Meaning
To dissolve a partnership means to bring an existing partnership business to an end. This entails selling the assets of the business, paying its creditors and other liabilities and sharing the balance of cash left between or among the partners in the agreed ratio.
Reasons for Dissolution
Any of the following reasons can lead to the dissolution of a partnership.
- Retirement of partner i.e a partner gives notice of his intention to retire from the partnership
- Admission of a new partner
- A partner giving notice to other partners of his opinion that the business be dissolved.
- Insanity of a partner i.e a partner’s problem of unsound mind.
- Bankruptcy or inability of a partner to pay his debt.
- Death of a partner
- A joint decision by the partners to dissolve the partnership
- If any time agreed upon expires
- The business can no longer make profit
- If it becomes illegal to continue to trade on the main object the business was established.
MAIN ACCOUNTS OPENED
- Cash/Bank A/c: To record the receipt of cash/cheque for assets disposed of, payments to creditors, expenses of dissolution and fund disbursements to the partners.
- Realization: To record book value and sales proceeds of assets sold, dissolution expenses, assets taken over by partner and the share of profit or loss on dissolution.
- Partner’s Capital A/C: To record share of profit or loss, goodwill, assets taken over, amount paid to partners or amount paid by a partner as a result of deficit, etc.
ACCOUNTING ENTRIES
- Book value of assets to be realized (excluding bank and cash)
Dr. realization A/c
Cr. Assets A/c.
- Assets sold
Dr. Cash or bank A/c
Cr. Realization A/c with cash proceeds
- Assets taken over by a partner
Dr. The capital A/c of partner
Cr. Realization A/c with the value of such an asset(s).
- Settlement of liabilities
Dr. liability A/c
Cr. Cash or bank A/c with amount involved
- Dissolution expenses
Dr. Realization A/c
Cr. Cash or Bank A/c
- Discount received from creditors
Dr. Creditor(s) A/c
Cr. Realization A/c
- Settlement of a creditor
Dr. Creditor A/c
Cr. Cash or Bank A/c
- Paying off a partner’s loan A/c
Dr. loan A/c
Cr. Cash or Bank A/c
- Profit on realization
Dr. Realization a/c
Cr. Partners A/c
- Loss on Realization
Dr. Partners’ capital A/c
Cr. Realization A/c
- Cash or Cheque paid in by a partner who has a debit balance
Dr. cash or Bank A/c
Cr. The capital a/c of partner concerned
- Final settlement of cash to partners
Cr. Cash or Bank A/c
Dr. each partner’s capital A/c
The double entry in item (L) above marks the end of the dissolution process, and the cash or bank balance must be the same as the amount required to be paid to each partner.
FORMATS
Realization A/c
N N
Book Value of Assets Amount from Sales
Business premises x Business premises x
Motor vehicle x Motor vehicle x
Furniture and fittings x Furniture and fittings x
Plant & machinery x Plant & machinery x
Debtors x Debtors x
Stock x Stock x
Dissolution expenses x Discount received x
Share of profit
A x
B x
C _x_
Xxx xxx
Dr Cash Book Cr
N N
Balance b/f x Dissolution cost x
Realization account Creditors x
Plant and machinery x Settlement of loan x
Debtors x Capital:
Motor Vehicle x K x
Stock x O x
Equipment x P _x_ x_
XX XX
Dr Partners Capital Accounts Cr
| A | B | C | A | B | C | ||
| N | N | N | N | N | N | ||
| Cash book | X | X | X | Balance b/f | X | X | X |
| Share pf profit | X | X | X | ||||
| xx | xx | xx | xx | xx | xx |
Ledger Entries
Dr. Plant and machinery account Cr.
N N
Balance b/f x Realization account x
Dr. Motor vehicle account Cr.
N N
Balance b/f x Realization account x
Dr. Furniture account Cr.
N N
Balance b/f x Realization account x
Dr. Stock account Cr.
N N
Balance b/f x Realization account x
Dr. Creditors account Cr.
N N
Bank X Balance b/f x
Evaluation question
- What is the dissolution of partnership?
- Give five reasons why a partnership may be dissolved.
