ACM 101 (2021-22) Lesson 1

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Lesson 1 ADMISSION & DISSOLUTION OF PARTNERSHIP FIRM

CONTENTS

● TREATMENT OF GOODWILL ● ADJUSTMENT FOR ACCUMULATED PROFIT AND LOSS ● REVALUATION ACCOUNT ● ADJUSTMENT OF CAPITAL ACCOUNT ● MEANING OF DISSOLUTION OF PARTNERSHIP AND PARTNERSHIP

FIRM ● CIRCUMSTANCES LEADING TO DISSOLUTION OF PARTNERSHIP ● SETTLEMENT OF ACCOUNTS ● ENTRIES FOR CLOSING THE BOOKS OF ACCOUNTS ● SELF EXAMINATION QUESTION

OBJECTIVES 1. To understand the circumstances in which a partner is admitted and

partnership is dissolved 2. To have an understanding of accounting process to deal with the matters

at the time of admission and disposal of assets and payment of liabilities 3. To settle the partner’s claims in case of general dissolution. 4. To settle the partner’s capital account at the time of admission of partner.

INTRODUCTION TO THE LESSON

As per Indian Partnership Act, 1932 “Dissolution of partnership between all the partners of a firm is called the dissolution of the firm”. Section 39 of this act lays down emphasis on two aspects (i) Dissolution of Partnership and (ii) Dissolution of Partnership Firm

ADMISSION OF A PARTNER

Accounting Treatment of Goodwill on the Admission of a New Partner

There may be three situations related to treatment of goodwill (premium) at the time of admission of a new partner:

(1) When the amount of goodwill (premium) is paid privately; (2) When the new partner brings his share of goodwill (premium) in Cash;

In this unit we shall discuss the circumstances in which a partner is admitted in a firm and also the situations due to which the dissolution of the partnership firm takes place and will deal with the necessary accounting treatments, which are required at the time of admission and in order to close the books of accounts at dissolution.

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(3) When the new partner does not bring his share of goodwill (premium) in Cash. These situations are discussed below: 1) When the amount of goodwill (premium) is paid privately: When the new partner pays the amount of goodwill in cash to the old (Sacrificing) partners privately outside the business, no entries are required to be passed.

2) Premium method- When the new partner brings his share of goodwill (premium) in Cash: According to this method there are two alternatives:

a) When the amount of goodwill/premium brought in by the new partner is retained in the business: If the new partner brings in his share of goodwill in cash and this amount is retained in the business, the amount is credited to the Capital Accounts of old partners in their sacrificing ratio. The following two entries are passed for this purpose:

i) Cash/Bank/A/c. Dr.

To Premium A/c.

(For the amount of goodwill/premium brought in cash by new partner)

ii) Premium A/c. Dr. To Sacrificing Partners’ Capital A/c’s

(For the amount of goodwill/premium transferred to old partners’(sacrificing) capital

accounts in sacrificing ratio)

Alternatively, it is credited to the new partner’s capital account and then adjusted in favour of the existing partners in sacrificing ratio. In that case the journal entries will be as follows: (i) Cash A/c Dr. To New Partner’s Capital A/c (Amount brought by new partner for his share of goodwill) (ii) New Partner’s Capital A/c Dr. To Sacrificing Partner’s Capital A/cs (Individually) (Goodwill brought by new partner distributed among existing partners in sacrificing ratio) An important observation There can be a case that even an old partner may also gain on account of an admission of New partner. In that scenario, even that Gaining partner will also contribute to the sacrificing Partners and the above Entry no. (ii) will change like this New Partner’s Capital A/c Dr. Gaining Partner Cap. A/c Dr. To Sacrificing Partner’s Capital A/cs (Individually) (Goodwill brought by new partner and the Gaining partner share distributed among existing sacrificing partners in sacrificing ratio)

b) When Goodwill brought by new partner is withdrawn by the old partners

Sometimes, the amount of goodwill brought in by new partner is withdrawn by the old

partners. In this case, in addition to the two Journal entries explained above in (a), part

one more Journal entry is required to be passed:

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Sacrificing Partner’s Capital A/c Dr.

To Cash/Bank A/c

(For the amount of goodwill/premium withdrawn by the old partners)

It must be noted that sometimes partners withdraw only ½ or ¼ amount of goodwill. In

such case, entry should be passed with the withdrawn amount only.

