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You have learnt about the reconst i tut ion of apartn ership firm wh ich tak es place on a ccou ntof adm ission, retiremen t or death of a pa rtner. In su ch

a s itu ation while th e existing pa rtn ersh ip is d iss olved,the firm m ay continu e un der the sa me na me if the

partn ers so decide. In other words, i t resu lts in th e

dissolu tion of a pa rtnersh ip bu t n ot that of the firm.

According to Section 3 9 of th e par tn ersh ip Act 193 2,

the d iss olu tion of partnersh ip between all the partn ers

of a firm is called the dissolution of the firm. That

means the Act recognises the di f ference in the

brea king of relation sh ip between a ll th e part n ers of a

firm an d between some of the pa rtners ; and it is the

brea king or discon tinu an ce of relations h ip between

all the pa rtn ers which is term ed as th e diss olu tion of

partn ersh ip firm. This b rings a n en d to the existen ceo f f i r m , a n d n o b u s i n e s s i s t r a n s a c t e d a f t e r

dissolution except th e activities r elated to closing of

th e firm as th e affairs of th e firm ar e to be woun d u p

by selling firm s as sets an d p ayin g its liabilities a n d

discha rging the claims of th e partn ers.

5.1 Dissolut ion of Partne rship

As st ated ear lier dissolution of par tn ersh ip ch an ges

the exist ing re la t ions hip between p ar tn ers bu t th e

f i rm may cont inue i t s bus iness a s be fore . The

dissolution of par tn ersh ip may take place in a n y of

th e following ways :

(1) Chan ge in existing profit sh aring ratio among

partners;

(2) Admission of a n ew par tn er ;

LEARNING OBJECTIVES

After stu dy ing this chap ter,you w ill be able to :

State the m eaning of

dis s olution of

partnersh ip firm ;

Dif feren t ia te be tw een

dissolution of partner-

sh ip and d issolution of a

partnersh ip firm ;

Descr ib e t h e va r io u s

modes of dissolution of

the pa rtnersh ip firm;

E x p l a i n t h e r u l e s

relating to the s ettlemen t

o f c l a i m s a m o n g a l l

partners;

P r e p a r e R e a l i s a t i o n

Account;

Record journal entries

a n d p r e p a r e t h e

n e c e s s a r y l e d g e r

accounts to c lose thebooks of the f irm and

set t lement of pa rtners

claim.

Dissolution of Partnership Firm 5

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227Dis s olution of Partnersh ip Firm

(3) Ret irement of a par tn er ;

(4 ) Dea th of a pa r tne r ;(5) Ins olvency of a par tn er ;

(6) Completion of th e ventu re, if par tners hip is formed for tha t; and

(7) Expiry of the period of partn ersh ip, if partn ersh ip is for a specific period

of time ;

5.2 Diss olut ion of a f irm

Dissolution of a partnership firm may take place without the intervention of

cour t or by the ord er of a cou rt, in an y of th e ways sp ecified later in th is section .

It m ay be n oted tha t dissolution of th e firm necess ari ly brings in d issolu tion of

the par tnersh ip.

Dissolu tion of a firm ta kes place in a n y of th e followin g ways:

1. Dis s olution by Agreem ent: A firm is d iss olved :

(a) with th e cons ent of a l l the par tn ers or

(b) in a ccordance with a contract between the pa r tners .

2 . Compu lsory Dis solution: A firm is diss olved comp u lsorily in th e followin g cas es:

(a) when all the pa rtners or all bu t one partn er, become ins olvent, rendering

them incompetent to s ign a contract ;

(b) when th e bu siness of th e firm b ecomes i llegal; or

(c) when some event h as ta ken place which ma kes it unlawfu l for the partn ers

to carry on the bu siness of the firm in par tn ership, e .g ., when a p ar tn er

who is a ci t izen of a country becomes an alien enemy because of the

declara tion of war with h is cou n try an d India.

3 . On the ha ppen ing of certain contingencies : Su bject to contra ct between th epar tn ers, a firm is d issolved :

(a) if const itu ted for a fixed term , by the expiry of th at term ;

(b) if constituted to carry out one or m ore ventu res, by the completion th ereof;

(c) by the dea th of a pa r tn e r ;

(d) by the adju dicat ion of a par tn er as an ins olvent .

4 . Diss olution by Notice: In case of partn ersh ip at will, th e firm m ay be diss olved

if an y on e of th e par tn ers gives a notice in writ ing to the oth er pa rtn ers,

signifyin g his int ent ion of seek ing diss olu tion of th e firm.

5. Dissolution by Court: At the sui t of a par tner , the court may order a

par tn ersh ip firm to be diss olved on an y of th e followin g grou nd s:

(a ) when a pa r tn e r becomes insan e ;

(b) when a p artn er becomes p erman ently incap able of performing his du ties

as a pa r tne r ;

(c) when a pa rtn er is guilty of m iscondu ct which is likely to advers ely affect

the bu siness of th e firm;

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2 28 Accountancy Not-for-Profit Organis a tion and Partners h ip Accounts

(d) when a pa r tner persis tent ly comm its breach of par tn ership agreement ;

(e) when a par tn er has t ran sferred the whole of his interest in th e firm to athi rd par ty;

(f) when th e bu siness of the f irm cann ot be carr ied on except a t a loss; or

(g) when, on any groun d, the cou rt regards dissolu t ion to be jus t and

equitable.

Dist inct ion between Dissolut ion of Partnership and Dissolut ion of Firm

Bas is Dis s olution of Partners h ip Dis s olu tion of Firm

1. Term in at ion of Th e bu sin es s is not Th e bu sin es s of th e firm is

bu s in es s term in a ted. closed.

2. Sett lem en t of As sets an d lia bilit ies are As sets are s old an d

a ss ets an d reva lu ed an d n ew b ala n ce lia bilit ies are p aid -off.liabilities sh eet is d rawn .

3. Cou rts Cou rt does n ot in terven e A firm ca n be d is solved b y

in terven tion beca u se pa r tn ersh ip is th e cou rt s order.

dissolved by mu tu al

agreement.

4 . Econ om ic Econ om ic rela t ion sh ip Econ om ic rela t ion sh ip

rela t ion sh ip between th e pa r tn ers between th e pa r tn ers

con t in ues th ou gh in com es to a n en d .

a ch an ged form.

5 . C los u r e of b ook s Does n ot re qu ir e b ec au s e Th e b ook s of a cc ou n t a r e

th e b u s in es s is n ot closed.

terminated.

6 . O the r d isso lu t ion It may or may no t involve It necessa r ily involves

d is s olu t ion o f t h e fir m . d is s olu t ion o f p a rt n er s h ip .

Test your Understanding I

Stat e giving rea sons , which of the following st atem ents are t ru e or false:

1. Diss olu tion of a par tner sh ip is different from dissolution of a firm,

2 . A partn ersh ip is d isso lved when th ere is a death of a partn er ,

3 . A fi rm is d isso lved when a l l par tn ers g ive consent to it .

4. A firm is comp ulsori ly dissolved when a pa rtn er decide to ret ire.

5. Diss olu tion of a firm necess ari ly involves dissolution of par tner sh ip.

6. A firm is compu lsorily dissolved when a l l partn ers or when al l except one par tner

become involvent.7 . Cour t can order a firm to be d isso lved when a pa rtner becomes ins ane .

8 . D is s o l u t io n o f p a r t n e r s h i p c a n n o t t a k e p l a c e wi th o u t i n t e r ve n t i on o f

t he cou r t .

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5 .3 Se t t l ement o f Accounts

In case of dissolu t ion of a f irm, th e firm ceases to condu ct bu siness a nd ha s to

settle its accoun ts. For th is pu rpose, it disposes off all its as sets for sa tisfyin g all

th e claims a gains t it. In th is context it sh ould be noted th at, su bject to agreement

among the par tners , the fol lowing rules as provided in Sect ion 48 of the

Partn ersh ip Act 1932 s ha ll app ly.

(a) Treatment of Losses

Loss es, inclu ding deficien cies of capital, sh all be paid :

(i) first ou t of profits,

(ii) next out of capital of par tn ers, an d

(iii) las tly, if n ecessa ry, by th e par tn ers ind ividua lly in t heir profits s h ar in g ratio.

(b) Application of Assets

The as sets of the firm, inclu ding any su m contribu ted by the partn ers to ma keu p d eficiencies of capital, sh all be a pplied in th e followin g ma nn er an d order :

(i) In p aying th e debts of th e firm t o the third pa rt ies;

(ii) In paying each pa r tner proport ionate ly wha t i s du e to him/ her f rom the

firm for ad vances as distingu ished from ca pital (i.e. par tn er loan );

(iii) In p aying to each part ner pr oportionately what is du e to him on a ccou nt

of cap ital; an d

(iv) th e residue, if an y, sh all be divided am ong the pa rtn ers in th eir profi t

sh aring rat io.

Thu s, th e am oun t realised from a ss ets along with contribu tion from pa rtners , if

requ ired, sh all be u tilised first to p ay off the ou tside liabilities of th e firm su ch as

creditors, loan s, ba nk overdra ft, bill pa yables, etc. (it may be noted th at s ecur ed

loans ha ve precedence over the u ns ecured loan s); the ba lan ce shou ld b e appliedto repay loans an d a dvan ces mad e by the par tn ers to the firm. (in case th e

balance amou nt i s not adequa te enough to pay off su ch loan s an d advances,

they are to be paid propart ionately); and surplus, if any is to be uti l ised in

settlemen t of th e capital accou nt b alan ces, after adju sting all profits a n d loss es.

Private Debts a nd Firms Debts : Where both the d ebts of the firm an d private debts of

a p ar tn er co-exist, th e followin g rules, as sta ted in Section 49 of th e Act, sh all ap ply.

(a) Th e property of th e firm sh all be app lied first in th e paymen t of debts of th e

firm a nd then the su rplus, if an y, sh all be divided am ong the partn ers as

per th eir claims, wh ich can be u tilised for pa ymen t of th eir pr ivate liabilities.

(b) The private property of an y pa rtn er sh all be app lied first in pa yment of

his private debts an d th e su rplus , if an y, ma y be u ti lised for paymen t of

th e firms debts , in ca se t h e firms liab ilities exceed t h e firms as sets .It ma y be noted th at th e private property of th e partn er does not includ e the

persona l properties of his wife an d ch ildren. Thu s, if th e as sets of th e firm ar e

not a dequ ate en ough to pay off firms liab ilities, th e par tn ers h ave to con tribu te

out of th eir n et private a ss ets (private ass ets m inu s p rivate liab ilities).

