When the partnership firm ceases to operarte as a going concern, it is called Dissolution of Partnership. It is also called Partnership 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:
| Debit | Credit |
| In order to close all assets account excluding cash and bank | |
| Ralization account | xxx |
| Accounts Receivable | xxx |
| Fixed Assets | xxx |
| Inventory/ Stock | xxx |
| In order to record sale of stocks or inventories | |
| Cash | xxx |
| Realization account | xxx |
| In order to record sale of fixed assets | |
| Cash | xxx |
| Realization account | xxx |
| In order to record payment received from debtors/ Accounts receivable | |
| Cash | xxx |
| Accounts receivable | xxx |
| To record payment against all liabilities | |
| Liabilities account | xxx |
| Cash | xxx |
| In case of gain on realization, following entry is passed: | |
| Realization account | xxx |
| Adam’s capital | xxx |
| Boon’s capital | xxx |
| Donald’s capital | xxx |
| xxx | |
| In case of loss on realization, following entry is passed: | |
| Adam’s capital | xxx |
| Boon’s capital | xxx |
| Donald’s capital | xxx |
| Realization account | xxx |
| In case of any loan of a partner, it is paid | |
| Loan Account – Partner | xxx |
| Cash | xxx |
| To close partner’s account and cash account, the following entry is passed: | |
| Adam’s capital | xxx |
| Boon’s capital | xxx |
| Donald’s capital | xxx |
| Cash | xxx |
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:
| Cash | 400,000 |
| Goodwill | 200,000 |
| Sundry assets | 1,400,000 |
| Liabilities | 400,000 |
| Adam capital | 320,000 |
| Bevan capital | 440,000 |
| Charles capital | 840,000 |
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. | Particulars | Debit | Credit |
| 1 | Cash Realization Sundry assets (Proceed from sale of sundry assets) | 400,000 1,000,000 | 1,400,000 |
| 2 | Adam capital Bevan capital Charles capital Goodwill (distribution of the goodwill among Adam, Bevan and Charles) | 80,000 80,000 40,000 | 200,000 |
| 3 | Adam capital Bevan capital Charles capital Realization (Distribution of lass among the Adam, Bevan & Charles) | 160,000 160,000 80,000 | 400,000 |
| 4 | Liabilities Cash (Paid to creditors to pay off liabilities) | 400,000 | 400,000 |
| 5 | Adam capital Bevan capital Charles capital Cash (distribution of cash available among the partners) | 80,000 200,000 720,000 | 1000,000 |