EXAMPLE 1. A and B are partners in a firm sharing profits and losses in the ratio of5:3. C is admitted in the firm for 1/5 share of profits. He brings in Rs. 20,000 as capital and Rs.4,000 as goodwill. Give the necessary journal entries, (a) When the amount of goodwill is retained in the business. (b) When the amount of goodwill is fully withdrawn. (c) When 50% of the amount of goodwill is fully withdrawn. Solution 1. (a) When the amount of goodwill credited to existing partners is retained in business (i) Cash A/c Dr. 24,000 To C’s Capital A/c 20,000 To Goodwill / Premium A/c 4,000 (The amount brought in by C as Capital and Goodwill) (ii) Goodwill / Premium A/c Dr. 4,000 To A’s Capital A/c 2,500 To B’s Capital A/c 1,500 (Goodwill transferred to A and B in the sacrificing ratio of 5:3) Alternatively, the following entries may be recorded: (i) Cash A/c Dr. 24,000 To C’s Capital A/c 24,000 (ii) C’s Capital A/c Dr 4,000 To A’s Capital A/c 2,500 To B’s Capital A/c 1,500 Note: Sacrificing ratio is the same as old profit sharing ratio, as New ratio is given and nothing else is mentioned. (b) When the amount of goodwill credited to existing partners is fully withdrawn. (i) Cash A/c Dr. 24,000 To C’s Capital A/c 20,000 To Goodwill / Premium A/c 4,000 (The amount brought in by C as Capital and Goodwill) (ii) Goodwill / Premium A/c Dr. 4,000 To A’s Capital A/c 2,500 To B’s Capital A/c 1,500 (Goodwill transferred to A and B in the sacrificing ratio of 5:3) (iii). A’s Capital A/c Dr. 2,500 B’s Capital A/c Dr. 1,500 To Cash A/c 4,000

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(Cash withdrawn by A and B equal to their share of goodwill) (c) When 50% of the amount of goodwill credited to partners is withdrawn. Only 3rd Entry will change, as compared to the 2nd case A Capital A/c Dr 1,250 B Capital A/c Dr 750 To Cash A/c 2,000 (Cash withdrawn for 50% of their share of goodwill) When goodwill already exists in books:

If new partner brings his share of goodwill in cash, and if the Goodwill Account already

appears in the books of the firm, first of all the existing Goodwill Account will have

to be written off. For this purpose, old Partners’ Capital Accounts are debited in their

old profit-sharing ratio and Goodwill Account is credited. Thus, the following entry is

passed to write off the existing goodwill:

Old Partner’s Capital A/cs Dr.

To Goodwill A/c But, if it is decided that the goodwill may continue to appear in the books at its old value, the amount to be brought in by new partner will have to be proportionately reduced i.e., He will be required to bring cash only for this share of the excess of the agreed value of goodwill over the amount of goodwill already appearing in books. Let us take an example on this point, A and B are partners with ratio of 3:2. Goodwill of the firm is valued at Rs.20,000 and Mr. C who is admitted for 1/4 share brings in Rs. 5,000as his share of goodwill. Suppose, goodwill already appearing in books at Rs.10,000 and there is a decision not to retain it. Now, in this case, after crediting A and B for the amount of goodwill brought in by C, the following additional journal entry shall be recorded for writing off the existing amount of goodwill. A’s Capital A/c Dr. 6,000 B’s Capital A/c Dr. 4,000 To Goodwill A/c 10,000 (Goodwill written-off in old ratio) However, if the partners decide to maintain the Goodwill Account at 10,000, then the new partner is required to bring in goodwill only for the difference between its total value and the book value. In other words, C will be required to bring in Rs. 2,500 only [1/4 of Rs. 10,000 (Rs 20,000 – Rs. 10,000)]. Which will be credited to old partners in their sacrificing ratio, and no entry will be recorded for writing off the existing amount of goodwill. Revaluation Method This method is followed when the new partner does not bring in his share of goodwill in cash. In such a situation, the goodwill account is raised in the books of account by crediting the old partners in the old profi- sharing ratio. When goodwill account is to be raised in the books of account there are two possibilities, (a) No goodwill appears in books at the time of admission, and

