UNIT V

Accounting of Dissolution of Partnership firm

5.1 Simple dissolution, Insolvency of all partners

Definition of Dissolution:

According to Section 39 of the Indian Partnership Act of 1932, the dissolution of a partnership between all partners of a company is called the dissolution of the company. The dissolution of the company is a complete collapse of the partnership and the partners will not continue the company.

Dissolution of a partnership means the restructuring of the company due to the retirement of a partner, and the remaining partners will provide the survival of the company in accordance with an explicit or implied agreement to that effect. When the company dissolves, the company is closed, so the company's assets are realized and the debt is exempted.

On the other hand, when the partnership is dissolved, the share of the seconded partner will be confirmed and the company will not be closed. Modes of Dissolution of a Company: Sections 40-44 of the Indian Partnership Act of 1932 deal with various methods by which a company may dissolve.

The company can be dissolved in any of the following ways:

Dissolution by agreement: If all partners agree to dissolve, the company will dissolve. Partnerships are the creation of contracts. Similarly, the company can be dissolved by agreement.

Dissolution of the Unforeseen Event: Unless the opposite contract is between partners, the company will dissolve in one of the following ways:

1. By the expiration of the company's lifetime.
2. By the completion of the adventure in which the company was formed.
3. By the death of a partner.
4. By the ruling of a bankrupt partner.

Dissolution by the will of the partnership: If the partnership is willing, the company may be dissolved at any time by a partner who informs all other partners in writing of their intention to dissolve the company.

Forced dissolution or dissolution due to the operation of the law: The company will be forced to dissolve in one of the following ways:

1. If all partners go bankrupt except.
2. When all partners go bankrupt.
3. When the business becomes illegal.
4. When the number of partners exceeds 20 in the case of regular business and 10 in the case of banking business.

Dissolution by Court: In a partner proceeding, the court may order the dissolution of the company in any of the following ways:

1. When a partner becomes unhealthy.
2. When a partner suffers from permanent incompetence and is unable to perform his or her duties as a partner.
3. If a partner is found guilty of an illegal act that affects the business of the company.
4. When a partner commits a deliberate or permanent breach of agreement.
5. When a member transfers all of the company's interests to a third party, or when the shares are transferred in accordance with the law, or when they are sold in the course of the law.
6. When the business of the company cannot be continued except for the loss.
7. Dissolve the company when the court is satisfied with the reason for making it fair and impartial.
8. Realization and Revaluation Accounts Created to realize a company's assets, the realized amount is used to pay the company's liabilities as required by law.
9. If there are costs incurred by the company to realize the company's assets (called realization costs), they are debited to this account. The difference between the two aspects of this account is that it discloses either realization gains or losses and is transferred to the partner capital account at a profit-sharing rate.

Realized accounts are different from revaluation accounts.

Criterion:

Time factor Asset recording Purpose Cost-effectiveness Realization account: Created when the company dissolves. Record the book value and realized value of assets and liabilities. Its main purpose is to realize the company's assets and use this amount to pay the company's liabilities to distribute the profits or losses from this effect to all partners. Contains an entry for dissolution costs. Record the impact of realization of various assets and payment of liabilities. After opening this account, all accounts in your ledger will be closed. That is, it will be liquidated.

Revaluation account:

1. Created at the time of deposit, partner's death, etc. 
2. Its main purpose is to revalue the company's assets and liabilities upon joining, leaving, or dying a partner so that the partner does not benefit or suffer from a partnership change.
3. It does not include entries for expenses incurred in revaluing assets and liabilities.
4. Record the impact of revaluation of assets and liabilities. The company will continue after opening this account.

Bankruptcy Definition: If a partner's capital account shows a debit balance at the time of the company's dissolution, he is supposed to pay the company a debit balance to settle this account.

However, if such a partner goes bankrupt, that is, if he cannot meet his debt to the company, according to Garner vs. Murray's decision, his shortage that he cannot bring will be borne by other solvent partners.

In this case, it was decided that the company would have to bear the shortage of the bankrupt partner's capital account unless there was an opposite agreement.

The effect of this ruling is to distinguish between the normal loss of trading or realization of an asset and the loss of a partner's bankruptcy.