Example:Ronke and Yetunde are in partnership, sharing profits and losses 3:2 respectively. The balance sheet as at 31st December 2000 when it was dissolved appeared as follows:
Balance Sheet Assets
Capital:
Ronke 5,500 Fixture and fittings 1,050
Yetunde 3,500 Plant and machinery 650
Creditors 1,650 Equipment 1,000
Debtors 900
Bank 7,050
10,650 10,650
- The following assets were realized:
N
Furniture and fittings 1, 500
Plant and machinery 700
Equipment 1, 900
Debtors 850
- Dissolution expenses 250
- The creditors were settled with 1, 500
Required: Prepare the necessary accounts on dissolution
Solution
Dr Realization account Cr.
N N
Book value of assets Amount realized from sales
Furniture and fittings 1,050 Furniture and fitting 1,500
Plant and machinery 650 Plant and machinery 700
Equipment 1,000 Equipment 1,900
Debtors 900 Debtors 850
Dissolution expenses 250 Disc Rec. 150
Share of profit
Ronke (3/5 x 1,250) 750
Yetunde (2/5 x 1,250) 500 1,250
5,100 5, 100
Discount on creditor = N1, 650 – N1, 500 = N150
Dr. Capital account Cr.
| Ronke | Yetunde | Ronke | Yetunde | ||
| N | N | N | N | ||
| Cash | 6, 250 | 4, 000 | Balance b/f | 5, 500 | 3, 500 |
| Share of profit | 750 | 500 | |||
| 6, 250 | 4, 000 | 6, 250 | 4, 000 |
Dr. Creditor account Cr.
N N
Cash 1,500 Balance b/f 1, 650
Discount 150
1,650 1, 650
Dr. Cash book Cr.
N N
Balance b/f 7,050 Creditors 1,500
Furniture and fittings 1,500 Cost of dissolution 250
Equipment 1,900 Capital:
Debtors 850 Ronke 6,250
Plant and machinery 700 Yetunde 4,000 10,250
12,000 12,000
Dr. Furniture and fittings account Cr.
N N
Balance b/f 1,050 Realization 1,050
Dr. Plant and machinery account Cr.
N N
Balance b/f 650 Realization 650
Dr. Equipment account Cr.
N N
Balance b/f 1,000 Realization 1,000
Dr. Debtor account Cr.
N N
Balance b/f 900 Realization 900
EVALUATION QUESTION
- What is goodwill?
- Explain the terms revaluation and realization in partnership accounts
WEEKEND ASSIGNMENT
- The double entry for discount received from creditors on dissolution is (a) Cr. creditor A/c Dr. Cash A/c (b) Cr. Creditors A/c, Dr. Cash (c) Cr. realization A/c; Dr. Creditors (d) Dr. Bank, Cr. Capital A/c
- Loss on an asset realized is debited to realization A/c and credited to ________ A/c (a) Cash (b) Asset (c) Realization (d) Revaluation
- Assets taken over by partners on dissolution are credited to realization A/c and debited to __________ (a) asset A/c (b) cash A/c (c) Capital A/c (d) all of the above
- Discount allowed is debited to ____ A/c (a) capital (b) realization (c) current (d) P & L
- For goodwill on dissolution debit _________ A/c and credit _________ A/c respectively (a) cash and capital (b) goodwill and realization (c) realization and goodwill (d) capitasl and cash
THEORY
- Explain how the proceeds of assets realized is applied in partnership dissolution.
- Provide the double entries for the following on dissolution of the partnership of XYZ.
(a) Discount allowed to debtors N500
(b) Cars taken over by Z N50, 000
(c) Share of loss by X N1000
(d) Y brings cash to meet his deficit N5000
(e) Discount received N2000
GENERAL EVALUATION
- State five differences between cash discount and trade discount
- Identify any seven prime books of account and highlight the uses of each of
them where necessary
- List five advantages of using the imprest system to record petty cash transactions
- Explain the following types of errors (a) omission (b) principle (c) commission
(d) original entry (e) complete reversal of entry (f) compensating error
- Explain how the following items are treated in Profit and Loss Account and Balance
Sheet (a) provision for doubtful debts (b) depreciation on fixed assets (c) accrued
income (d) accrued expenses (e) prepaid expenses
See also
FINAL ACCOUNTS OF A PARTNERSHIP BUSINESS