Term: 2^nd Term

Week: 6

Class: Senior Secondary School 2

Age: 16 years

Duration: 40 minutes of 2 periods each

Date:

Subject: Financial accounting

Topic:- Partnership account VI

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

Explain the dissolution of partnership
Give reasons for the dissolution of partnership
Prepare a realization account

INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source

INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures

INSTRUCTIONAL PROCEDURES

PERIOD 1-2

PRESENTATION	TEACHER’S ACTIVITY	STUDENT’S ACTIVITY
STEP 1 INTRODUCTION	The teacher reviews the previous lesson on partnership account	Students pay attention
STEP 2 EXPLANATION	She explains the meaning of dissolution of partnership and gives reasons for it	Students pay attention and participates
STEP 3 DEMONSTRATION	She explains how to prepare a realization account	Students pay attention and participate
STEP 4 NOTE TAKING	The teacher writes a summarized note on the board	The students copy the note in their books

NOTE

PARTNERSHIP ACCOUNT

Dissolution of Partnership Firm

As we know that after the dissolution of partnership firm the existing relationship between the partner’s changes. But, the firm continues its activities. The dissolution of partnership takes place in any of the following ways:

Change in the existing profit-sharing ratio.
Admission of a new partner
The retirement of an existing partner
Death of an existing partner
Insolvency of a partner as he becomes incompetent to contract. Thus, he can no longer be a partner in the firm.
On completion of a specific venturein case, the partnership was formed specifically for that particular venture.
On expiry of the period for which the partnership was formed.

However, the dissolution of a firm may be without or with the intervention of the court. It is noteworthy here that the dissolution of partnership may not necessarily result in the dissolution of the firm.

But, dissolution of partnership firm always results in the dissolution of the partnership.

Following are the ways in which dissolution of a partnership firm takes place:

1. Dissolution by Agreement

A firm may be dissolved if all the partners agree to the dissolution. Also, if there exists a contract between the partners regarding the dissolution, the dissolution may take place in accordance with it.

2. Compulsory Dissolution

In the following cases the dissolution of a firm takes place compulsorily:

Insolvency of all the partners or all but one partner as this makes them incompetent to enter into a contract.
When the businessof the firm becomes illegal due to some reason.
When due to some event it becomes unlawful for the partnership firm to carry its business. For example, a partnership firm has a partner who is of another country and Indiadeclares war against that country, then he becomes an enemy. Thus, the business becomes unlawful.

3. When certain contingencies happen

The dissolution of the firm takes place subject to a contract among the partners, if:

The firm is formed for a fixed term, on the expiry of that term.
The firm is formed to carry out specific venture, on the completion of that venture.
A partner dies.
A partner becomes insolvent.

4. Dissolution by Notice

When the partnership is at will, the dissolution of a firm may take place if any one of the partners gives a notice in writing to the other partners stating his intention to dissolve the firm.

5. Dissolution by Court

When a partner files a suit in the court, the court may order the dissolution of the firm on the basis of the following grounds:

In the case where a partner becomes insane
In the case where a partner becomes permanently incapable of performing his duties.
When a partner becomes guilty of misconduct and it affects the firm’s business adversely.
When a partner continuously commits a breach of the partnership agreement.
In a case where a partner transfers the whole of his interest in the partnership firm to a third party.
In a case where the business cannot be carried on except at a loss
When the court regards the dissolution of the firm to be just and equitable on any ground.

Settlement of Accounts

In a case where the partners do not have an agreement regarding the dissolution of the firm, the following provisions will apply:

The firm will pay the losses including the deficiency of capital firstly out of the profits, secondly out of the partner’s capital and lastly by the partners individually in their profit-sharing ratio.
The firm shall apply its assets including any contribution to make up the deficiency firstly, for paying the third-party debts, secondly for paying any loan or advance by any partner and lastly for paying back their capitals. Any surplus left after all the above payments is shared by partners in profit sharing ratio.