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Inabil i ty of a Partner to Contribute Towards Deficiency

In the context of se t t lement of accounts amon g the pa rtners there i s s t i ll another

importan t as pect to be noted , i.e ., when a partn er i s un able to cont r ibute towards

the deficiency of his capital accou nt (the accoun t fina lly sh owing a debit ba lance),

he/ she i s s a id to be inso lvent , an d th e su m not recoverable is t rea ted a s capi ta l loss

for the firm . In th e abs ence of an y agreemen t, to the contrar y, su ch a ca pital loss is

to be borne by the rem aining solvent p art ners in accordan ce with th e principle laid

down in Garn er vs . Murray case , which s ta tes th a t th e so lvent pa rtners have to bear

such loss in the rat io of their capitals as on the date of dissolution. However, the

accoun ting treatmen t relat ing to diss olut ion of par tner sh ip on accou nt of insolvency

of partn ers i s no t be ing taken u p a t th is s tage .

5.4 Accounting Treatment

When th e firm is diss olved, its books of accoun t ar e to be closed a n d th e profit or

loss arising on realisation of i ts assets and discharge of l iabil i t ies is to becompu ted. For this pu rpose, a Realisa tion Accou nt is prepa red to ascertain th e

n et effect (profit or loss ) of realisat ion of as sets an d p aym ent of liab ilities which

ma y be is tra ns ferred to part ners cap ital accoun ts in th eir profit sh aring rat io.

Hence, al l as sets (other tha n cas h in ha nd b an k balan ce and fict it ious a ss ets, if

an y), an d a ll external l iab il it ies a re tra ns ferred to th is accoun t. It a lso records

th e sale of as sets , an d pa ymen t of liab ilities an d realisa tion expen ses . Th e balan ce

in this accou nt is term ed as p rofi t or loss on realisa tion wh ich is tran sferred to

pa rtn ers capital accoun ts in th ier profi t sh aring ra t io (see figure 5 .1)

Dr. Real isat ion Acco unt Cr.

Particulars Amount Particu lars Am ount

(Rs .) (Rs .)La n d a n d Bu ild in g xxx Su n dry creditors xxx

Pla n t a n d Ma ch in ery xxx Bills pa ya b les xxx

Fu rn itu re a n d Fit t in gs xxx Ba n k overdra ft xxx

Bills receiva b les xxx Ou ts ta n din g expen s es xxx

Su n dry debtors xxx Provis ion for dou b tfu l deb ts xxx

Ca s h / Ba n k xxx Ca s h / Ba n k (s a le of a s s ets ) xxx

(pa ym en t of lia b ilit ies ) Pa r tn er s ca p ita l a ccou n t xxx

Ca s h / Ba n k xxx (a s s ets ta ken by th e pa r tn er )

(paym en t of u n recorded liabilities) Los s (t ra n s fer red to pa r tn ers xxx

Pa r tn er s ca p ita l a ccou n t xxx ca pita l a ccou n ts )

(liability ass um ed by the pa rtn er)

Profit (t ra ns fer red to pa rtn ers xxx

capital accoun ts in th eir profi t

sha ring ra t io)

Total xxxxx Total xxxxx

Fig. 5 .1 : Form at of Realisation Account

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I l lustrat ion 1

Su priya an d Monika a re par tn ers, who sh are pr ofit in th e ratio of 3:2. Following

is th e balan ce sh eet as on March 31 , 2007.

Balance Sh eet of Supriya and Monika as on March 3 1, 2 00 7

Liabilities Amount Assets Am ount

(Rs .) (Rs .)

Su pr iya s Ca p ita l 32,500 Ca s h a n d Ba n k 40,500

Mon ika s Ca pita l 11,500 Stock 7,500

Su n dry Cred itors 48,000 Su n dry debtors 21,500

Res erve fu n d 13,500 Less: Provis ion 500 21,000

for dou btful debts

Fixed As s ets 36,500

1 ,0 5 ,5 0 0 1 ,0 5 ,5 0 0

Th e firm was diss olved on March 31 , 200 7 . Close th e books of th e firm with

th e followin g in form at ion:

(i) Debtors rea lised a t a discou nt of 5%,

(ii) S tock real ised a t Rs.7,000,

(iii) Fixed ass ets realised at Rs.42 ,000,

(iv) Realisa tion expenses of Rs.1,500,

(v) Creditors ar e paid in full.

Prepare necessa ry ledger accoun ts.

Solut ionBooks of Supriya and Monik a

Real isat ion Accoun t

Dr. Cr.

Particulars Am ount Particu lars Am ount

(Rs .) (Rs .)

As s ets t ra n s fer red : Provis ion for dou b tfu l deb ts 500

Stock 7,500 Su n dry creditors 48,000

Su n dry debtors 21,500 Ban k

Fixed a s s ets 36,500 Deb tors 20,425

Ba n k Stock 7,000

Cred itors 48,000 Fixed a s s ets 42,000 69,425

Rea lisa t ion expen s es 1,500

Profi t t ran sferred to:

Su p r iya Ca pita l 1,755

Mon ika Ca p ita l 1 ,170 2,925

1 ,1 7 ,9 2 5 1 ,1 7 ,9 2 5

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Partne rs Capital Acc oun ts

Dr. Cr.

Date Particulars J.F. S upriy a Monik a Date Particula rs J.F. S upriy a Monik a

(Rs .) (Rs .) (Rs .) (Rs .)

Bank 42 ,355 1 8 ,070 Ba la n ce b / d 32 ,500 11 ,500

Reserve fu n d 8 ,100 5 ,400

Rea lisa tion (Profit ) 1 ,755 1 ,170

42 ,355 18 ,070 42,355 18 ,070

Cash and Bank Acco unt

Dr. Cr.

Date Particulars J.F. Am oun t Date Particula rs J.F. Am oun t

(Rs .) (Rs .)

Ba la n ce b / d 40 ,500 Realisation 48 ,000Realisa tion 69 ,425 Realisation 1 ,500

Su priya s Cap ita l 42 ,355

Mon ikas Capita l 18 ,070

1 ,0 9 ,9 2 5 1 ,0 9 ,9 2 5

5 . 4 .1 J o ur n a l En t r i es

1 . For t rnas fer of ass e ts

All as set accou nts exclu ding cash , ban k an d th e fict it iou s a ss ets, i f an y are

closed b y tran sfer to the debit of Realisa tion Accoun t at t heir book values . It

ma y be noted that su ndr y debtors are t rans ferred a t gross value and th e

provision for d oub tfu l debts is tran sferred to th e credit side of Realisation

Accou n t a lon g with liab ilities. The s am e th ing will ap ply to fixed a ss ets , ifprovision for d epreciation a ccou nt is ma int ained.

Rea lis a t ion A/ c Dr.

To Ass ets (Individu ally) A/ c

2. For trans fer of l iabilit ies

All external liability accounts including provisions, if any, are closed by

tran sferring them to the credit of Realisa tion a ccou nt.Lia b ilit ies (in dividu a lly) Dr.

To Realisa t ion A/ c

3 . For sa le of a s se tsBa n k A/ c Dr.


4 . For an ass e t taken over by a partner Pa r tn ers Ca pita l A/ c Dr.


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5. For pay men t of liabilit ies


To Bank A/ c

6. For a l iability w hich a partner takes res ponsibility to discharge

Ra lis a t ion A/ c Dr.

To Partn ers Ca pital A/ c

7. For se t t lement with th e creditor through t ran sfer of ass e ts when a creditor

accepts an asset in full and final set t lement of his account, journal entry

needs to be recorded. But, if the creditor accepts an ass et only as p art p ayment

of his/ her d u es, the en try will be made for cash paymen t only. For examp le,

a creditor to whom Rs. 10,000 was due accepts office equipment worth

Rs. 8,000 a n d is paid Rs. 2,000 in cas h, th e followin g en try sha ll be ma de

for th e paym ent of Rs. 2,000 only.


To Bank A/ c

However, when a creditor accepts an asset whose value is more than the

am oun t du e to him, h e/ sh e will pay cash to the frim for the d ifference for which

th e ent ry will be:

Ba n k A/ c Dr.


8. For paym ent of realisat ion expenses

(a) When some expenses a re incu rred and paid by the firm in th e process of

realisation of as sets an d pa ymen t of liab ilities:


To Bank A/ c

(b) When realisa t ion expens es are p aid by a pa r tner on behal f of the f irm:



(c) When a par tn er has a greed to u ndertak e the dissolut ion work for an

agreed remu nera tion bear th e realisa tion expens es:

(i) if pa yment of realisa tion expens es is m ade by the firm

Pa r tn ers Ca pita l A/ c Dr.

To Bank A/ c

(ii) if the pa rtn er hims elf pays th e realisa tion expens es, no entr y is requ ired

(iii) For agreed remu nerat ion to such par tn er



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9. For realisa tion of any unrecorded as sets includ ing goodw ill, if any

Ba n k A/ c Dr.


10.For settlement of any unrecorded liability


To Bank A/ c

11.For transfer of profit and loss on realisation

(a) In case of profit on r ealisa tionRea lis a t ion A/ c Dr.

To Par tn ers Cap ital A/ c (individu ally) A/ c

(b) In ca se of loss on realisa tion

Pa rtn ers Ca pita l A/ c (in dividu ally) Dr.To Realisa t ion A/ c

12.For transfer of accumulated profits in the form of reserve fund or general

reserve:

Res erve Fu nd / G en era l Res erve A/ c Dr.

To Par tn ers Cap ital A/ c (individu ally)

13 . For trans fer of fictitious as s ets , if any , to pa rtners capital accoun ts in

their profit sharing ratio:

Pa rtn ers Ca pita l A/ c (in dividu ally) Dr.

To Fictitious Ass et A/ c

14 . For pay m ent of loans du e to partners

Pa r tn ers Loa n A/ c Dr.

To Bank A/ c

15.For settlement of partners accounts

If th e partn ers cap ital accoun t sh ows a debit balance, he brings in th e

necess ary cas h for which the en try will be:

Ba n k A/ c Dr.


The ba lan ce is pa id to partn ers whose capital accoun ts sh ow a credit balan ce

an d t he following entry is r ecorded.

Pa r tn ers Ca p ita ls A/ c s (in d ividu a lly) Dr.

To Bank A/ c

It ma y be noted th at th e aggregate amou n t finally pa yable to the part ners

must equal to the amount avai lable in bank and cash accounts . Thus, a l laccoun ts of a firm are closed in cas e of dissolution.

