Dissolution of Partnership – Partnership Liquidation

When the partnership firm ceases to operarte as a going concern, it is called Dissolution of Partnership. It is also calledPartnership Liquidation.There may be numerious reasons for the dissolution. Few of them are:

  • the completion of the period for which partnership was formed,
  • the completion of the task or project
  • the death of a partner
  • the partner become insolvent
  • the retirement of a partner
  • the order of the court for dissolution of the partnership due to reasons such as gulity of misconduct, unsound mind of a partner, continuous losses etc.

Partnership Liquidation Journal Entries

Realization Account

On dissolution, a realization account is opened which accounts for all the assets sales into cash conversion. The following entries are important in dissolution of partnership:

DebitCredit
In order to close all assets account excluding cash and bank
Ralization accountxxx
Accounts Receivablexxx
Fixed Assetsxxx
Inventory/ Stockxxx
In order to record sale of stocks or inventories
Cashxxx
Realization accountxxx
In order to record sale of fixed assets
Cashxxx
Realization accountxxx
In order to record payment received from debtors/ Accounts receivable
Cashxxx
Accounts receivablexxx
To record payment against all liabilities
Liabilities accountxxx
Cashxxx
In case of gain on realization, following entry is passed:
Realization accountxxx
Adam’s capitalxxx
Boon’s capitalxxx
Donald’s capitalxxx
xxx
In case of loss on realization, following entry is passed:
Adam’s capitalxxx
Boon’s capitalxxx
Donald’s capitalxxx
Realization accountxxx
In case of any loan of a partner, it is paid
Loan Account – Partnerxxx
Cashxxx
To close partner’s account and cash account, the following entry is passed:
Adam’s capitalxxx
Boon’s capitalxxx
Donald’s capitalxxx
Cashxxx

Liquidation Example Problem

Adam, Bevan and Charles decided to liquidate the partnership on Jan 1, 2014. The partnership business is about providing tax, audit and tax consultancy services to the people of Canada. However, due to differences among partners, they have decided to liquidate the partnership. Just before the process of liquidation, following balances were extracted from the balance sheet:

Cash400,000
Goodwill200,000
Sundry assets1,400,000
Liabilities400,000
Adam capital320,000
Bevan capital440,000
Charles capital840,000

Adam, Bevan and Charles share profit & loss in the ratio of 2:2:1 respectively. Other assets realized $ 1,000,000, all liabilities were paid off. All partners are personally solvent.

Required

You are required to pass on general journal entries relating to liquidation and final settlement between partners.

Solution

Adam, Bevan & Charles Partnership

Journal Entries

No.ParticularsDebitCredit
1Cash
Realization
Sundry assets
(Proceed from sale of sundry assets)
400,000
1,000,000
1,400,000
2Adam capital
Bevan capital
Charles capital
Goodwill
(distribution of the goodwill among Adam, Bevan and Charles)
80,000
80,000
40,000
200,000
3Adam capital
Bevan capital
Charles capital
Realization
(Distribution of lass among the Adam, Bevan & Charles)
160,000
160,000
80,000
400,000
4Liabilities
Cash
(Paid to creditors to pay off liabilities)
400,000400,000
5Adam capital
Bevan capital
Charles capital
Cash
(distribution of cash available among the partners)
80,000
200,000
720,000
1000,000