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(b) Goodwill already exists in books at the time of admission. Case (a) When no goodwill exists in the books: At the time of the admission of a new partner, the goodwill account must be raised at its full value. This can be done by debiting goodwill account with its full value and crediting the Old partners’ capital accounts in their Old profit sharing ratio. The journal entry will be: Goodwill A/c Dr. To Old Partners’ Capitals A/c (individually) (Being Goodwill raised at full value in the old ratio) This goodwill will appear in the balance sheet of the firm at its full value. EXAMPLE 2. A and B are partners in a firm sharing profits and losses in the ratio of3:2. They decide to admit C for 1/5 share of profits, which he acquires equally from A and B. Goodwill is valued at Rs.30,000. C brings in Rs. 16,000 as his capital but does not bring any amount for goodwill. No goodwill account exists in books of the firm. Goodwill account is to be raised at full value. Record the necessary journal entries. Sometimes, a partner may bring in a part of his share of goodwill in Cash Now In such a situation, after distributing the amount brought in for goodwill among the old partners in their sacrificing ratio, the Goodwill account will be raised in the books based on the portion of premium not brought by the new partner. Let us take an example on this point EXAMPLE 3. A and B are partners sharing profits in ratio of 3:1. They admit C as a new partner for 1/5 share in profits. C is to bring in Rs.20,000 as his share of goodwill as the total value of goodwill is estimated at Rs. 1,00,000. But he is able to bring only Rs. 10,000 (half of what is due) on this account. SOLUTION3. In this case, after crediting Old Partners with Rs. 10,000 to A and B capital accounts in their sacrificing ratio (3:1), Goodwill account will be raised by Rs. 50,000 (half of its total value) by crediting in their old profit sharing ratio. (i) Cash A/c Dr.10,000 To Goodwill / Premium A/c 10,000 (ii) Goodwill / Premium A/c Dr.10,000 To A’s Capital A/c 7,500 To B’s Capital A/c 2,500 (iii) Goodwill A/c Dr.50,000 To A’s Capital A/c 37,500 To B’s Capital A/c 12,500 (Being Goodwill raised at remaining value in old ratio) Case (b) When goodwill already exists in the books: If the books already show some balance in the Goodwill Account, the adjustment for goodwill in the old partner’s capital accounts shall be made only for the difference between the agreed value of goodwill and the amount of goodwill appearing in books.

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The amount of goodwill appearing in the books may be less than its agreed value or it may be more than the agreed value. If it is less than the agreed value, the difference between the agreed value of goodwill and the amount of goodwill appearing in the books will be debited to goodwill account (i.e. Raised) and credited to old partner’s capital accounts in their old profit sharing ratio. Journal entry will be as under: Goodwill A/c Dr. To Old Partners’ Capital A/c (Goodwill raised to its agreed value) EXAMPLE 4. Ram and Rahim are partners in a firm sharing profits and losses in the ratio of 3:2. Rahul is admitted into partnership for 1/3 share in profits. He brings in Rs.10,000 as capital, but is not in a position to bring any amount for his share of goodwill which has been valued at Rs. 30,000. Give necessary journal entries when the goodwill already appears at Rs 15,000 in the books If, however, it is more than the agreed value, the difference will be debited to the old partners’ capital accounts in their old profits sharing ratio and credited to the goodwill account (Written off) Journal entry will be as under: Old Partners’ Capital A/c Dr. To Goodwill A/c (Goodwill brought down to its agreed value) EXAMPLE 5. Ram and Rahim are partners in a firm sharing profits and losses in the ratio of 3:2. Rahul is admitted into partnership for 1/3 share in profits. He brings in Rs.10,000 as capital, but is not in a position to bring any amount for his share of goodwill which has been valued at Rs. 30,000. Give necessary journal entries when the goodwill appear at Rs. 36,000 in the books Normally, when goodwill is raised in the books of the firm, it is shown in the balance sheet. If, however, the partners decide that after necessary adjustments have been made in the old partners’ capital accounts, the goodwill should not appear in the firm’s balance sheet, then it has to be written off. This is done by Capital a/c(All partners) (including new) Dr. To Goodwill account (in New profit sharing ratio). The net effect of such treatment will be that the new partner’s capital account stands debited to the extent of his share of goodwill and the old partners capital accounts credited in the ratio of their sacrifice, and the Goodwill shows nil balance in the Balance sheet. EXAMPLE 6. A and B are Equal partners. They admit C into partnership and the new ratio is fixed as 4:3:2. C is unable to bring anything for goodwill but brings Rs 25,000 as capital.