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Test your Understanding II

Tick () the Correct Answer

1. On d isso lu t ion of a firm, ban k overdraf t i s t ransferred to :

(a ) Ca s h Ac cou n t

(b ) B a n k Ac co u n t

(c ) Rea l isa t i on Aaccoun t

(d) Partners capita l Accoun t .

2 . On d isso lu t ion of a fi rm, partners loan account i s t ran sferred to :

(a ) Rea l isa t i on Accoun t

(b) Partners Capi ta l Accoun t

(c ) Pa r tne r s Cur ren t Accoun t

(d) None of the above.

3. After tran sferring liabil it ies like creditors a nd b ills payables in th e Realisat ion

Accoun t , in the absen ce of an y informa t ion regard ing then payment , s uch

liabil it ies are t reated as :(a ) Ne ve r p a id

(b ) F u lly p a id

(c ) P a rt ly p a id


4 . When rea l isa t ion expenses are paid by the fi rm on behal f of a partn er , su ch

expenses are debi ted to :


(b) Partners Capi ta l Accoun t

(c ) Pa r tne r s Loan Accoun t


5 . U nreco rded a sse t s when t aken ove r by a pa r tne r a re shown in :

(a) Debit of Real isa t ion Accoun t

(b) Debit of Bank Accoun t

(c) Credit o f Reali sa t ion Accoun t(d) Credit of Bank Accoun t .

6 . U nreco rded l iab ilit ie s w hen pa id a re show n in :

(a) Debit of Real isa t ion Accoun t

(b) Debit of Bank Accoun t

(c) Credit o f Reali sa t ion Accoun t

(d) Credit of Bank Accoun t .

7 . The accum ula t ed p ro fit s and re se rves a re t rans fe r red t o :


(b) Partners Capi ta l Accoun ts

(c ) B a n k Ac co u n t


8 . On d isso lu t ion of the fi rm, partners capi ta l accounts ar e c losed through:


(b ) D rawings Accoun t(c ) B a n k Ac co u n t

(d ) Loan Accoun t .

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I l lustrat ion 2

Sita, Rita an d Meeta ar e part ners sh aring profi t and losses in th e rat io of 2:2:1

Their balan ce sheet as on March 3 1, 200 7 is as follows:

Balance She et of Si ta, Rita and Meet a as on March 3 1, 2 00 7

Liabilities Am ount Assets Am ount

(Rs .) (Rs .)

Res erve fu n d 2,500 Ca s h a t ba n k 2,500

Creditors 2,000 S tock 2,500

Ca p it a ls : Fu rn itu re 1,000

Sit a 5,000 Deb tors 2,000

Rit a 2,000 Pla n t a n d Ma ch in ery 4,500

Meeta 1,000 8,000

1 2 ,5 0 0 1 2 ,5 0 0

Th ey decided to dissolve the b u sines s. The followin g amou n ts were realised:

Plan t an d Machinery Rs.4,250, Stock Rs.3,500, Debtors Rs.185 0, Furn itu re 750.

Sita agreed to bear all realisa tion expenses . For th e service Sita is paid Rs.60 .

Actua l expens es on rea lisation am oun ted to Rs.450.Creditors pa id 2% less.

There was a n u nrecorded ass e ts of Rs.250, which was taken over by Rita a t

Rs.200.

Prepare th e necess ary accoun ts to close the b ooks of th e firm.

Solut ionBooks of Si ta, Ri ta and Meet a

Dr. Real isat ion Acco unt Cr.

Particu la rs Amount Particu lars Am ount (Rs .) (Rs .)

Cred itors 2,000Stock 2,500 Rita s ca p ita l 200Fu rn itu re 1,000 [Un recorded a s s ets ]Deb tors 2,000 Ba n k [a s s ets rea lis ed ]:Pla n t a n d Ma ch in ery 4,500 Pla n t a n d Ma ch in ery 4,250Ba n k [Cred itors ] 1,960 Deb tors 1,850Sita s ca p ita l 60 Stock 3,500

(rea lis a t ion expen s es ] Fu rn itu re 750 10,350Profi t t ran sferred to:Sita s ca p ita l 212Rita s ca p ita l 212

Meeta s ca pita l 106 530

1 2 ,5 5 0 1 2 ,5 5 0

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Dr. Partne rs Capital Accou nt s Cr.

Da te Particula rs J.F. S ita Rita Meeta Date Particula rs J.F. S ita Rita Meeta

(Rs .) (Rs .) (Rs .) (Rs .) (Rs .) (Rs .)

Bank 450 Ba la n ce b / d 5 ,000 2,00 0 1,000Realisation (asset) 200 Res erve fu n d 1 ,0 00 1 ,000 500Bank 5 ,822 3 ,012 1 ,606 Realisa tion

[profit ] 212 212 106Realisation

(expen ses ) 60

6 ,272 3 ,212 1 ,606 6 ,272 3 ,212 1 ,606

Dr. Bank Accou nt Cr.


(Rs .) (Rs .)

Ba la n ce b / d 2 ,500 Rea lisa tion (Creditor) 1 ,960Realisa tion Sita s Capita l 450(a s s ets rea lis ed ) 10 ,350 [expen s es ]

Sita s Capita l 5 ,822Rita s Capita l 3 ,012

Meeta s cap ita l 1 ,606

12 ,850 12 ,850

l lus t ra t ion 3

Nayan a an d Aru sh i were pa rtn ers s ha ring profi ts equa lly Their Balance Sheet

as on March 3 1, 200 7 was a s follows:

Balance Sh eet of Nayana and Arushi as on March 3 1, 2 00 7


(Rs .) (Rs .)

Ca p it a ls : Ban k 30,000

Nayan a 1,00,000 Deb tors 25,000

Aru sh i 50 ,000 1,50,000 Stock 35,000

Cred itors 20,000 Fu rn itu re 40,000

Aru s h is cu r ren t a ccou n t 10,000 Ma ch in ery 60,000

Workm en Com pen sa t ion Fu nd 15,000 Na ya n a s cu rren t a ccou nt 10,000

Ba n k overdra ft 5,000

2 ,0 0 ,0 0 0 2 ,0 0 ,0 0 0

Th e firm was dissolved on th e above date:

1. Nayana took over 50% of the s tock a t 1 0% less on it s book value , andthe rema ining stock was s old at a gain of 15%. Furn itu re and Machinery

realised for Rs.30,00 0 a n d Rs.50 ,000 resp ectively;

2. There was an u nrecorded investment which was sold for Rs. 25,000;

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3. Debtors rea l ised 90 % only and Rs.1,200 were recovered for bad debts

written -off las t year;

4 . There was an outsta nding bill for repairs which ha d to be paid for

Rs.2,000.

Record n ecessa ry journ al ent r ies an d p repare ledger a ccou nts to c lose the

books of th e firm.

Solut ion

Books of Nayan a and Arushi

Jour nal

Date Particulars L.F. Debit Cre d it

Am ount Am ou n t

(Rs .) (Rs .)

Rea lis a t ion A/ c Dr. 1,60,000

To Deb tors 25,000

To Stock A/ c 35,000

To Fu rn itu re A/ c 40,000

To Ma ch in ery A/ c 60,000

(Ass ets tran sferred to Realisa t ion Account )

Creditors A/ c Dr. 20,000

Ba n k overd ra ft A/ c Dr. 5,000

To Rea lis a t ion A/ c 25,000

(Liabilities transferred to Realisation Account)

Rea lis a t ion A/ c Dr. 27,000

To Ba n k A/ c 27,000

(Creditors, Bank overdraft , Outstanding

repa ir bi ll paid)

Ba n k A/ c Dr. 1,57,825

To Rea lis a t ion A/ c 1,57,825

(Ass ets sold an d ba d debts recovered)

Na ya n a s Ca p ita l A/ c Dr. 15,750

To Rea lis a t ion A/ c 15,750

(Half stock ta ke over by Nayana at 1 0% less)

Rea lis a t ion A/ c Dr. 15,575

To Naya n a s Cu r ren t A/ c 5,788

To Aru s h is Cu r ren t A/ c 5,787

(Realisation profit tran sferred to p ar tn ers

current account)

Workm a n Com pen s a tion Fu n d A/ c Dr. 15,000

To Na ya n a s Cu r ren t A/ c 7,500

To Aru s h is Cu r ren t A/ c 7,500

(Compen sat ion fun d t ra nsfered to partners

Curren t accoun t s )

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Aru s h i Cu r ren t A/ c Dr. 23,287

To Aru s h is Ca p ita l A/ c 23,287

(Current accoun t balance t ran sferred to

Capi ta l accoun t )

Na ya n a Ca p ita l A/ c Dr. 12,462

To Na ya n a s Cu rren t A/ c 12,462

(Current account ba lance t rans ferred to Capi ta l

accoun t )

Na ya n a s Ca p ita l A/ c Dr. 87,538

Aru s h is Ca pita l A/ c Dr. 73,287

To Ba n k A/ c 1,60,825

(Final am ounts due to partn ers paid)


Dr. Cr.


(Rs .) (Rs .)

Cred itors 20,000

Deb tors 25,000 Ba n k overdra ft 5,000

Stock 35,000 Ban k:

Fu rn itu re 40,000 In ves tm en t 25,000

Ma ch in ery 60 ,000 1,60,000 Fu rn itu re 30,000

Ban k: Ma ch in ery 50,000

Cred itors 20,000 Debtors (90%) 31,500

Ba n k overd ra ft 5,000 Stock : 20,125

Ou ts ta n d in g b ill 2 ,000 27,000 Ba d deb ts

Profit t r a n s fer red to : recovered 1 ,200 1,57,825

Nayan a s capita l 5,788 Na ya n a s ca pita lAru sh is capita l 5 ,787 11,575 (s tock ta ken over ) 15,750

1 ,9 8 ,5 7 5 1 ,9 8 ,5 7 5

Partn ers Current Acc oun ts

Dr. Cr.

Date Particulars J.F. Nay ana Arus hi Date Particula rs J.F. Nay ana Arus hi

(Rs .) (Rs .) (Rs .) (Rs .)

Ba la n ce b / d 10 ,000 Ba la n ce b / d 10 ,000

Realisa tion 15 ,750 Workm en 7 ,500 7 ,500

Aru shis capital 23 ,287 Com pen sa tion

Fund

Rea lisa tion (profit ) 5 ,788 5 ,787Nayan as Capita l 1 2 ,462

25 ,750 23 ,287 25 ,750 23 ,287

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Partn ers Current Acc oun ts

Dr. Cr.Date Particulars J.F. Nay ana Arus hi Date Particula rs J.F. Nay ana Arus hi

(Rs .) (Rs .) (Rs .) (Rs .)

