Dissolution of a Partnership Firm

Lesson

Part 1 — what dissolution means, Section 48, the Memorandum Balance Sheet and what goes to the Realisation Account. Every firm, person and figure in this chapter is imagined.

In this lesson you will

Distinguish dissolution of the partnership from dissolution of the firm
Settle accounts in the order laid down by Section 48 of the Indian Partnership Act, 1932
Prepare a Memorandum Balance Sheet and transfer balances to the Realisation Account under the ISC rules
Apply the ISC assumptions when the question is silent about an asset or a liability

Part 1 at a glance

Concept

Partnership or firm: what is dissolved?

Dissolution of partnership: the old agreement ends; the firm continues with adjusted books.
Dissolution of the firm: the relation among all partners ends; the business closes and the books are closed.

Table comparing dissolution of partnership, where only the old agreement ends and the business continues with adjusted books, with dissolution of the firm, where the relation among all partners and the business end and the books are closed
Basis	Dissolution of partnership	Dissolution of the firm
What ends	The old agreement among the partners	The relation among all partners and the business
Business	Continues (reconstitution)	Closed down
Books of account	Adjusted: revaluation, goodwill, capitals	Closed: Realisation, capital and Bank/Cash accounts
Examples	Admission, retirement, death, change in ratio	All partners agree to close; the court orders winding up
Link	May happen without dissolving the firm	Always dissolves the partnership too

Worked example

Worked example 1: partnership or firm?

Four imagined firms in the north-east. Decide in each case what has been dissolved.

Table of worked example one: a retirement, an admission and a change in ratio dissolve only the partnership, because the business continues; an agreement by all partners to wind up and sell the assets dissolves the firm
Situation (imagined firms)	Partnership or firm?	Why
Sraboni retires from Bagdogra Tea Tasters; the other two carry on	Partnership only	Business continues under a new agreement
Nalbari Bell Metal admits a third partner	Partnership only	Reconstitution: books adjusted
All partners of Chumoukedima Bamboo Shoots agree to wind up and sell the assets	Firm	Business closed; every account settled
The partners of Naharlagun Cane Craft change their ratio from 1 : 1 to 3 : 2	Partnership only	Same partners, new agreement

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