:

Steps involved in solving the above problem-

Step 1- Scheme of payment of surplus amount of Rs.2,00,000 out of second Instalment.

Step 2- Scheme of payment of Rs.15,00,000 realised in 3^rd Instalment.

Step 3- Preparing Statement of Piecemeal Distribution (Under Higher Relative Capital Method).

Working Details:

Scheme of payment of surplus amount of Rs.2,00,000 out of second Instalment:

	Capital A/cs
	L (Rs.)	M (Rs.)	S (Rs.)
Balance (1)	15,00,000	10,00,000	5,00,000
Profit sharing ratio (2)	1	1	1
Capital taking S’s Capital (3)	5,00,000	5,00,000	5,00,000
Excess Capital (4) = (1) – (3)	10,00,000	5,00,000
Profit Sharing Ratio	1	1
Excess capital taking
M’s Excess Capital as base (5)	5,00,000	5,00,000
Higher Relative Excess (4) – (5)	5,00,000

So, Mr. L should get Rs.5,00,000 first which will bring down his capital account balance from Rs.15,00,000 to Rs.10,00,000. Accordingly, surplus amounting to Rs.2,00,000 will be paid to Mr. L towards higher relative capital.

Scheme of payment of Rs.15,00,000 realised in 3^rd Instalment:
- Payment of Rs.3,00,000 will be made to Mr. L to discharge higher relative capital. This makes the higher capital of both Mr. L & Mr. M Rs.5,00,000 as compared to capital of Mr. S.
- Payment of Rs.5,00,000 will be made to each of Mr. L & Mr. M to discharge the higher capital.
- Balance Rs.2,00,000 equally to L, M and S, i.e., Rs.66,667, Rs.66,667 and Rs.66,666 respectively.
  - In the Books of M/s LMS

Statement of Piecemeal Distribution (Under Higher Relative Capital Method)

Partnership Firm Dissolution Accounts

Dissolution of Partnership Firm

Consequences of Dissolution

Liability of Retiring Partner or estate of Deceased Partner on Dissolution

Dissolution of Partnership before expiry of a fixed term

Closing of Partnership Books on Dissolution

Accounting Entries on Dissolution of Partnership Firm

Treatment of some special accounts on Dissolution of Partnership Firm

Take Over of business by Partners on Dissolution

Take Over of Partnership Business by One Partner – Accounting Examples

Take over of Partnership Business jointly by two or More Partners

Continuation of existing Books on Partnership Business Dissolution

Insolvency of One Partner in Partnership Firm

Insolvency of all the Partners in Partnership Firm

Piecemeal Payments on Dissolution of Partnership Firm

Payment to Creditors on Dissolution of Partnership Firm

Expenses of Realization on Dissolution of Partnership Firm

Payment to Partners Loan on Dissolution of Partnership Firm

Payment for Partners Capital on Dissolution of Partnership Firm

Payment for Partners on Dissolution Accounting – Maximum Loss Method

Payment for Partners on Dissolution Accounting – Highest Relative Capital Method

Dissolution of Partnership Accounts – Practical Problems -1

Dissolution of Partnership Accounts – Practical Problems -2

Dissolution of Partnership Accounts – Practical Problems -3

Dissolution of Partnership Accounts – Practical Problems -4

Dissolution of Partnership Accounts – Practical Problems -5

Dissolution of Partnership Accounts – Practical Problems -6

Dissolution of Partnership Accounts – Practical Problems -7

Dissolution of Partnership Accounts – Practical Problems -8

Dissolution of Partnership Accounts – Practical Problems -9

Dissolution of Partnership Accounts – Practical Problems -10

Dissolution of Partnership Accounts – Practical Problems -11

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