Nayan as cu rren t 12 ,462 Ba la n ce b / d 1 ,0 0 ,0 0 0 50 ,000

accou n t Aru sh is 23 ,287

Bank 87 ,538 7 3 ,287 cu rren t a ccou n t

1 ,0 0 ,0 0 0 7 3 ,287 1 ,0 0 ,0 0 0 73 ,287

Bank Acco unt

Dr. Cr.


(Rs .) (Rs .)

Ba la n ce b / d 30 ,000 Realisation 27 ,000

Realisa tion 1 ,5 7 ,8 2 5 Nayan as capita l 87 ,538

Aru sh is capita l 73 ,287

1 ,8 7 ,8 2 5 1 ,8 7 ,8 2 5

Test your Understanding III

Fill in t he Correc t Word(s):

1 . Al l a s s e t s (excep t ca sh / ban k and f ic t it ious a s se t s ) a re t ran s fer red t o the

(Deb it/ Cre dit) side of Accou n t (Realisa tion / Cap ital).

2. All (intern al/ externa l) l iabil it ies a re tr an sferred to the

(Debit/ Credit) side of acccou n t (Ban k/ Realisat ion).

3 . Accumu lated losses are t ran sferred to (Current / Capi ta l Accoun ts)in (equ al ra tio/ profit sh ar ing rat io).

4. If a l iabil ity is as su med b y a partn er, such Partn ers Cap ital Accoun t is

(debited / credited).

5 . If a p a r t n e r t a k e s o ve r a n a s s e t , s u c h (P a r t n e r s C a p i t a l Ac c ou n t ) i s

(deb ited/ cre dited ).

6. No entry is required when a (par tner / creditor) accepts a fixed

ass e t in pa yment of h is du es .

7 . When c red itor accep t s an a sse t w hose va lue is more t han t he amoun t due t o

him , he will (pa y/ not p ay) th e excess a m oun t which will be

cre dited Accou n t.

8 . When th e firm h as a greed to pay the partner a f ixed amoun t for rea li sa t ion

work irrespective of the actu al am oun t spent , such fixed am oun t is debited to

(Realisa t ion/ Capital) Account a nd Credited to (Capital / Ban k) Accoun t.

9 . Partn ers loan i s (recorded/ not recorded) in the (Reali sa t ion

Account).

10. Pa r tn e r s cu r ren t accoun t s a re t ran s fe r red t o re spec t ive

Partn ers (Loan/ Capital) Account s.

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I l lustrat ion 4

Following is th e Balan ce Sheet of Ash wani and Bhara t on Mar ch 31 , 20 07 .

Balance Sh eet Ashwani and Bharat as on March 3 1, 2 00 7

Liabilities Amount Assets Am ount (Rs .) (Rs .)

Creditors 76,000 Ca s h a t ba n k 17,000Mrs .As h wa n is loa n 10,000 Stock 10,000Mrs .Bh a ra t loa n 20,000 In ves tm en ts 20,000In ves tm en t flu ctu a t ion fu n d 2,000 Deb tors 40,000Res erve fu n d 20,000 Less: ProvisionCa p it a ls : for dou b t fu l deb ts 4 ,000 36,000As h wa n i 20,000 Bu ild in gs 70,000

Bh a ra t 20,000 40,000 Goodwill 15,000

1 ,6 8 ,0 0 0 1 ,6 8 ,0 0 0

The firm was dissolved on that date. The following was agreed transactions took place.

(i) Aswhan i promised to pay Mrs. Ash wanis loan an d took away stock for

Rs.8,000.

(ii) Bhara t took away ha lf of the investment a t 10% less . Debtors rea lised

for Rs.38 ,00 0. Creditors were pa id at less of Rs.38 0. Bu ildings r ealised

for Rs.1,30 ,000, Goodwill Rs.12,00 0 an d th e remaining Investm ent were

sold at Rs.9,000. An old typewriter n ot recorded in th e books was ta ken

over by Bh ara t for Rs. 600. Realisation expenses a mou nted to Rs. 2,000.

Prepare Realisa tion Accou nt , Partn ers Capital Accou nt an d Ba nk Accou nt .

Solut ion

Books of Ashwani and BharatDr. Real isat ion Acco unt Cr.


(Rs .) (Rs .)

In ves tm en t 20,000 Provis ion for dou b tfu l deb ts 4,000

Deb tors 40,000 Cred itors 76,000

Bu ild in gs 70,000 Mrs . As h wa n i loa n 10,000

Stock 10,000 Mrs . Bh a ra t loa n 20,000

Good will 15 ,000 1,55,000 In ves tm en t flu ctu a t ion fu n d 2,000

As h wa n is Ca pita l 10,000 As h wa n is Ca p ita l[s tock ] 8,000

(Mrs .As h wa n is loa n } Bh a ra t s ca pita l (Typewr iter ) 600

Ba n k (Mrs . Bh a ra t s loa n ) 20,000 Bh ara t s ca p ita l (In ves tm en t) 9,000

Ba n k (cred itors ) 75,620 Ban k:

Ba n k (rea lis a t ion expen s es ) 2,000 In ves tm en t 9,000

Profit t ra n s fer red to: Deb tors 38,000As h wa n is Ca p ita l 27,990 Bu ild in gs 1,30,000

Bha rat s Capital 27 ,990 55,980 Good will 12 ,000 1,89,000

3 ,1 8 ,6 0 0 3 ,1 8 ,6 0 0

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Partners Capital Accounts

Dr. Cr.Date Particulars J.F. As hw an i Bharat Date Particula rs J.F. As hw an i Bharat

(Rs ,) (Rs ,) (Rs ,) (Rs ,)

Realisa tion Ba la n ce b / d 20 ,000 20 ,000

(s tock ) 8 ,0 00 Res erve fu n d 10 ,0 00 1 0 ,000

Realisa tion Realisa tion 10 ,000

[s a le of typ ewr iter ] 600 [Mrs . Ash win is

Rea lisa tion loan]

[in ves tm en t] 9 ,000 Realisa tion (profit) 27 ,990 27 ,990

Bank 59 ,990 48 ,390

67 ,990 57 ,990 67,990 57 ,990

Bank Acco untDr. Cr.


(Rs .) (Rs .)

Ba la n ce b / d 17 ,000 Rea lisa tion [creditors ] 75 ,620

Realisa tion 1 ,8 9 ,0 0 0 Rea lis a tion [expen s es ] 2 ,000

Realisation

(Mrs .Bh ara ts loa n ) 20 ,000

Ash wan is ca pita l 59 ,990

Bh a ra t s ca p ita l 48 ,390

2 ,0 6 ,0 0 0 2 ,0 6 ,0 0 0

Do it Yourself

Give th e jou rn al ent ry(ies) to be record ed for the following, in ca se of the diss olution

of a partnership firm.

1 . For c lo su re of a s se t s accoun t s .

2 . For c losure of liab ili t ies accounts .

3 . F or s a le of a s s e ts .

4 . For se t t lement of a creditor by t ransfer of fixed ass e ts to h im.

5 . For expenses of rea l isa t ion when actua l expenses are paid by the partner on

behalf of the firm.

6 . When a pa rtner d ischarges the l iab i li ty of the f irm.

7 . For paymen t o f pa r tne r s l oan .

8 . For se t t lemen t o f cap it a l accoun t s .

Il lust rat ion 5

Sonia, Rohit an d Udit are pa rtn ers s ha ring profi ts in th e rat io of 5:3:2. Their

Balance Sh eet as on March 3 1, 200 7 was a s follows:

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Balance Sh eet o f Sonia, Rohi t and Udit as on March 3 1, 2 00 7


Creditors 30,000 Bu ild in gs 2,00,000Bills pa ya b le 30,000 Ma ch in ery 40,000Ba n k loa n 1,20,000 Stock 1,60,000Son ia s h u s ba n d s loa n 1,30,000 Bills receiva ble 1,20,000Gen era l res erve 80,000 Fu rn itu re 80,000Ca p it a ls : Ca s h a t ba n k 60,000Son ia 70,000Roh it 90,000Udit 1 ,10 ,000 2,70,000

6 ,6 0 ,0 0 0 6 ,6 0 ,0 0 0

The firm was diss olved on th at d at e. Close th e books of th e firm with followin ginformation:

1 . B u i ld i n g s r e a l is e d fo r R s . 1 , 9 0 , 0 0 0 , B i lls r e c e iv a b l e r e a li s e d fo r

Rs .1 ,10 ,000; S tock rea l i sed Rs .1 ,50 ,000; and Machine ry so ld fo r

Rs.48,000 an d fu rni ture for Rs. 75,000,

2. Ban k loan was s ett led for Rs.1,30,000 . Creditors an d Bills pa yable were

set t led a t 1 0% discou nt ,

3 . Rohi t paid the rea lisa t ion expenses of Rs.10,000 an d h e was to get a

remu n eration of Rs.12,000 for comp leting the dissolution p rocess.

Prepare necessa ry ledger accoun ts.

Solut ionBooks o f Sonia, Rohi t and Udit

Dr. Real isat ion Accoun t Cr.

Particulars Am ount Particu lars Am ount (Rs .) (Rs .)

Bu ild in gs 2,00,000 Cred itors 30,000Mach in ery 40,000 Bills pa ya b le 30,000Stock 1,60,000 Ba n k loa n 1,20,000Bills receiva ble 1,20,000 Son ia s h u s ba n d s loa n 1,30,000Fu rn itu re 80 ,000 6,00,000 Ban k:Ba n k (Ba n k Loa n ) 1,30,000 Bu ild in gs 1,90 ,000Ban k Bills receiva ble 1,10 ,000[cred itors a n d Bills pa ya b le] 54,000 Stock 1,50 ,000Ba n k [Son ia s h u s ba n ds loa n ] 1,30,000 Ma ch in ery 48,000Roh its ca p ita l 12,000 Fu rn itu re 75 ,000 5,73,000(res lis a t ion expen s es ) Los s t ra n s fer red to

capi ta l accounts :Son ia 21,500Roh it 12,900Udit 8 ,600 43,000

9 ,2 6 ,0 0 0 9 ,2 6 ,0 0 0

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Dr. Cr. D a t e P a r tic u l a r s J . F. S o n i a R o h i t Ud i t D a t e P a r tic u l a r s J . F. S o n i a R o h i t Ud it

(R s . ) (R s . ) (R s . ) (R s . ) (R s . ) (R s . )

R e a l i s a t io n 2 1 , 5 0 0 1 2 , 9 0 0 8 , 6 0 0 B a l a n c e b / d 7 0, 0 00 9 0, 0 00 1 ,1 0 ,0 0 0

(Lo s s ) R e a l is a t i o n 1 2 , 0 0 0

B a n k 8 8 , 5 0 0 1 ,1 3 ,1 0 0 1 ,1 7 ,4 0 0 (e xp e n s e s )

G e n e r a l 4 0 , 0 0 0 2 4 , 0 0 0 1 6 , 0 0 0

r e s e r ve

1 ,1 0 ,0 0 0 1 ,2 6 ,0 0 0 1 ,2 6 ,0 0 0 1 ,1 0 ,0 0 0 1 ,2 6 ,0 0 0 1 ,2 6 ,0 0 0

Bank Acco unt

Dr. Cr.


