Back to: Financial Accounting
Good day, class.
This week, we will study the dissolution of a partnership, which occurs when the business comes to an end. All assets are sold, liabilities are settled, and remaining balances are distributed among partners.
Dissolution of a Partnership
1. Reasons for Dissolution
Expiry of the partnership agreement
Mutual agreement of partners
Bankruptcy or death of a partner (if not continued)
Court order due to misconduct or dispute
Completion of the business objective
2. Accounting Procedure for Dissolution
When a partnership is dissolved:
A Realisation Account is prepared to:
Record sale of assets
Record payment of liabilities
Calculate profit or loss on dissolution
Steps Involved:
a. Transfer of Assets (except cash) to the Realisation Account
b. Transfer of Liabilities (except capital and current accounts) to Realisation Account
c. Record sale of assets and payments to settle liabilities
d. Pay off expenses of dissolution
e. Share profit or loss on realisation among partners in their profit-sharing ratio
f. Settle capital accounts: Pay partners or request further contributions to cover losses
3. Order of Payment
According to partnership law and general practice, the following order is followed:
Outside creditors (e.g. suppliers, loans)
Partners’ loans
Capital contributed by partners
Final balances shared as per agreement
If there is a shortage, partners are expected to bring in cash to cover their share of any loss.
4. Illustration (Summary):
Assets = N500,000, sold for N400,000
Liabilities = N150,000
Realisation expenses = N10,000
Loss on realisation = N60,000
Partners A and B share profits equally.
Each partner bears N30,000 of the loss, which is adjusted in their capital accounts.
Important Points to Note
The business ceases to exist after dissolution
All gains and losses must be shared as agreed
Capital accounts must be settled fully
If a partner is unable to pay, ot
hers may have to cover the deficit (subject to agreement or legal provision)