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Goodwill of the firm is valued at Rs 18,000. Give the necessary journal entries assuming that the partners do not want goodwill to appear in the Balance Sheet. Solution 1. Cash A/c Dr. 25,000 To C’s Capital A/c 25,000 (Cash brought in by C as Capital) 2. Goodwill raised at its full value Goodwill 18,000 To A’s Capital A/c 9,000 To B’s Capital A/c 9,000 3. A’s Capital A/c Dr. 8,000 B’s Capital A/c Dr. 6,000 C’s Capital A/c Dr. 4,000 To Goodwill A/c 18,000 Just see the net effect of the entries (2) and (3). C’s Capital account has been debited by Rs. 4,000 and A’s Capital account and B’s Capital account credited in their sacrificing ratio by Rs 1,000 (credit Rs 9,000 – debit Rs 8,000) and Rs 3,000 (credit Rs 9,000 – debit Rs 6,000 ) respectively, and goodwill will show nil balance. Sometimes, the partners may decide not to show goodwill account any wherein books (not even in the journal and ledger). In that case, for adjustment of goodwill, just one entry can also be passed: New partner’s capital account Dr. (with his share of goodwill) To Old partners’ capital accounts (in their ratio of sacrifice). If in the EXAMPLE given above we were to treat goodwill in this manner, then the entry for goodwill would have been as follows: C’s Capital A/c Dr. 4,000 To A’s Capital A/c 1,000 To B’s Capital A/c 3,000 (Adjustment for C’s share of goodwill) The above entry has same effect on partners’ capital a/c’s as journal entries (2) and (3). It is important to mention here that in the normal course Raising of goodwill as an Asset should be avoided and, if and when it is brought in to books, it should be written off in the shortest possible period (As a matter of Financial Prudence), because it is a Non-productive asset. Adjustment for Accumulated Profits and Losses Sometimes a firm may have accumulated profits (existing in the Balance sheet). It means they are not yet transferred to capital accounts of the partners. These are in the form of general reserve, reserve fund and/or Profit and Loss Account (Credit balance). Obviously, these Profits/Reserves are due to the Efforts of Old Partners. So, the new partner is not entitled to have any share in such accumulated profits. So, very correctly, these are distributed among the old partners in their capital accounts in old profit sharing ratio.

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General Reserve A/c Dr.

Reserve Fund A/c Dr.

Profit and Loss A/c Dr.

Investment Fluctuation Reserve A/c Dr.

Contingency Reserve A/c Dr.

Workmen Compensation Reserve A/c Dr.

To Old Partners' Capital A/c

(Being distribution of accumulated profits among old partners in old ratio)

Similarly, if there are some accumulated losses in the form of a debit balance of profit and loss account appearing in the balance sheet of the firm, the same are transferred to the Debit side of old partners’ capital accounts in old ratio.

Old Partners' Capital A/c Dr.

To Profit and Loss A/c

To Advertisement Suspense A/c

To Deferred Revenue Expenditure A/c

(Being distribution of undistributed losses among old partners in the old ratio)

EXAMPLE 7. X and Y are partners in a firm sharing profits in the ratio of 4:1. They admit Z as a new partner. On that date there was a balance of Rs. 20,000 in General reserve and a debit balance of Rs. 10,000 in the profit and loss account of the firm. Pass necessary journal entries regarding adjustment of accumulated profit or loss.

❖ Revaluation Account:

Revaluation account or profit and loss adjustment account are the same.

● Credit the increase in the value of assets or decrease in the number of liabilities to revaluation account, being profit.

● Debit the decrease in value of assets or increase in the number of liabilities to revaluation account, being a loss.

● The difference between the two sides of the revaluation account is either profit or loss.

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Particulars Amount Particulars Amount

To Decrease in assets

By Increase in assets

To Increase liabilities

By Decrease in liabilities

To Unrecorded liabilities

By Unrecorded assets

To Profit transferred to old partners’ capital accounts

By Loss transferred to old partners’ capital accounts

Journal Entries:

Date Particulars Amount (Dr.)

Amount (Cr.)

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1. Increase in value of assets

Asset’s a/c Dr.

To Revaluation a/c

(Being value of assets increased)

2. A decrease in value of assets

Revaluation a/c Dr.

To Assets a/c

(Being value of assets decreased)

3. Increase in the number of liabilities

Revaluation a/c

Dr.

To Liabilities a/c

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(Being increase in liabilities)

4. A decrease in the amount of liabilities

Liabilities a/c

Dr.