(Rs .) (Rs .)

Ba la n ce b / d 60 ,000 Rea lisa t ion [ban k loa n ] 1 ,3 0 ,0 0 0

Realisa tion 5 ,7 3 ,0 0 0 Realisation 54 ,000

(a s s ets rea lis ed ) [cred itors a n d

bills p ayable]

Realis ation 1 ,3 0 ,0 0 0

(Sonias hu sba nd loan)

Son ias ca pita l 88 ,500

Roh its capita l 1 ,1 3 ,1 0 0

Udits ca pita l 1 ,1 7 ,4 0 0

6 ,3 3 ,0 0 0 6 ,3 3 ,0 0 0

Note: No entr y has been recorded in firm s books for the actu al real isa t ion expen ses

incurred by Rohi t becaus e he gets Rs. 12 ,000 as h is remu nerat ion which ha s been

du ly accoun ted for.

Il lust rat ion 6

Romesh an d Bha wan were in p artn ership sh aring profit an d losses a s 3:2. Their

Balance Sh eet as on March 3 1, 2007 , was a s follows:

Balance Sheet of Romesh and Bhawan as on March 31, 2007


(Rs .) (Rs .)

Ba n k loa n 60,000 Ca s h a t ba n k 30,000

Cred itors 80,000 Debtors 70,000

Bills pa ya b les 40,000 Stock 2,00,000

Bh a wa n loa n 20,000 In ves tm en ts 1,40,000

Ca p it a ls : Bu ild in gs 60,000

Rom esh 1,00,000Bh a wan 2,00,000 3,00,000

5 ,0 0 ,0 0 0 5 ,0 0 ,0 0 0

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Bank Acco unt

Dr. Cr.


(Rs .) (Rs .)

Ba la n ce b / d 30 ,000 Realisa tion [creditor] 63 ,000

Realisa tion 3 ,1 7 ,5 0 0 Realisation 5 ,000

(a s s ets rea lis ed ) [u n recorded lia bility]

Bh awa n loan 20 ,000

Realisation 40 ,000

(bills paya ble]

Rom esh s cap ita l 80 ,500

Bh a wa n s ca pita l 1 ,3 9 ,0 0 0

3 ,4 7 ,5 0 0 3 ,4 7 ,5 0 0

Note: No ent ry ha s b een m ade for a cceptan ce of un recorded investmen ts b y a credi tor a s

part pa yment of h is dues a s per ru les .

Il lust rat ion 7

Sonu a nd Ash u s ha r ing profit s as 3:1 an d they agree u pon dissolu t ion. The

Balan ce Sheet as on March 31, 2006 is as u nd er :

Balance She et of Sonu and Ashu as on March 3 1, 2 00 6


(Rs .) (Rs .)

Loa n 12,000 Ca s h a t ban k 25,000

Cred itors 18,000 Stock 45,000Ca p it a l Fu rn itu re 16,000

Son u 1,10,000 Deb tors 70,000

Ash u 68 ,000 1,78,000 Pla n t a n d Ma ch in ery 52,000

2 0 8 ,0 0 0 2 ,0 8 ,0 0 0

Sonu took over p lan t an d m ach ine ry a t an agreed va lue of Rs .60 ,000 .

S tock an d Fu rn itu re were so ld for Rs .42 ,000 an d Rs .13 ,900 respec t ive ly .

Debtors were took over by Ash u a t Rs .69 ,000 . Cred ito rs were pa id su b jec t

to d i scou nt o f Rs .900 . Sonu agrees to pay the loans . Rea l isa t ion expens es

were Rs.1,600 .

Prepare Real isa t ion Account , Bank Account and Capi ta l Accounts of

the Par tners .

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Solut ionBooks of Sonu and Ashu


Dr. Cr.


(Rs .) (Rs .)

Stock 45,000 Loa n 12,000Fu rn itu re 16,000 Cred itors 18,000Deb tors 70,000 Son u s ca p ita l 60,000Pla n t a n d Ma ch in ery 52,000 (p la n t& m a ch in ery)Ba n k (cred itors ) 17,100 As h u s ca p ita l (debtors ) 69,000Son u s ca pita l (loa n ) 12,000 Ban k :Ba n k (rea lis a t ion expen s es ) 1,600 Stock 42,000Profit t r a n s fer red to : Fu rn itu re 13,900 55,900

Son u s ca pita l 900As h u s ca p ita l 300 1,200

2 ,1 4 ,9 0 0 2 ,1 4 ,9 0 0


Dr. Cr.

Date Particulars J.F. Sonu As hu Date Particula rs J.F. Sonu As hu

(Rs .) (Rs .) (Rs .) (Rs .)

Realisa tion 60 ,000 Ba la n ce b / d 1 ,10 ,000 68,000

[plant and machinery] Rea lisa tion [loa n ] 1 2 ,000

Realisation 69 ,000 Realisa tion [p rofit] 900 300

[debtors] Bank 700

Bank 62 ,900

1,22 ,900 69,000 1 ,22,900 69,000

Bank Acco unt

Dr. Cr.


(Rs .) (Rs .)

Ba la n ce b / d 25 ,000 Rea lisa tion [creditor] 17 ,100

Rea lis a tion (a s sets 5 5 ,900 Rea lis a tion [expen s es ] 1 ,600

rea lis ed ) Son u s capita l 62 ,900

Ash u s ca pita l 700

81 ,600 81 ,600

Il lust rat ion 8

An ju , Man ju an d Sa n ju sh aring profi t in th e rat io of 3:1:1 decided to diss olve

th eir firm . On March 31, 2 006 th eir posit ion was a s follows:

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Balance Sheet Anju, Manju and Sanju as o n March 3 1, 2 00 6


(Rs .) (Rs .)

Cred itors 60,000 Ca s h a t ba n k 35,000

Loa n 15,000 Stock 83,000

Ca p it a ls : Fu rn itu re 12,000

An ju 2,75,000 Deb tors 2,42,000

Ma n ju 1,10,000 Less: Provision for

Sa n ju 1 ,00,000 4,85,000 dou b tfu l deb ts 12 ,000 2,30,000

Bu ild in gs 2,00,000

5 ,6 0 ,0 0 0 5 ,6 0 ,0 0 0

It is agreed tha t:

1 . Anju t akes over the Furn i tu re a t Rs .10 ,000 and Debtors am ount ing toRs.2,00,000 at Rs.1,85 ,000. Anju a lso agrees to pay the Creditors,

2 . Man ju is to take over S tock a t b ook valu e and Bui ldings a t book value

less 1 0%,

3. San ju is to take over remaining Debtors a t 80% of book value an d

res pon sibility for the disch ar ge of t h e loan ,

4. The expens es of dissolu t ion amou nted to Rs.2,200.

Prepare Realisat ion Accoun t, Ban k Accou nt an d Capital Accou nt s of th e partn ers.

Solut ionBooks of Anju, Manju and Sanju

Dr. Real isat ion Accoun t Cr.


(Rs .) (Rs .)

Pr ovis ion for dou btfu l d eb ts 12,000Stock 83,000 Cred itors 60,000Fu rn itu re 12,000 Loa n 15,000Deb tors 2,42,000 An ju s ca p ita l :Bu ild in gs 2 ,00,000 5,37,000 Fu rn itu re 10,000

An ju ca p ita l (cred itors ) 60,000 Deb tors 1,85 ,000 1,95,000Sa n ju ca p ita l (loa n ) 15,000 Ma n ju s ca p ita l :Ba n k (rea lis a t ion expen s es ) 2,200 Stock 83,000

Bu ild in gs 1,80 ,000 2,63,000San jus ca pital :(rem an ing debtors less20% of book va lu e) 33,600Loss trans ferred to :

An ju s ca pita l 21,360Ma n ju s ca pita l 7,120

Sa n ju s ca p ita l 7 ,120 35,640

6 ,1 4 ,2 0 0 6 ,1 4 ,2 4 0

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Dr. Partn ers Capital Accou nts Cr.

Da te Pa rticu la rs J .F. An ju Ma n ju S a nju Da te Pa rticu la rs J.F. An ju Ma n ju S a nju(Rs .) (Rs .) (Rs .) (Rs .) (Rs .) (Rs .)

Realisation

(assets) 1 ,95 ,000 2,63 ,000 3 3 ,600 Balance b/ d 2,75,000 1,10,000 1,00,000

Realisation

(los s ) 21 ,360 7 ,12 0 7 ,120 Realisa tion 60 ,00 0

Bank 1 ,18 ,640 7 4 ,280 (creditors )

Realisa tion 15 ,00 0

(loan)

Bank 1 ,60 ,120

3,35,000 2,70,120 1,15,000 3,35,000 2,70,120 1,15,000

Dr. Bank Accou nt Cr.

Date Particulars J.F. Am oun t Date Particula rs J.F. Am oun t (Rs .) (Rs .)