The loss in case of bankruptcy is a capital loss and must be borne by another solvency partner with that capital.  This ruling was given to return the solvent partner's capital account to the value before the transfer of the loss of realization.

Fixed and variable capital: When determining the capital ratio of solvent partners, it is necessary to distinguish between fixed and variable capital.

If it is agreed that the partner's capital will be fixed, no adjustments such as cumulative profit or loss, interest on capital, drawings, etc. will be required, and the bankruptcy partner shortage will be payable in proportion to the agreed fixed capital

The partner will pay for it if the capital account is maintained on a variable basis, the capital account is adjusted for reserves, profit or loss, interest on capital, drawings, and unrecorded assets and liabilities on the date of the balance sheet immediately before the firm dissolves need to do it.

Date / Senior Number Details LF Debit Credit Solvent Partners Current a / c Dr. To Insolvent Partners Capital a / c (Transfer the insolvent partner's shortfall to the Solvent Partner's checking account in proportion to the agreed fixed capital. ) Date / Senior Number Details LF Debit Credit Solvent Partners Capital a / c Dr. To Insolvent Partners Capital a / c (Transfer the shortfall of Solvent Partners to the Solvent Partners Capital Account)

If all partners go bankrupt: If all partners go bankrupt and cannot bring the amount to be paid, the full amount cannot be paid to the creditors of the company. Second, there are two ways to close a company's books.

(A)  If the external liability cannot be transferred to the realized account: Follow these steps:

1. Miscellaneous assets (excluding cash and bank balances) will be debited to the realized account as usual.
2. Realization accounts are credited when the asset is realized.
3. For realized costs, the realized account is debited and the cash account is credited.
4. If the liability is secured, the liability will be paid preferentially within the realization of the asset held as collateral.
5. The amount the partner brings in from private land is credited to the capital account and debited to the cash account.
6. A cash account is provided to calculate the amount available for payment to unsecured external liabilities.
7. The balance of the unsecured external liabilities account represents the amount not paid to these creditors and is closed by the transfer to the shortfall account.
8. The capital account (after all entries) is closed by transferring the balance to the shortage account. The shortfall account, if prepared, will be aggregated.

(B) If the effects of realization of all assets and liabilities pass through the realization account:

(A)  In this case, the external liabilities are also transferred to the realization account. External liabilities are paid in the amount available for unsecured external liabilities that can be identified by creating a cash account.

(B)   Secured creditors (within collateral mitigation) are always paid preferentially over unsecured creditors.

(C)  Realized losses are transferred to the capital account.

(D)  The balance of the capital account is transferred to the shortage account.

(E)   Shortage accounts are aggregated when prepared

Sale to Company Definition: Partnership conversion means changing the status of a partnership company to a joint-stock company. A new company was established to take over the business of the company. A conversion is like selling a partnership business to a new company.

The need to convert partnerships into companies: Shareholder responsibilities are limited. The company can raise more money to expand its business.

1. The entity of the company is separated from its members. Membership, death or bankruptcy does not affect the survival of the company.
2. To take advantage of lower income tax rates.
3. To enjoy the benefits of large-scale production.
4. The business unit must survive.

Purchase Consideration: The amount that the purchasing company pays to the vendor company to take over the assets and liabilities.

Calculation method of purchase conditions:

One-time method: The case of making a fixed amount or one-time payment from the purchasing company of the vendor company is called the one-time method.

Net Payment Method: In this method, the purchase consideration is the sum of all payments made by the company to the vendor company, in the form of stocks, bonds, and cash.

Net worth method: This method calculates the total assets inherited at the value agreed by the company and deducts the agreed value of the liabilities assumed.

Gradual Realization and Gradual Distribution of Assets: In tiered asset realization, realized cash is distributed in the following order to avoid overpayment to partners:

1. Realization costs are paid first because they take precedence over unsecured. a creditor.
2. Second, the company's debt to third parties must be paid in full before the partner pays any amount of the loan and capital.
3. Secured creditors should take precedence over unsecured creditors. After the creditor is repaid, you must pay the amount you should pay to your partner as a loan.
4. If the loan is from multiple partners, the available cash must be paid properly. After payment of external debt and loans to the member, the member's capital is paid in two ways:

1. Proportional capital method
2. Maximum loss method

(i)Proportional capital method: If a member's capital is in a ratio, their profit-sharing arrangements, and each of them is paid according to his capital ratio in each distribution. If the partner's capital is not in the profit-sharing ratio, the first cash that can be distributed between the partners must be paid to the partner whose capital is greater than the profit-sharing ratio to bring the capital to the profit-sharing level. Cash that can be distributed between partners cannot be distributed according to the profit and loss distribution ratio unless the partner's capital is in the profit and loss distribution ratio. This is because the outstanding balance of the capital account does not remain in the profit and loss distribution. Partner ratio.

