Dissolution of a Partnership

 

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In today’s class, we will be talking about the dissolution of a partnership. Enjoy the class!

Dissolution of a Partnership

Dissolution of Partnership | classnotes.ng

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.

  1. Retirement of partner i.e. a partner gives notice of his intention to retire from the partnership
  2. Admission of a new partner
  3. A partner giving notice to other partners of his opinion that the business is dissolved.
  4. The insanity of a partner i.e. a partner’s problem of unsound mind.
  5. Bankruptcy or inability of a partner to pay his debt.
  6. Death of a partner
  7. A joint decision by the partners to dissolve the partnership
  8. If any time agreed upon expires
  9. The business can no longer make profit
  10. If it becomes illegal to continue to trade on the main object the business was established.

Main accounts opened

They are:

  1. 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.
  2. 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.
  3. Partner’s Capital A/C: To record share of profit or loss, goodwill, assets taken over, the amount paid to partners or amount paid by a partner as a result of deficit, etc.
Accounting entries
  1. Book value of assets to be realized (excluding bank and cash)

Dr. realization A/c

Cr. Assets A/c.

  1. Assets sold

Dr. Cash or bank A/c

Cr. Realization  A/c with cash proceeds

  1. 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).

  1. Settlement of liabilities

Dr. liability A/c

Cr. Cash or bank A/c with the amount involved

  1. Dissolution expenses

Dr. Realization A/c

Cr. Cash or Bank A/c

  1. Discount received from creditors

Dr. Creditor(s) A/c

Cr. Realization A/c

  1. Settlement of a creditor

Dr. Creditor A/c

Cr. Cash or Bank A/c

  1. Paying off a partner’s loan A/c

Dr. loan A/c

Cr. Cash or Bank A/c

  1. Profit on realization

Dr. Realization a/c

Cr. Partners A/c

  1. Loss on Realization

Dr. Partners’ capital A/c

Cr. Realization A/c

  1. 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

  1. 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

  1. What is the dissolution of partnership?
  2. 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

  1. The following assets were realized:

N

Furniture and fittings                                                          1, 500

Plant and machinery                                                            700

Equipment                                                                           1, 900

Debtors                                                                                     850

  1. Dissolution expenses     250
  2. 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

  1. What is goodwill?
  2. Explain the terms revaluation and realization in partnership accounts
General evaluation
  1. State five differences between cash discount and trade discount
  2. Identify any seven prime books of account and highlight the uses of each of them where necessary
  3. List five advantages of using the imprest system to record petty cash transactions
  4. Explain the following types of errors (a) omission (b) principle (c) commission (d) original entry (e) complete reversal of entry (f) compensating error
  5. 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

Reading assignment

Simplified Bookkeeping and Accounting by F.L Olatunji, Page 315-324.

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) capital and cash

Theory

  1. Explain how the proceeds of assets realized is applied in partnership dissolution.
  2. 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

 

In our next class, we will be talking about Introduction to Company Accounts.  We hope you enjoyed the class.

Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.

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