Ba la n ce b / d 3 5 ,000 Rea lis a tion (expen s es ) 2 ,200

Man ju s capita l 1 ,6 0 ,1 2 0 An ju s capita l 1 ,1 8 ,6 4 0

San ju s capita l 74 ,280

1 ,9 5 ,1 2 0 1 ,9 5 ,1 2 0

Il lust rat ion 9

Su mit, Amit an d Vinit are pa rtn ers s h aring profit in th e rat io of 5:3:2. Their

Balance Sh eet as on March 3 1, 200 7 was a s follows:

Balance Sh eet of Suni t , Amit and Vini t as on March 3 1, 2 00 7


Ca p it a ls : Ma ch in ery 80,000

Su m it 40,000 In ves tm en ts 1,50,000

Am it 50,000 Stock 10,000

Vin it 60,000 1,50,000 Deb tors 35,000

Profit a n d Los s 10,000 Ca s h a t ba n k 15,000

Mrs . Am its loa n 40,000

Su n dry creditors 90,000

2 ,9 0 ,0 0 0 2 ,9 0 ,0 0 0

Th e firm was diss olved on th at da te. Amit took over h is wifes loan . One of the

Creditors for Rs.2,600 was n ot claim th e amou n t. Other as sets r ealised a s follows:

1. Machinery was sold for Rs.70,000,

2. In vestm ents with b ook value of Rs.1,00,00 0 were given to Creditors in

fu ll set t lemen t of th eir accou nt . The r ema ining Investm ents were took

over by Vinit a t a n agreed value of Rs.45,00 0,

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3. Stock was sold for Rs.11,000 a nd Debtors for Rs.3,000 proved to be bad,

4. Real isa t ion expenses were Rs.1,500.

Prepare ledger accou nt s to close the b ooks of th e firm .

Solut ionBooks o f Amit , Sum it and Vini t


Dr. Cr.


(Rs .) (Rs .)

Mach in ery 80,000 Su n dry creditors 90,000

In ves tm en ts 1,50,000 Mrs .Am it s loa n 40,000

Stock 10,000 Ba n k :

Deb tors 35 ,000 2,75,000 Ma ch in ery 70,000

Am its Ca p ita l (wifes loa n ) 40,000 Stock 11,000Ba n k (rea lis a t ion expen s es ) 1,500 Deb tors 32 ,000 1,13,000

Vin it s ca pita l (in ves tm en t) 45,000

Loss transferred to :

Am it s ca p ita l 14,250

Su m it s ca pita l 8,550

Vin it s ca pita l 5 ,700 28,500

3 ,1 6 ,5 0 0 3 ,1 6 ,5 0 0

Dr. Partners Capital Accounts Cr.

Da te Pa rticu la rs J .F. A m it S u m it Vin it Da te Pa rticu la rs J.F. A m it S u m it Vin it

(Rs .) (Rs .) (Rs .) (Rs .) (Rs .) (Rs .)

Realisa tion 45 ,000 Ba la n ce b / d 40 ,000 50 ,000 6 0 ,000

(a s sets ) Rea lisa tion

Realisa tion 1 4 ,250 8 ,550 5 ,70 0 (Mrs . Vin it s 40 ,000

(loss) loan )

Bank 70 ,750 44 ,450 11 ,300 Profit an d Loss 5 ,0 00 3 ,000 2 ,000

85 ,000 53 ,000 62 ,000 85 ,000 53 ,000 6 2 ,000

Bank Acco unt

Dr. Cr.


(Rs .) (Rs .)

Ba la n ce b / d 15 ,000 Rea lis a tion (expen s es ) 1 ,500

Realisa tion 1 ,1 3 ,0 0 0 Am its capita l 70 ,750

(a s s ets rea lis ed ) Su m its capita l 44 ,450Vin its capita l 11 ,300

1 ,2 8 ,0 0 0 1 ,2 8 ,0 0 0

Note: No ent ry has been m ade for th e investments taken over by the credi tors a s per r u les .

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I l lus t ra t ion 10

Meena a nd Tina are pa rtners in a firm an d s ha ring profit as 3:2. They decided to

dissolve th eir firm on March 31, 2 007 when th eir Balan ce Sheet was a follows:

Balance She et Meena and Tina as on March 3 1, 2 00 7

Liabilities Am ount (Rs .) Assets Am ount (Rs .)

Ca p ita l : Ma ch in ery 70,000Meen a 90,000 In ves tm en ts 50,000Tin a 80 ,000 1,70,000 Stock 22,000Su n dry creditors 60,000 Su n dry Deb tors 1,03,000Bills pa ya b le 20,000 Ca s h a t ba n k 5,000

2 ,5 0 ,0 0 0 2 ,5 0 ,0 0 0

The as sets an d l iabili t ies were disposed off as follows :

(a) Machinery were g iven to credi tors in fu l l se t t lement of the i r accoun t an d Stock were given to bills payable in full settlement.

(b) Investm ent were took over by Tina at book value. Su ndr y debtors of book value Rs.

50,000 took over by Meena a t 10% less a nd r ema ining debtors rea lised Rs. 51,000 .

(c ) Rea l isa t i on expenses amoun t t o Rs . 2 ,000 .

Prepar e necess ary ledger accoun ts to close th e book of the firm .

Solut ionBooks o f Meena and Tina Real i sat ion Account

Particulars Am ount (Rs .) Particu lars Am ount (Rs .)

As s ets t ra n s ferred : Su n dry creditors 60,000Ma ch in ery 70,000 Bills pa ya b le 20,000In ves tm en ts 50,000 Tin a s Ca p ita l (in ves tm en t) 50,000Stock 22,000 Meen a s Ca p ita l (debtors of 45,000

Su ndry debtors 1 ,03 ,000 2,45,000 books va lu e Rs . 50 ,000Ba n k (rea lis a t ion expen s es ) 2,000 les s 10%)

BankDeb tors 51,000Loss transferred to :Meen as ca pita l 12,600

Ten a s ca p ita l 8 ,400 21,000

2 ,4 7 ,0 0 0 2 ,4 7 ,0 0 0

Partners Capital AccountsDr. Cr.

Particulars Mena Tina Particu lars Meena Tina(Rs .) (Rs .) (Rs .) (Rs .)

Rea lis a t ion (in ves tm en t) 50,000 Ba la n ce b / d 90,000 80,000

Rea lis at ion (d eb tor s) 45,000Rea lis a t ion (los s ) 12,600 8,400Ban k 32,400 21,600

9 0 ,0 0 0 8 0 ,0 0 0 9 0 ,0 0 0 8 0 ,0 0 0

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T e rm s In t r o d u c e d i n t h e C h a p t e r

1 . Dis s olu tion of Pa r tn er s h ip 4 . Com p u ls ory Dis s olu tion

2 . Dis s olu tion of Pa r tn er s h ip 5 . Dis s olu tion by Not ice

Firm 6. Rea lis a t ion Expen s es3 . Pa r tn er s h ip a t Will 7 . Rea lis a t ion Accou n t

S u m m a r y

1 . D i s so l u t i o n o f P a r t n er sh i p F i rm : T h e d i s s o l u t i o n o f a f i r m i m p l i e s t h e

di scont inuance of par tner sh ip bus iness and separa t ion of economic r e l a t ions

between the par tners. In the case of a dissolut ion of a f i rm, the f i rm closes i t s

business al together and real ises al l i t s assets and pays al l i t s l iabi l i t ies. The

paymen t i s mad e to the credi tors f ir st ou t of the a ss ets real ised a nd , if necess ary,

next out of the contr ibut ions made by the par tners in thei r prof i t shar ing rat io.

When al l accounts are set t led and the f inal payment i s made to the par tners

for the amounts due to them, the books of the f i rm are closed.

2 . Dissolution of Partnership : A par tnership gets terminated in case of admission,

retirement death, etc. of a partner. This does not necessarily involve dissolution

of the firm.

3 . Real i sa t ion Account : T h e R e a l i s a t i o n A c c o u n t i s p r e p a r e d t o r e c o r d t h e

t ran sa ct ions relat ing to sale and real isa t ion of as sets a nd set t lement of credi tors.

Any prof it or loss a r ising act of th is process i s sh ared by pa r tn ers in th ei r

profit sh ar ing rat io. Par tners accoun ts a re also set t led an d th e Cash or Bank

account i s closed.

Ques t ions for Prac t i ce

Short Answer Quest ions

1. Sta t e the d i fference be tween d i sso lu t ion of par tner sh ip an d d i sso lu t ion of

par tner sh ip f i rm.

2 . S t a te t h e a cc ou n t in g t re a tm e n t fo r:i. Un recor d ed a s s et s ii. Un record ed lia b ilit ies

3 . On d i sso lu t ion , h ow will you d ea l with par tner s loan if it appear s on th e

(a) assets side of the balance sheet, (b) l iabil i t ies side of balance sheet.

Bank Acco unt

Dr. Cr.

Particulars Am ount (Rs .) Particu lars Am ount (Rs .)

Ba la n ce b / d 5,000 Rea lis a t ion (expen s es ) 2,000

Rea lis a t ion (a s s ets rea lis ed ) 51,000 Men a s ca p ita l 32,400

Tin a s ca pita l 21,600

5 6 ,0 0 0 5 6 ,0 0 0

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4. Dis t inguish be tween firms debt s an d par tn er s pr iva te debt s .

5 . S ta t e the order of se t t lement of account s on d i sso lu t ion .6 . On what account Realisa t ion Accoun t d iffer s from Revalua t ion Accoun t .

Long Answer Questions

1. Expla in the process d isso lu t ion of par tner sh ip firm?

2 . Wha t i s a Rea lis a t ion Accoun t ?

3 . Reproduce the format of Real isa t ion Accoun t .

4. How deficiency of Crdi tors i s paid off?

Num erical Ques tion s

1. J ourn al ise the fo llowing t r ansa c t ions r egard ing r ea lisa t ion expens es :

[a ] R ea lis a t ion expenses am oun t ed t o R s .2 , 500 .

[b] Real isa t ion expens es am ount ing to Rs .3 ,000 were pa id by Ash ok, one of the

p a r t n e r s .[c ] Real isa t ion expenses Rs .2 ,300 borne by Taru n , per sonal ly .

[d] Ami t , a pa r tner was appoin ted to rea lise the as se t s , a t a cos t of Rs .4 ,000.

The actual amount of real isat ion amounted to Rs.3,000.

2 . Record necessary journa l en t r ies in th e fo llowing cases :

[a ] C r ed it or s w or t h R s . 8 5 ,0 0 0 a c c e p t ed R s . 4 0 ,0 0 0 a s c a s h a n d I n ve s t m e n t

worth Rs.43,000, in full sett lement of their claim.

[b] Creditor s were Rs .16 ,000. They accepted Machinery va lued a t Rs .18 ,000

in sett lement of their claim.

[c] Creditor s were Rs .90 ,000. They accepted Bui ld ings va lued Rs .1 ,20 ,000 an d

paid cash to the f i rm Rs.30,000.

3 . There was an o ld compu ter which was wr it t en-off in the books of account s in

the p ervious year. The s am e ha s been taken over by a pa r tner Nit in for Rs.3,000.

Journal i se the t r ansac t ion , supposing . That the f i rm has been d i sso lved .4 . Wha t journ al en t r i es wil l be r ecorded for the fo llowing t r an sa c t ions on th e

dissolution of a f irm:

[a] Payment of un recorded l iab i lit ies of Rs .3 ,200.