To Revaluation a/c

(Being decrease in liabilities)

5. Unrecorded assets

Unrecorded assets a/c

Dr.

To Revaluation a/c

(Being unrecorded asset now recorded)

6. Unrecorded liabilities

Revaluation a/c

Dr.

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To Unrecorded liabilities a/c

(Being unrecorded liability now recorded)

7. Revaluation profit

Revaluation a/c Dr.

To partners’ capital a/c

(Being profit transferred to partners capitals accounts)

8. Revaluation loss

Partners’ capital a/c

Dr.

To revaluation a/c

(Being loss transferred to

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partners’ capital accounts)

❖ Adjustment of partner’s capital

There are two cases for adjustment of capital at the time of admission

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Example Question:

A and B were partners sharing profits equally. Their balance sheet as at 31st March 2018 was:

Liabilities Amount Assets Amount

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Creditors 50,000 Cash 12,000

Bills payable 15,000 Cash at bank 15,000

Outstanding expenses 3,000 Debtors 20,000

Capital a/cs: Less: provision for doubtful debts 500

19,500

A 60,000 Stock 20,000

B 40,000 Furniture 10,000

Machinery 8,000

Land and Building 73,500

1,68,000 1,68,000

A and B admit C as a partner from 1st April 2018 on the following terms:

1. He will get the 1/5th share in profits and he will bring in Rs 20,000 as his capital and Rs 5,000 as his share of goodwill.

2. C brings Goodwill and A and B withdraw it.

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3. Bring Provision of doubtful debts up to 5% on debtors.

4. Depreciate Machinery by Rs 2,000 and furniture by 12.5%.

5. Value of Stock is Rs 23,000.

6. Appreciate Land and Building by 20%.

7. Record Investments of Rs 2,000 which do not appear in books.

8. Out of the amount of insurance premium which was debited to profit and loss account, Rs 5,000 be carried forward as unexpired insurance.

9. A bill of Rs 5,000 for electricity expenses was omitted to be accounted for.

Prepare revaluation account, partner’s capital account, and balance sheet.

Ans:

Revaluation Account

Particulars Amount Particulars Amount

To Provision for doubtful debts 500 By Stock a/c 3,000

To Machinery a/c 2,000 By Land and Building a/c 14,700

To Furniture a/c 1,250 By Investments 2,000

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To Outstanding electricity a/c 5,000 By Prepaid insurance a/c 5,000

To Profit transferred to:

A 7,975

B 7,975 15,950

24,700 24,700

Partner’s Capital Account

Particulars A B C Particulars A B C

To Cash a/c 2,500 2,500 —- By Balance b/d

60,000 40,000

To Balance c/d

67,975 47,975 20,000 By Cash a/c —- —- 20,000

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By Premium for goodwill a/c

2,500 2,500 —-

By Revaluation a/c

7,975 7,975 —-

70,475 50,475 20,000 70,475 50,475 20,000

Balance Sheet as at 1st April 2018

Liabilities Amount Assets Amount

Bills payable 15,000 Cash in hand (Working note) 32,000

Creditors 50,000 Cash at bank 15,000

Outstanding expenses 8,000 Stock 23,000

Capital a/cs Debtors 20,000

A 67,975 Less: Provision for doubtful debts 1,000

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B 47,975 Prepaid insurance 5,000

C 20,000 Furniture 8,750

Machinery 16,000

Land and Building 88,200

Investments 2,000

2,08,950 2,08,950

Working note:

Cash A/c

Particulars Amount Particulars Amount

To Balance b/d 12,000 By A 2,500

To C 20,000 By B 2,500

To Premium for goodwill a/c

5,000 By Balance c/d 32,000

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37,000 37,000

DISSOLUTION OF PARTNERSHIP ‘Dissolution of partnership’ is a situation in which any partner of the firm separates himself from the firm due to retirement, death or any other reason or departs from the firm or termination of the old partnership agreement is called dissolution of partnership. In this situation the outgoing partner has no relation with any other partner and the remaining partners continue to carry on the business of the firm under the old name.

DISSOLUTION OF PARTNERSHIP FIRM

The dissolution of the partnership firm takes place when the relations of all the partners with each other does not exist. In case of dissolution of a firm, the business of the firm is closed down and its affairs are wound up. The assets are sold off and liabilities are paid off.