(ii) Maximum Loss Method: Another way to distribute cash in small increments between partners is to calculate the maximum loss possible for all realizations after the external debt and partner loan have been paid. The amount distributable between partners is compared to the amount of capital paid to the partners to ensure the maximum possible loss, assuming no future assets realize any amount. The maximum loss thus identified is deducted from the partner's capital at the profit and loss distribution ratio, and the balance left in the capital account after deducting the maximum possible loss is the amount paid to the partner. However, if the share of the partner with the greatest potential loss is greater than the amount standing in the credit of his capital account, he is treated as bankrupt and his shortage is the ratio of the capital of the other partner. Should be debited to the capital account of the other partner in, as stated in the case of Garner vs. Murray, stood on the day of dissolution.

Key takeaways:

1. A partnership is an arrangement between two or more people to oversee the operation of a business and share its interests and debts.
2. In a partnership, all members share both profits and liabilities.
3. Professionals such as doctors and lawyers often form limited liability partnerships.
4. Partnerships may have tax incentives compared to companies.
5. The liquidating company will cease business as usual.
6. Its sole purpose is to sell the assets, pay the creditors and distribute the remaining assets.
7. Liquidation of a business is not the same as bankruptcy, but it is usually the end result of bankruptcy.
8. A partnership is a business consisting of two or more partners, each sharing a business debt, liability, and asset.
9. Partners have unlimited liability and personal property may be seized if the partnership goes bankrupt.
10. Partners must create a written partnership agreement.
11. Partnerships are less expensive to form than companies.

Example 1

Kumar, Shy am and Ratan were partners of companies that each shared profit in a 5: 3: 2 ratios. We have decided to dissolve the company from April 1, 2013. On the day, the company's balance sheet is as follows on As of April 1, 2013.

The following results were obtained due to the dissolution

1. Rs 40,00 for plant. It was taken over by Kumar with an agreed value of 40,000 rupees. 45,000 and the rest of the plants achieved Rs. 50,000.
2. Furniture has realized Rs. 40,000.
3. The motor van was taken over by Siam. 30,000.
4. The debtor has realized Rs. Less than 1,000.
5. Rupee creditor. 20,000 were untraceable and the remaining creditors were paid in full.
6. The realization cost has reached rupees. 5,000.

Prepare realization accounts, partner capital accounts, and company bank accounts.

Note: If there is no information about the realization of an asset, it is assumed that nothing will be realized from that asset (such as a stock in this case).

Working Note:

1. Realized loss = 1,000

Realized loss transferred to Kumar's capital account = 1,000 x 5/10 = 500

Realized loss transferred to Shyam's capital account = 1,000 x 3/10 = 300

Realized loss transferred to Rattan's capital account = 1,000 × 2 = 200

2. Creditor = 1,20,000

20,000 of them were untraceable

Therefore, the creditor was paid in full payment of 1,20,000 – 20,000 = 1,00,000.

Example 2

The Ravi and Mohan companies were dissolved on January 3, 2013. According to the agreement, Rabbi agreed to carry out the dissolution work with the agreed reward of 2,000 rupees and to bear all the realization costs. The dissolution cost was rupees. The same as 1,500 was paid by the company. Pass the journals required to pay the dissolution fee.

Solution:

1. Realization A / c …… .. Dr   1,500

To cash A / c                                                    1,500

(The cost of realization will be paid.)

Ii.                 Realization A / c …… ..           Dr. 600

To Mohan's capital A / c                            600

(The cost of realization will be borne by the partner.)

Iii.               Realization account …… .. Dr 2,000

To the capital of Mohan, A / c 2,000

(The cost of realization will be paid to Mohan.)