Differences between the Dissolution of Partnership and Dissolution of Firm

Basis	Dissolution of Partnership	Dissolution of Firm
1. Closure of business	The business of the firm continues there is no closure.	The business of the firm gets discontinued.
2. Settling of assets and liabilities	There is a revaluation of assets and liabilities. Hence, they are shown at revalued figures in the Balance Sheet.	The liabilities are paid-off and assets are realized.
3. Intervention by court	In this case, there is no intervention by the court as the dissolution of partnership takes place by the mutual consent of all the partners.	The court may or may not intervene in this case.
4. Relationship	The relationship between the partners continues to exist though it may change its form.	The relationship between the partners ceases to exist.
5. The closing of Books of accounts	There is no closure of books as the business continues.	The books need closure as the business ceases to continue.

REALIZATION ACCOUNT

On dissolution of a firm, all the books of account are closed, all assets are sold and all liabilities are paid off. In order to record the sale of assets and discharge of liabilities, a nominal account is opened named realisation account. The main purpose to open realisation account is to ascertain the profit or loss due to the realisation of assets and liabilities. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the partner's capital account in their profit sharing ratio. Concisely, following are the important objectives of preparing realisation account

(i) To close all the books of account.

(ii) To record transactions relating to the sale of assets and discharge of liabilities.

(iii) To determine profit or loss due to the realisation of assets and liabilities.

Features of Realisation Account

(i) In realisation account, sale of assets is recorded at their realised value.

(ii) Payment to liabilities (creditors) is recorded at their settlement value.

(iii) After all the transactions have been recorded, there will be balance, which may be profit or loss.

(iv) Profit arises in two situations

(a) When assets are realised at more than their book value.

(b) When liabilities are settled at less than their book value.

(v) If the two conditions are vice versa, the net result will be loss.

(vi) The net profit or loss on realisation is to be transferred to the partner's capital accounts in their profit-sharing ratio.

The format for realisation account is as follows

Example

Suppose 3 partners P, Q & R with a profit-sharing ratio of 1:1:1 decide to dissolve their partnership firm at will. Also, assuming that the firm’s balance sheet on the date of dissolution is as shown below;

Further, P takes the investments at a value of 16,000.

Cash realized from the firm’s assets is as follows;

Freehold Property – 30,000
Sundry Debtors – 10,000
Stock – 2,000

Moreover, the firm settles the creditors at a discount of 20% and pays the realisation expenses worth 1,000.

Thus, the Realisation Account will be prepared as follows;

Realisation Account

Particulars (Dr.)	Amt	Particulars (Cr.)	Amt
Sundry Assets (Transfer)		Sundry Creditors A/C (Transfer)	10,000
Freehold Property A/C – 25,000		Bank A/C (Assets Realized)
Investments A/C – 20,000		Freehold Property A/C – 30,000
Sundry Debtors A/C – 15,000		Sundry Debtors A/C – 10,000
Stock A/C – 5,000	65,000	Stock A/C – 2,000	42,000
Bank A/C (Creditors Paid = 10,000 x 80%)	8,000	P’s Capital A/C (Investments at agreed value)	16,000
Bank A/C (Realisation Expenses)	1,000
		Loss on realisation transferred to partner’s Capital A/C:- (1:1:1)
		P’s Capital A/C – 2,000
		Q’s Capital A/C – 2,000
		R’s Capital A/C – 2,000	6,000
Total	74,000	Total	74,000

Points to be noted

The credit balance of Profit & Loss A/C is not to be transferred to the Realisation A/C, instead, it will be credited directly to the partners’ Capital A/C in their profit sharing ratio.
The amount of loan given to R that is 4,000, is to be debited to R’s Capital A/C and not Realisation A/C.

EVALUATION: 1. Define dissolution of partnership

Give four reasons for the dissolution of partnership
Differentiate between dissolution of firm and dissolution of partnership
How can journal entries and a new balance sheet be prepared from a revaluation account?
Explain the meaning of realization account
How can a realization account be prepared?

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively

Lesson Notes By Weeks and Term - Senior Secondary 2