CIRCUMSTANCES LEADING TO DISSOLUTION OF PARTNERSHIP FIRM The dissolution of partnership may arise due to the following reasons:

a. Expiry of the term of partnership business b. Completion of the business c. Death of the partner d. Insolvency of the partner e. Retirement of a partner

In all the situations mentioned above the remaining partners may continue the firm business. However if they do not want to continue the business the dissolution of the firm takes place. In addition to the above circumstances the dissolution of the partnership business and partnership firm takes place in the following cases;

a. On agreement of the partners to dissolve the firm; b. All the partners or all the partners except one are insolvent; c. Partnership business becomes illegal; d. In case of partnership at will, when a notice in given by any partner for

dissolution of firm; e. Under the order of court for dissolution; The court may order for dissolution of the partnership firm in the following circumstances;

Self-Assessment Question 1-What do you understand by dissolution of partnership and partnership firm?

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1. Any partner become of unsound mind 2. Any partner suffers from permanent incapacity 3. Any partner is guilty of misconduct affecting the business 4. On persistent disregard of partnership agreement by a partner 5. On transfer of interest or share to a third person; 6. Business accruing a loss on a continuous basis 7. Dissolution appears to be justified to the court.

SETTLEMENT OF ACCOUNTS In event of dissolution, the assets of the firm are sold and the amount realized from the assets are utilized for the payment of external liabilities. If their remains any surplus after payment of external liabilities the payment is made to the partners for the loan they had provided. Thereafter if their remains any surplus fund the balance is utilised to return the capital of the partners. If partnership business has obtained some loan for the firm from external sources and even the partners have provided loan to the firm then in such a situation the firm’s asset will be first utilized for the payment of loans borrowed from external sources and then from the balance fund (if any) the partner’s loan will be refunded. In the same manner the partners will utilize their private assets to pay of their personal loans and if any surplus is left after meeting their personal liabilities, it will be utilized for the payment of firms loan. When all the partners are solvent and they want to dissolve the partnership business then following accounts are prepared:- 1-Realisation Account 2-Partner’s Capital Account 3-Partner’s Loan Account 3-Cash Account The discussions of the above accounts are as under:-

REALISATION ACCOUNT A realization account, which is of the nominal nature, is prepared to find out the profit or loss on realization. For this purpose the following activities are carried out.

a) All the assets (except cash and bank balance) are transferred to the debit side of realization account at the there book values.

b) In case if the asset which is being transferred to the realization account has any provision created against it then such asset should be transferred to the realization account at their gross figure. The provision created against these assets will be transferred to the credit side of the realization account.

Self-Assessment Question

1-Under what circumstances the partnership firm may be dissolved?

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c) All external liabilities should be transferred to the credit side of realization account at their book values (except partner’s loan account and capital account).

d) The amount realized from the sale of asset for cash should be debited to Cash or Bank account and Realisation Account should be credited.

e) If any asset is taken over by the partner, his capital account should debited and Realisation account should be credited with the agreed value.

f) If any asset has been taken by any creditor for his claim then the liability of the creditor will be reduced by the amount of asset taken over and the remaining liability will be paid off through realization account.

g) The liabilities toward the third parties should be paid off. The amount paid should be debited to Realisation account and credited to Cash account. If any specific amount is not mentioned then it will be assumed that its book value has been paid off.

h) The amount of goodwill shown in the balance sheet will be transferred to the debit side of realization account.

i) Any asset of fictitious nature which can not be converted into cash will not be transferred to the realization account i.e. debit balance of profit and loss account, development expenses, etc. These assets will be transferred to the capital account of the partners.

j) If any partner takes the responsibility to discharge any liability then Realisation account should be debited and Partner’s capital account should be credited with the agreed value at which the liability is taken over by the partner.

k) The amount of realization expenses incurred during the course of dissolution should be debited to realization account and credited to cash or bank account.

l) If there are unrecorded asset, which are not shown in the balance sheet but are physically available with the firm they will be utilized for the payment of liabilities of the firm. For this cash account will be debited and realization account will be credited.

m) If there are unrecorded liabilities that are not shown in the balance sheet but at the time of dissolution they become real liability then they will be paid. For this realization account will be debited and cash account will be credited.

n) The difference in the realization account will represent profit or loss on realization, which will be distributed among all the partners in their profit sharing ratio. If the credit side of realization account is greater than the difference will represent profit and vice-versa loss.

