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Dissolution of Partnership Firm: Meaning and Example

Last Updated : 05 Apr, 2023
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What is Dissolution of a Partnership Firm?

Dissolution of the firm means dissolution of the partnership among the partners of the firm. The business is closed, and an end comes to the business relationship among partners on the dissolution of the firm. The firm is dissolved either by a court order or without legal intervention. The firm is dissolved by court order when a partner becomes a person of unsound mind, permanently incapacitated, or found guilty of misconduct on breach of partnership agreement purposely by any partner, the court, then finds the dissolution of the firm justified. The firm is dissolved without court intervention in case of partnership at will when all the partners agree to do s; or when one or all partner becomes insolvent; business becomes unlawful; completion of the venture; dissolution by notice. On dissolution of the partnership, firm’s assets are realised and the liabilities are settled. All the reserves and accumulated profit and loss standing in the balance sheet on the date of dissolution are distributed among the partners in their profit-sharing ratio. The partner’s capital account is settled by making a payment to the credit balance in relation to the final settlement, or the partner brings in the amount of deficiency(debit balance) to his/her capital account for the final settlement.

Illustration 1:

Balram, Rama, and Komal are partners sharing profit in a ratio of 3:3:4. On 30th November 2022, they decided to dissolve their firm.


In addition to this:

  1.  A contingent liability of ₹7,950 not brought into the accounts matured and had to be met.
  2. The land was realised at a value of ₹90,000, and the furniture was realised for ₹30,450.
  3. Creditors were fully paid.

Pass necessary Journal entries and prepare necessary Ledger Accounts to close the books.








Illustration 2:

Krishna and Rukmani were partners for an equal share. The Balance Sheet of their firm was as under:


They decided to dissolve the firm on the same date. Further, the firm was dissolved on the following terms:

  1. ₹ 3,000 out of debtors become a bad debt.
  2. The stock sold at 10% less book value.
  3. Goodwill couldn’t realise any value.
  4. Building realised at ₹ 1,80,000.
  5. Creditors were paid off at a discount of 3%.
  6. Dissolution Expenses amounted to ₹ 3,000.

Pass necessary Journal entries and prepare necessary Ledger Accounts to close the books.







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