No entry

Example 3

How are undistributed profits such as general reserves and income statement credit balances treated when the company is dissolved?

Solution

The court may order the dissolution of a partnership company in the event of bankruptcy of all partners or all but one partner.

Example 5

What is a partnership breakup?

Solution

According to Section 39 of the Indian Partnership Act of 1932, the dissolution of a partnership between all partners of a company is called the dissolution of the company. The dissolution of the company is a complete collapse of the partnership and the partners will not continue the company.

Dissolution of a partnership means the restructuring of the company due to the retirement of a partner, and the remaining partners will provide the survival of the company in accordance with an explicit or implied agreement to that effect. When the company dissolves, the company is closed, so the company's assets are realized and the debt is exempted.

On the other hand, when the partnership is dissolved, the share of the seconded partner will be confirmed and the company will not be closed. Modes of Dissolution of a Company: Sections 40-44 of the Indian Partnership Act of 1932 deal with various methods by which a company may dissolve.

Example 6

Identify situations in which the court may order the dissolution of the partnership company.

Pass the journal if:

1. Realization cost Rs. 1,500
2. Realization cost Rs. 600, but paid by partner Mohan,
3. Mohan, one of the company's partners, was asked to investigate the dissolution of the company he was allowed to charge for Rs. 2,000.
4. A car with a book value of 50,000 taken over by a creditor with a book value of Rs. 40,000 for final payment.

Solution

Iv.               Realization A / c …… .. Dr   1,500

To cash A / c                                                    1,500

(The cost of realization will be paid.)

v.                  Realization A / c …… ..           Dr. 600

To Mohan's capital A / c                            600

(The cost of realization will be borne by the partner.)

Vi.               Realization account …… .. Dr 2,000

To the capital of Mohan, A / c 2,000

(The cost of realization will be paid to Mohan.)

Vii.                         no entry

Example 7

A and B share profits and losses in a 5: 2 ratios. They decided to dissolve the company. Assets and external debt have been transferred to Realization A / c. Pass in the journal entries that affect:

1. Rupee bank loan. 12,000 will pay off.
2. A was to bear all the costs of the realization he was given to the Rs fee. 400.
3. The postponed advertising costs A / c appeared in the Rs book. 28,000.
4. Stock equivalent to Rs. It was taken over by B for 1,600 rupees. 1,200.
5. Just as an unrecorded computer realized Rs. 7,000.
6. I had an unpaid invoice for a rupee repair. 2,000. It was rewarded.

Solution

1. Realization A / c Dr.                                       12,000

To bank A / c                                                                        12,000

(Repaying bank loan) …… 12,000

2.     Realization A / c Dr.                                           400

To A / c, the capital of A                                          400

(Commission to A credited to A's capital account)      

3.     Capital of A A / c Dr.                                           20,000

B ’s Capital A / c Dr.                                               8,000

To postponed advertising expenses A / c                         28,000

(Deleted advertising costs, or profit-sharing ratio, cancelled by debiting the partner's capital account at a ratio of 5: 2). 28,000

4.     B's Capital A / c Dr.                              1,200

To       Realization A / c                                          1,200

(The shares have been taken over by B for 1,200 rupees at the agreed value)

5.     Bank A / c Dr.                                            7,000

To Realization A / c                                                      7,000

(Unrecorded computer sells for 7,000 rupees)

6.     Realization A / c Dr.                                  2,000

To bank A / c                                                               2,000

(It must be an unpaid invoice paid for repair)

References:

1. Lal Jawahar and Seema Sriwastava, Financial Accounting, Himalaya Publishing House
2. Monga, J.R, Financial Accounting: Concepts and Application Mayoor Paper Backs, New Delhi.
3. Shukla M.C, T.S. Grewal and S.C. Gupta. Advanced Accounts. Vol-1, S. Chand & Co.
4. Maheshwari S.N, Financial Accounting Vikas Publishing House, New Delhi
5. Jain S.P. And K.L. Narang Financial Accounting Kalyani Publishers New Delhi
6. Bhushan Kumar Goyal and, HN Tiwari, Financial Accounting, Vikas Publishing House, New Delhi
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8. Compendium of Statements and Standards of Accounting, ICAI, New Delhi.