PARTNER’S CAPITAL ACCOUNT

Following records are made in the capital account of the partners:

a) All reserves and undistributed profit will be transferred to the credit side of partner’s capital account in profit sharing ratio.

b) Profit or loss on realization account will be transferred to the capital account of the partners in profit sharing ratio.

c) If the partners have withdrawn any cash for personal use then it will be debited to the partners capital account.

d) Any undistributed loss will be transferred to the debit side of the partner’s capital account.

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e) Any other adjustment which affects the partner’s capital account will accordingly be adjusted.

f) The balance of the capital account will be transferred to cash or bank account. If there is a credit balance in the partner’s capital account then partners will withdraw cash and if there is debit balance in the partner’s capital account he will bring in the balance cash.

g) If the partners have a current account then all the above adjustment will be made in the partner’s current account and the balance will then be transferred to the partner’s capital account.

PARTNERS LOAN ACCOUNT If there appears a partner loan account in the balance sheet then such loan will be paid off by the firm in cash. If the loan has been paid at discount or at a premium then this premium or discount will be transferred to realization account accordingly.

BANK/CASH ACCOUNT

1. The balance of the bank and cash account is brought in the debit side of this account.

2. The amount realized from the sale of asset is recorded in the debit side of the account.

3. The amount paid to the following are recorded in the credit side of the account: a. Payment to creditors b. Payment of realization expenses c. Payment of partners loan d. Payment to partners

Self-Assessment Question 1. What accounts are opened for settlement of accounts in case

of dissolution 2. How are assets and liabilities dealt in case of dissolution of

partnership firms in realization accounts

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Journal Entries for Realisation Accounts Dr. Cr.

A

B

C

Realisation A/c …… …. Dr.

To Sundry Assets A/c

(Being book value of assets

transferred to Relisation A/c )

Book Value

of Assets

Value as per

Balance

Sheet

Realisation

Amt. of

Assets

The Same

The Same

The Same

Provision for Bad Debts ……… Dr.

Provision for Depreciation …… Dr.

Specific Reserves and Funds. Dr.

To Realisation A/c

(Being Various Specific reserves and

Funds Transferred)

Bank A/c ….. Dr.

To Realisation A/c

(Being record for the amount realised

by sale of assets )

D

E

F

G

H

I

J

Partners’ Capital A/c………. . Dr.

To Realisation A/c

(Being taken over by the partners)

The price at

which

liabilities are

paid off

Book Value

of Liabilities

The Value at

which

liabilities are

paid off

Expenses of

Dissolution

Amt. of Loan

Amt. of Loan

Premium

The Value at

which the

The Same

The Same

The Same

The Same

Amt. Paid

Discount

Amt. Paid

The Same

Sundry Liabilities A/c ………… .Dr.

To Realisation A/c

( Being transfer of liabilities to

Realisation A/c at book value )

Realisation A/c ……………Dr

To Bank A/c

(Being Payment of Liabilities )

Realisation A/c ………………Dr

To Bank A/c

(Being payment of loan and expenses

)

Partner’s Loan A/c……………….Dr.

To Cash A/c

To Realisation A/c

( Being payment of loan at discount )

Partner’s Loan A/c ………. Dr.

Relisation A/c ………………Dr.

To Cash A/c

( Being payment of loan at premium )

Realisation A/c ………………..Dr.

To Partners capital or Current A/cs

ACM 101 (2021-22) Lesson 1

25

K

L

( Being the liabilities taken over by the

partners)

liabilities are

taken over

Profit

Loss

Profit

Loss

Realisation A/c ………………..Dr.

To Partners Capital or Current A/c

( Being profit on realization

transferred to Capital Accounts of the

partners)

Partners’ capital or Current A/c… Dr.

To Realisation A/c

( Being the loss on Realisation

transferred to Capital Accounts of the

partners )

Specimen of Realisation Account

To Sundry Assets

( write the names of all real

assets separately)

To Bank A/c

To Bank A/c

To Partners Capital or

Current A/c( if partners

have taken over the

liabilities )

To Bank A/c (Premium

paid on partners loan’s )

To Partners Capital or

Current A/c ( if profit )

Book

Value

Expense

s

Creditor

Profit

By Sundry Liabilities

(names of the liabilities &

write them separately)

By Specific reserves

By Bank

By Partners Capital or

Current A/c ( if assets is

taken over by the partners )

By Partners loan A/c

(Discount on this loan )

By Partners Capital or

Current A/c ( If loss )

Book

Value

Realisabl

e

Value of

assets

Value of

the

Assets

Loss