[b] Stock wor th Rs .7 ,500 is t aken by a par tner Rohit .

[c] Profi t on Realisa t ion am oun t ing to Rs.18,000 is to be dist r ibu ted between

the par tn ers Ash ish an d Taru n in the rat io of 5:7.

[d ] An u n r ecor ded a s se t r ea lis ed R s .5 , 500 .

5 . Give journa l en t r i es for the fo llowing t r an sac t ions :

1 . To r ecord th e r ea lisa t ion of var ious ass e t s an d l iab i lit ies ,

2 . A Firm h as a S tock of Rs . 1 ,60 ,000. Aziz , a par tner took over 50% of the

Stock at a discount of 20%,

3 . Remaining Stock was so ld a t a profit o f 30% on cos t ,

4 . Lan d an d Bu ildging (book va lue Rs . 1 ,60 ,000) so ld for Rs . 3 ,00 ,000 through

a broker who charged 2%, commission on the deal ,

5 . P lan t an d Machinery (book va lue Rs . 60 ,000) was ha nded over to a Creditor

at an agreed valuat ion of 10% less t han the book va lue ,

6 . Inves tment whose face va lue was Rs . 4 ,000 was r ea l ised a t 50%.

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6. How will you d eal with th e real isa t ion expens es of the f irm of Rash im an d Bind iya

in the following cases:1 . Rea lis a t ion expenses am oun t s t o Rs . 1 ,00 , 000 ,

2 . Real isa t ion expenses amou nt ing to Rs . 30 ,000 are pa id by Rashim, a par tner.

3 . Real isa t ion expenses a re to be borne by Rashim for which he will be pa id

Rs. 70 ,000 as r emunera t ion for comple t ing the d i sso lu t ion process . The

actual expenses incurred by Rashim were Rs. 1,20,000.

7 . The book va lue of ass e t s (o ther than cash a nd b ank ) t r ans fer r ed to Realisa t ion

Accoun t i s Rs. 1,00,000. 50% of the a ss ets are ta ken over by a pa r tner Atu l , at

a discount of 20%; 40% of the remaining assets are sold at a prof i t of 30% on

cost ; 5% of the balance being obsolete, real ised nothing and remaining assets

are handed over to a Creditor, in full sett lement of his claim.

You are required to record th e jou rn al ent r ies for rea lisa t ion of as sets .

8 . R eco r d neces sa r y jou r n a l en t r i e s t o r ecor d t he fo llowing un r ecor ded a s s e t sand l iabi l i t ies in the books of Paras and Pr iya:

1 . There was a n o ld furn iture in th e firm which ha d been wr it t en-off comple tely

in the b ooks. This was sold for Rs. 3,000,

2 . Ash i sh , an o ld cu s t om er whose accoun t f or R s . 1 , 000 w as w r it t en -o ff a s

bad in the previous year , paid 60%, of the amount ,

3. Paras agreed to takeover the fi rms goodwil l (not recorded in th e books of

the f irm), at a valuation of Rs. 30,000,

4 . There was a n o ld typewr it e r which h ad b een wr it t en-off complete ly from

the b ooks. It was est imated to real ize Rs. 40 0. I t was taken away by Pr iya at

an est imated pr ice less 25%,

5 . There were 100 sha res of Rs . 10 each in S tar Limi ted acqui r ed a t a cos t of

Rs . 2 ,000 which had been wr i t t en-of f comple te ly f rom the books . These

sh ares a re va lued @ Rs. 6 each a nd d ivided am ong the par tn er s in the i r

prof i t shar ing rat io.

9 . All p a r t n e r s w is h e s t o d is s o lve t h e fir m . Ya s t i n , a p a r t n e r w a n t s t h a t h e r

loan of Rs . 2 ,00 ,0 00 m u st be pa id off before the paymen t of capi t a l s to the

pa r t ne r s . B u t , A m ar t , ano t he r pa r t ne r w an t s t ha t t he cap i t a l s m us t be pa i d

before the p aym en t of Yas t ins loan . You a re requ ired to set t le the con fl ict

g i v i ng r ea sons .

10. Wha t journ al ent r ies wou ld be recorded for the following t ran sa ct ions on the

dissolu t ion of a firm a fter var ious a ssets (other th an cash ) on the th ird par ty

l iabi l i t ies have been t ransfer red to Rel iasat ion account .

1 . Ar t i t ook over the S tock wor th Rs . 80 ,000 a t Rs . 68 ,000.

2. There was u nrecorded Bike of Rs. 40,000 which was ta ken over By Mr. Kar im.

3 . The firm paid Rs . 40 ,000 as compen sat ion to employees .

4 . S u n d r y c r ed it or s a m o u n t in g t o Rs . 3 6 , 0 0 0 w er e s e t tle d a t a d is c ou n tof 15%.

5 . Loss on r ea l isa t ion Rs . 42 ,000 was to be d i s t r ibu ted be tween Ar t i an d Kar im

in the ratio of 3:4.

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11. Rose a nd Li ly sha red profit s in the ra t io of 2:3. Their Balance Sh eet on March

31, 2006 was as follows:

Balance Sh eet o f Rose an d Li ly as on March 3 1, 2 00 6


(Rs .) (Rs .)

Creditors 40,000 Cas h 16,000

Lilys loa n 32,000 Deb tors 80,000

Profit a n d Los s 50,000 Less : Provision for

Capitals: dou b t fu l debts 3 ,600 76,400

Lily 1,60,000 In ven tory 1,09,600

Ros e 2,40 ,000 Bills receiva ble 40,000

Bu ild in gs 2,80,000

5 ,2 2 ,0 0 0 5 ,2 2 ,0 0 0

Rose and Lily decided to dissolve the f irm on the above date. Assets (except

bi l l s receivables) real ised Rs. 4,84,000. Bi l l s Receivable were taken over by

Rose at Rs. 30 ,000. Credi tors agreed to take Rs. 3 8,000. Cost of realisat ion was

Rs. 2,400. There was a Motor Cycle in the f i rm which was bought out of the

fi rms m oney, was not s h own in th e books of the f irm . It was n ow sold for

Rs. 10,000. There was a contingent l iabil i ty in respect of outstanding electric

bil l of Rs. 5,000 Bill Receivable taken over by Rose at Rs. 33,000.

Show Real i sa t ion Account , Par tner s Capi t a l Acount , Loan Account and

C ash A ccoun t .

(Ans : Realisation Profit Rs. 15,600, Total of Cash Account Rs. 5,10,000)

12 . Sh i lpa , M eena a nd N an da dec i ded t o d i s so lve t he i r pa r t n e r sh ip on M ar ch31,2006. Thei r prof i t shar ing r a t io was 3 :2 :1 and the i r Balance Sheet was

a s u n d e r :

Balance She et of Shi lpa, Meena and Nanda as on March 3 1, 20 06


(Rs .) (Rs .)

Ca p it a ls : Lan d 81,000

Sh ilpa 80,000 Stock 56,760

Meen a 40,000 Deb tors 18,600

Ba n k loa n 20,000 Na n da s ca p ita l 23,000

Creditors 37,000 Cas h 10,840

Provis ion for dou bt fu l deb ts 1,200

Gen era l res erve 12,000

1 ,9 0 ,2 0 0 1 ,9 0 ,2 0 0

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The stock of value of Rs. 41,660 are taken over by Shilpa for Rs. 35,000 and she

agreed to discharge bank loan. The remaining stock was sold at Rs. 14,000 anddebtors amounting to Rs. 10,000 realised Rs. 8,000. land is sold for Rs. 1,10,000. The

remaining debtors realised 50% at their book value. Cost of realisation amounted to

Rs. 1,200. There was a typewriter not recorded in the books worth Rs. 6,000 which

were taken over by one of the Creditors at this value. Prepare Realisation Account.

(Ans : Profit on Realisation Rs. 20,940, Total of Cash Account Rs. 1,64,650)

13. Su r j it an d Rah i were sh ar ing profit s ( losses) in the rat io of 3:2, thei r Balance

Sheet as on March 31, 2004 is as fol lows:

Balance Sh eet of Surji t and Rahi as on March 3 1, 2 00 4

Liabilities Am ount Assets Am ount (Rs .) (Rs .)

Creditors 38,000 Ban k 11,500Mrs . Su r jit loa n 10,000 Stock 6,000Reserve 15,000 Deb tors 19,000Ra h is loa n 5,000 Fu rn itu re 4,000Ca p ita ls : Pla n t 28,000

Su r jit 10,000 In ves tm en t 10,000Ra h i 8,000 Profit a n d Los s 7,500

8 6 ,0 0 0 8 6 ,0 0 0

The f i rm was dissolved on March 31, 2006 on the fol lowing terms:

1. Surjit agreed to take the investments at Rs. 8,000 an d to pay Mrs. Surojits loan .

2 . O the r a s se t s w e re r ea lis ed a s fo llows :

S tock Rs . 5 ,000

Deb tor s Rs . 18 ,500

Fu r n it u r e Rs . 4 ,500

Pla n t Rs . 25 ,000

3 . E xpenses on r ea lis a t ion am oun t ed t o R s . 1 , 600 .

4 . Creditor s agreed to accept Rs . 37 ,000 as a fina l se t t lement .

You are requ ired to p repare Realisa t ion accoun t , Par tn ers Capi tal accoun t

and B ank accoun t .

(Ans : Loss on Real isa t ion Rs. 6,600, Total of Cash Accoun t Rs. 6 4,500)

14. Rit a , Geeta a nd Ashi sh were par tner s in a f irm s ha r ing profit s / losses in the

rat io of 3:2:1. On March 31, 2006 thei r balance sheet was as fol lows:


Ca p it a ls : Cas h 22,500Rit a 80,000 Deb tors 52,300Geeta 50,000 Stock 36,000As h is h 30 ,000 1,60,000 In ves tm en ts 69,000

Cred itors 65,000 Pla n t 91,200Bills pa ya b le 26,000Gen era l reserve 20,000

2 ,7 1 ,0 0 0 2 ,7 1 ,0 0 0

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On the date of above ment ioned date the f i rm was dissolved:

1 . Rit a was a ppoin ted to r ea lise the a sse t s . Rit a was to r ece ive 5% comm iss ionon th e rate of assets (except cas h) and was to b ear a l l expenses of real isa t ion,

2 . Asse t s were r ea l ised as fo llows:

Rs.

