Rohit Agarwal

DISSOLUTION OF PARTNERSHIP
Journal Entries 1. For transferring all the recorded assets at their gross book values excluding cash, bank, Partners Debit bal. and the fictitious assets. Realization a/c Dr. To Assets a/c (individually) 2. For transferring all the recorded external liability (including Loan from Partners relative) & specific provisions, if any at their book values. External liabilities a/c(Individually) Dr. To Realization a/c (Note: Partners capital account and loan account of the partner are prepared separately and are not transferred to realization account.) 3. For sale of assets (whether recorded or unrecorded) Bank a/c Dr. To Realization a/c 4. For an asset taken over by a partner (whether recorded or unrecorded) Partners capital a/c Dr. To Realization a/c (Agreed price) 5. When a creditor accepts an asset as full and final settlement, no entry is recorded. 6. For discharge of outsiders liabilities (whether recorded or unrecorded) Realization a/c Dr. To Bank a/c 7. For liability taken over by a partner(whether recorded or unrecorded) Realization a/c Dr. To Partners capital a/c 8. Expenses of realization. (a) When realization expenses are paid by the firm. Realization a/cDr. To Bank a/c (b) When realization expenses are paid by the partner, on behalf of firm. Realization a/cDr. 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.

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Rohit Agarwal
10. 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 on realization Partners Capitals a/c (individually) Dr. To Realization a/c 11. For transferring accumulated profits and reserve to the partners capital account in their respective profit sharing ratio : Accumulated profit/reserves Dr. To Partners capitals a/c (Individually) 12. Transfer of 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 13. Payment of Partners loans Partners loan a/c Dr. To Bank a/c 14. Transfer the balance in Current Account (if any) to Capital Account. 15. Settlement of capital accounts (a) If the partners capital account shows debit balance, he is to bring in the necessary cash : Bank a/c Dr. To Partners capital a/c (b) In case of partners whose accounts show credit balance, the same is paid off Partners capitals a/c Dr. To Bank a/c Thus, here we will make three ledger accounts: 1. Realisation A/c 2. Partners Capital A/c 3. Bank A/c which must tally.

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Rohit Agarwal

PIECEMEAL DISTRIBUTION
When a partnership firm is dissolved, all the assets of the firm is realised and the available funds are utilized in the following fashion: o Expenses of realization o Payment to outside creditors(It is to be noted that secured creditors are to be paid off first out of the proceeds of secured assets before anything is paid to unsecured creditors) o Loans and advances made by partners spouse o Loans and advances made by a partner apart form his capital o Final claims of the partners on their capital account. On dissolution of partnership assets are not realized on the day one or at the same time, but it is a long process which might get over in a month or may even take more than a year. Thus, the payments are made as and when funds are available. This method is known as Piecemeal Distribution. When payments are made under this system, a statement is prepared showing the details of the assets realised and liabilities paid in various installments. Once this process is over, we prepare Dissolution Account, Capital Account and Cash Account. Piecemeal distribution can be done in two ways, first is known as Maximum Loss Method and second as Proportionate Capital Method. Proportionate Capital Method: Under this system we calculate the surplus capital contributed by each partner on the basis of the profit sharing ratio. After repaying the surplus capital of each partner(s) the balance of capital for each partner is in proportionate to their profit sharing ratio. So, the realised funds are utilized first to pay external liabilities, then advances from the partners, after that surplus capital of the partners and lastly the proportionate capital, any surplus is distributed in the profit sharing ratio among all the partners. Following is the example for calculating the proportionate capital: A, B and C are partners sharing profits in the ratio 3:2:1. Their closing capital is Rs. 2,70,000; Rs. 2,10,000 and Rs. 1,80,000 respectively. Particulars A B C A. Capital Balance 270,000 210,000 180,000 B. Profit Sharing Ratio 3 2 1 C. Base Capital (A/B) 90,000 105,000 180,000 D. Proportionate Capital (B x 90,000) 270,000 180,000 90,000 E. Surplus Capital 30,000 90,000 F. Profit Sharing Ratio 2 1 G. Base Capital (E/F) 15,000 90,000 H. Proportionate Capital (F x 15,000) 30,000 15,000 I. Surplus Capital 75,000 After paying third parties dues and advances from partners, Rs. 75,000 will be paid to Mr. C; then next Rs. 45,000 will be paid to Mr. B and Mr. C in the ratio 2:1. After these surplus capital any money realised will be paid to all the three partners in the ratio 3:2:1.

