Dissolution of Firm | Dissolution of Partnership Firm | Differences | Partnership Accounting | L 51

Описание: artnerships are a common form of business in India. Partners work together, share profits and losses, contribute capital, and participate in management. But what happens when:

A partner dies?

A partner retires?

A new partner joins?

The firm is permanently closed?

To understand these scenarios, students must be able to differentiate between:

🔹 Dissolution of Partnership

and

🔹 Dissolution of Firm

These two terms may sound similar but have very different meanings, accounting treatments, and implications.

This lecture covers everything in detail — from definitions to legal provisions, practical situations, real-life examples, and distinctions asked in exams.

📚 1. What is Dissolution of Partnership?
📌 Definition:

Dissolution of partnership refers to a change in the existing relationship among partners. The partnership continues to exist, but its structure or composition changes.

📌 Key Points:

The firm continues, but the partnership changes.

Occurs when:

a new partner is admitted

an existing partner retires

a partner dies

there is a change in profit-sharing ratio

Reconstitution occurs, not closure.

📌 Example:

A, B, and C are partners sharing profits equally. B retires.
Here, partnership among A, B, and C ends, but the firm of A and C continues.

📌 Accounting Treatment:

Revaluation Account may be prepared

New ratio and SACRIFICING ratio determined

Adjustments in partners’ capitals

Business does NOT stop

Assets and liabilities continue at old values unless revalued

📌 Implication for Boards:

This concept is asked for 2–3 marks regularly in examinations as a short note or comparison.

📚 2. What is Dissolution of Firm?
📌 Definition:

Dissolution of firm refers to the complete closure of the business, end of partnership agreement, and winding up of affairs.

📌 Key Points:

Business STOPS permanently

Assets are sold

Liabilities are paid off

Remaining cash distributed to partners

Partnership ceases to exist entirely

📌 Example:

A, B, and C are partners. Due to continuous losses or mutual agreement, they decide to shut the business permanently. Here, the firm is dissolved.

📌 Accounting Treatment:

Realisation Account prepared

All assets sold

All liabilities settled

Loan & capital accounts settled

Cash/Bank account is closed at end

📌 Implication for Boards:

This is a detailed chapter with always a 6–8 marks numerical question in final exams.

⚖️ 3. Legal Provisions Under the Partnership Act, 1932

The Partnership Act clearly explains rules related to dissolution.

🔹 A. Dissolution by Agreement (Section 40)

Partners mutually decide to end the firm

Requires consent of all partners

🔹 B. Compulsory Dissolution (Section 41)

Occurs when:

All partners become insolvent

Business becomes illegal
(e.g., ban on business activities)

🔹 C. Dissolution on Happening of Certain Events (Section 42)

Expiry of term

Completion of venture

Death of a partner

Insolvency of a partner

🔹 D. Dissolution by Court (Section 44)

Court may dissolve a firm if:

Partner becomes insane

Misconduct by a partner

Breach of partnership agreement

Continuous losses

Partner unable to perform duties

All these sections have been simplified and explained in this lecture using examples.

🧾 4. Difference Between Dissolution of Partnership & Dissolution of Firm

This is the most asked question in exams.
Students should learn at least 5–6 points of differentiation.

Dissolution of Partnership

Firm continues

Only relationship changes

No realisation account

Business operations continue

Dissolution of Firm

Firm ends permanently

Realisation account mandatory

Assets sold and liabilities paid

Business operations stop

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