Deb tor s 30 ,00 0

S tock 26 ,000

Pla n t 42 ,75 0

3. Inves tment s were r ea l ised a t 85% of the book va lue ,

4 . E xpenses o f r ea lis a t ion am oun t ed t o Rs . 4 ,100 ,

5 . F irm ha d to pay Rs . 7 ,200 for out s t an ding sa l ary not provided for ear lie r,

6 . Cont ingent liab i lit y in r espect of b i lls d i scounted wi th the ba nk was a l so

mater ial i sed and paid off Rs. 9,800,

Prepare Realisa tion a ccoun t, Capital Accoun ts of Partn ers a nd Cash Accoun t.

(Ans : Loss on Realisa t ion Rs. 1,29,455 , Total of Cash Accoun t Rs. 1,65,70 5)

15. Anu p an d Su mi t a r e equal par tn er s in a firm. They dec ided to d iss o lve the

parn ter sh ip on December 31 , 2006. When the ba lance shee t i s as under :

Balance Sheet o f Anup and Sumit as on December 31 , 2006


(Rs .) (Rs .)

Su n dry Cred itors 27,000 Ca s h a t ba n k 11,000

Res erve fu n d 10,000 Su n dry Deb tors 12,000

Loa n 40,000 Pla n ts 47,000

Ca p it a l Stock 42,000

Anu p 60,000 Lea s e h old la n d 60,000

Su m it 60,000 1,20,000 Fu rn itu re 25,000

1 ,9 7 ,0 0 0 1 ,9 7 ,0 0 0

The Assets were realised as follows :

Rs.

Lea s e h old la n d 72 ,000

Fu r n it u r e 22 ,5 00

S tock 40 ,5 00

Pla n t 48 ,000

Su nd ry Deb tor s 10 ,50 00

The Creditors were paid Rs. 25,500 in full sett lement. Expenses of realisation

amou nt to Rs . 2 ,500.

Prepare Real isa t ion Accoun t , Ban k Accoun t , Par tn ers Ca pi tal Accoun ts to closethe books of the f irm.

(Ans : Realisation Profit Rs. 46,500)

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16. Ash u a nd Har i sh a re par tner s s ha r ing profit and losses as 3 :2 . They dec ided

to d i sso lve th e firm on December 3 1 , 200 6. Their ba lan ce sh ee t on th e ab oveda t e w as :

Balance Sheet o f Ashu and Harish as on December 31 , 2006


Ca p ita ls : Bu ild in g 80,000Ash u 1,08 ,000 Ma ch in ery 70,000Ha ris h 54,000 1,62,000 Fu rn itu re 14,000

Cred itors 88,000 Stock 20,000Ba n k overd ra ft 50,000 In ves tm en ts 60,000

Deb tors 48,000Ca s h in h a n d 8,000

3 ,0 0 ,0 0 0 3 ,0 0 ,0 0 0

Ashu is to take over the bui lding at Rs. 95,000 and Machinery and Furni ture i stake over by Har ish at value of Rs. 80,000. Ashu agreed to pay Credi tor andHar i sh agreed to meet Bank overdraf t . S tock and Inves tment s a r e t aken byboth par tner in prof i t shar ing rat io. Debtors real ised for Rs. 46,000, expensesof real isat ion amounted to Rs. 3,000. Prepare necessary ledger account .

(Ans : Loss on Real isa t ion Rs. 14,000, Cash / Ban k Total Rs. 59,600 )

17. San jay, Taru n a nd Vineet sh ared prof it in th e r a t io of 3 :2 :1 . On Decemb er31,2006 thei r balance sheet was as fol lows :

Balance Sheet o f Sanjay , Tarun and Vineet as on December 31 , 2006


Ca p it a ls : Pla n t 90,000Sa n ja y 1,00,000 Deb tors 60,000Taru n 1,00,000 Fu rn itu re 32,000Vin eet 70 ,000 2,70,000 Stock 60,000

Cred itors 80,000 In ves tm en ts 70,000Bills pa ya b le 30,000 Bills receiva b le 36,000

Ca s h in h a n d 32,000

3 ,8 0 ,0 0 0 3 ,8 0 ,0 0 0

On th is da te the firm was dissolved. San jay was ap pointed to real ise th e ass ets .Sanjay was to receive 6% commission on the sale of assets (except cash) andwas to bear al l expenses of real isat ion.Sanjay real ised the assets as fol lows : Plant Rs. 72,000, Debtors Rs. 54,000,Furni ture Rs . 18 ,000, S tock 90% of the book va lue , Inves tment s Rs . 76 ,000and Bi l ls receivable Rs.31,000. Expenses of real isat ion amounted to Rs.4,500.Prepare Real isat ion Account , Capi tal Accounts and Cash Account

(Ans : Loss on Realisat ion Rs.61,300, Total of Cash Accoun t Rs.3,37,00 0)

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18. The following is th e Balan ce Sheet of Gupta an d Sha rma as on December 31,2006:

Balance Sheet o f Gupta and Sharma as on December 31 , 2006


Su n dry Cred itors 38,000 Ca s h a t ba n k 12,500Mrs .Gu p ta s loa n 20,000 Su n dry Deb tors 55,000Mrs .Sh a rm a s loa n 30,000 Stock 44,000Res erve fu n d 6,000 Bills receiva ble 19,000Provis ion of dou bt fu l debts 4,000 Ma ch in ery 52,000Ca p it a l In ves tm en t 38,500

Gu pta 90,000 Fixtu r es 27,000S h a r m a 60,000 1,50,000

2 ,4 8 ,0 0 0 2 ,4 8 ,0 0 0

The firm was d issolved on December 31, 200 6 an d as set real ised an d set t lementsof liabilities as follows:(a) The rea l isa t ion of the a ss ets were as follows:

Rs .Su n d ry Deb tor s 52 ,0 00S tock 42 ,0 00Bills r eceiva b le 16 ,000Ma ch in e r y 49 ,00 0

(b ) Inves t m en t w as t aken ove r by G up t a a t ag r eed va l ue of R s .36 , 000 andagreed to pa y of Mrs. Gup tas loan .

(c) The Su ndry Creditor s were pa id off less 3% di scoun t .(d) The r ea l isa t ion expenses incur red am ounted to Rs .1 ,200.

J ourn al ise the ent r ies to be made on th e dissolut ion an d prepa re Real isa t ionAccount , Bank Account and Par tner s Capi t a l Account s .

(Ans : Loss on Realisa t ion Rs.19,660, Total of Cash Accoun t Rs.1,88,50 0)

19. Ash ok, Babu a nd Ch etan a re in pa r tners hip sha r ing profit in the propor t ion of 1/ 2, 1/ 3, 1/ 6 respect ively. They dissolve the par tn ersh ip of the December 31,2006, when the ba lance shee t of the f i rm as under :

Balance Sheet o f Ashok, Babu and Chetan as on December 31 , 2006


Su n dry Cred itors 20,000 Ba n k 7,500Bills pa ya b le 25,500 Su n dry Deb tors 58,000Ba bu s loa n 30,000 Stock 39,500Ca p ita ls : Ma ch in ery 48,000

Ash ok 70,000 In ves tm en t 42,000Babu 55,000 Freeh old p roperty 50,500

Che tan 27,000 1,52,000Curren t accoun t s :

Ash ok 10,000Babu 5,000Ch eta n 3 ,000 18,000

2 ,4 5 ,5 0 0 2 ,4 5 ,5 0 0

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The Machinery was t aken over by Babu for Rs .45 ,000, Ashok took over the

Inves t m en t fo r R s . 40 , 000 an d F r eeho ld p r ope r t y t ook ove r by C he t a n a tRs.55,000. The rema ining Ass ets real ised as follows: Su nd ry Debtors Rs.56,50 0

an d Stock Rs.36,500. S u nd ry Creditors were set t led at discoun t of 7%. A Office

computer , not shown in the books of accounts real ised Rs.9,000. Real isat ion

expenses amounted to Rs .3 ,000.

Prepare Real isat ion Account , Par tners Capi tal Account , Bank Account .

(Ans : Profit on Realisation Rs.1,200, Total of Cash Account Rs.1,34,100)

20. The fol lowing is the Balance sheet of Tanu and Manu, who shares prof i t and

losses in the rat io of 5:3, On December 31,2006:

Balance Sheet o f Tanu and Manu as on December 31 , 2006


(Rs .) (Rs .)

Su n dry Creditors 62,000 Ca s h a t ba n k 16,000

Bills pa ya b le 32,000 Su n dry Debtors 55,000

Ba n k loa n 50,000 Stock 75,000

Res erve fu n d 16,000 Motor ca r 90,000

Ca p it a l Ma ch in ery 45,000

Tan u 1 ,10 ,000 In ves tm en t 70,000

Man u 90 ,000 2,00,000 Fixtu res 9,000

3 ,6 0 ,0 0 0 3 ,6 0 ,0 0 0

On th e above date th e fi rm is dissolved a nd the fol lowing a greemen t was ma de:

Tanu agree to pay the bank loan and took away the sundry debtor s . Sundry

credi tor s accept s s tock and pa id Rs .10 ,000 to the f i rm. Machinery i s t aken

over by Manu for Rs.40,000 an d a greed to pa y of bi ll s payab le at a d iscou nt of 5%. . Motor car was t aken over by Tanu for Rs .60 ,000. Inves tment r ea l i sed

R s . 76 , 000 and f i x t u r e s R s . 4 , 000 . T he expenses o f d i s so l u t i on am oun t ed t o

Rs .2 ,200.

Prepare Real i sa t ion Account , Bank Account and Par tner s Capi t a l Account s .

(Ans : Loss on Ral isa t ion Rs.37,600, Total of Cash Accoun t Rs.1,06,00 0)

Check -l i s t t o Check y our Und ers t an d ing

Test your Understanding I

1 . Tru e, 2 Tru e, 3. Tr ue, 4. Fa ls e, 5 . Tru e, 6. Tru e, 7 . Tru e, 8. Fa ls e.

Test y our Und erstan ding II

1 . (c), 2 . (d ), 3 . (b ), 4 . (d ), 5 . (c), 6 . (a ), 7 . (b ), 8 . (c)

Test y our Und erstan ding III

1 . D eb it , Re a lis a t on , 2 . E xt er n a l, C re d it , Re a lis a t io n , 3 . C a p it a l Ac co u n t s ,

P r o fit s h a r in g ra t io . 4 . C r e d it e d , 5 . D e b it e d , 6 . C r e d it o r , 7 . P a y,

Rea lis a tion , 8 . Rea lis a tion , Ca p it al, 9 . Not recor ded , 1 0 . Ca p it al.

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