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Rohit Agarwal
In the above example we include the following further points: Rs. 3,00,000 due to creditors and Rs. 1,00,000 was loan from Mr. C and cash in hand is Rs. 10,000. Assets realised Rs. 2,50,000 in first month, Rs. 2,00,000 in second month and then Rs. 2,00,000. During the last month it realised Rs. 3,50,000. For above information statement for piecemeal distribution will be prepared as follow: Statement for Piecemeal Distribution Cash Creditors C's Loan Capital A B C Total First Opening Balance 10,000 300,000 100,000 270,000 210,000 180,000 660,000 Assets Realised 250,000 260,000 Less: Cash Paid 260,000 260,000 Balance 0 40,000 100,000 270,000 210,000 180,000 660,000 Second Assets Realised 200,000 Less: Cash Paid 40,000 40,000 Balance 160,000 0 100,000 270,000 210,000 180,000 660,000 Less: Cash Paid 100,000 100,000 Balance 60,000 0 270,000 210,000 180,000 660,000 Less: Cash Paid 60,000 60,000 60,000 Balance 0 270,000 210,000 120,000 600,000 Third Assets Realised 200,000 Less: Cash Paid 15,000 15,000 15,000 Balance 185,000 270,000 210,000 105,000 585,000 Less: Cash Paid 45,000 30,000 15,000 45,000 Balance 140,000 270,000 180,000 90,000 540,000 Less: Cash Paid 140,000 70,000 46,667 23,333 140,000 0 200,000 133,333 66,667 400,000 Fourth Assets Realised 350,000 Less: Cash Paid 350,000 175,000 116,667 58,333 350,000 Loss on Realisation 0 25,000 16,666 8,334 50,000 Month Particulars

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Rohit Agarwal
Maximum Loss Method: For this system, we assume that the available funds are the last fund and the balance capital will be lost. So this deficit is distributed on profit sharing loss. If specifically mentioned in the problem, it is to be distributed following Garner vs Murry Rule. We solve the above example under this system also: Statement for Piecemeal Distribution Month Particulars Cash Creditors C's Loan Capital A B C Total First Opening Balance 10,000 300,000 100,000 270,000 210,000 180,000 660,000 Assets Realised 250,000 260,000 Less: Cash Paid 260,000 260,000 Balance 0 40,000 100,000 270,000 210,000 180,000 660,000 Second Assets Realised 200,000 Less: Cash Paid 40,000 40,000 Balance 160,000 0 100,000 270,000 210,000 180,000 660,000 Less: Cash Paid 100,000 100,000 Balance 60,000 0 270,000 210,000 180,000 660,000 Less: Total Capital 660,000 Maximum Loss 600,000 300,000 200,000 100,000 600,000 -30,000 10,000 80,000 Excess of A Adjusted 30,000 20,000 10,000 0 -10,000 70,000 Excess of B Adjusted 10,000 10,000 Cash Paid 0 0 60,000 60,000 Balance 0 270,000 210,000 120,000 600,000 Third Assets Realised 200,000 Less: Total Capital 600,000 Maximum Loss 400,000 200,000 133,333 66,667 400,000 Cash Paid 200,000 70,000 76,667 53,333 200,000 Balance 0 200,000 133,333 66,667 400,000 Fourth Assets Realised 350,000 Less: Total Capital 400,000 Maximum Loss 50,000 25,000 16,667 8,333 50,000 Cash Paid 350,000 175,000 116,666 58,334 350,000 Loss on Realisaiton 50,000 25,000 16,667 8,333 50,000

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Rohit Agarwal

INSOLVENCY OF PARTNER
Case 1. Where all Partners, except one are insolvent. Solve the problem in same way as in Dissolution, and at last transfer the debit balances of insolvent partners capital account to solvent partners capital account. Case 2. Where all Partners are insolvent. Step1: Prepare realization Account (without transferring outsiders liabilities) in the usual manner and transfer its profit and loss to Partners Capital accounts. Step2: Prepare Cash/Bank Account to ascertain the cash available for outsiders liabilities. Step3: Prepare outsiders liabilities accounts, pay them off with available cash proportionately and transfer the unpaid balance to Deficiency Account. Step4: Prepare Partners Capital accounts and transfer the balance to Deficiency Account. Step5: Prepare Deficiency Account, which must tally. Case 3. Where all Partners, except more than one are insolvent. Solve the problem in same way as in Dissolution, and at last the debit balance of the insolvent partner will have to be borne by solvent partners. Now the question arises that in what ratio it should be borne? We have two options. Option 1 is plain & simple. The debit balance of the insolvent partner will have to be borne by solvent partners in their Profit Sharing Ratio. You should go for this option, only if the problem asks to do that, other wise go for option 2. Option 2 : Apply the rule of Garner v/s Murray. For this you need to remember to thing. 1. The Solvent Partners (whether having Dr or Cr capital balance) will have to bring in cash an amount equivalent to their respective share of loss on realization, and 2. The Solvent Partners (having Cr capital balance) will have to bear the debit balance of insolvent partner in Last Agreed Capital Ratio. For this purpose, Last Agreed Capital would mean: Last Agreed Capital Fixed Capital System Capital as per balance sheet given in question. Fluctuating Capital System

Particulars Capital ( Opening Balance) Add: Reserves/PL A/c Less: PL A/c Last Agreed Capital Ratio

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