Dissolution of Partnership Firm- Class 12 Notes

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Dissolution of Partnership Firm Study Notes

Accounts is an integral subject of the class 12 commerce syllabus and dissolution of partnership firm is one of the most important chapters of the accountancy syllabus of class 12. If you are thorough with your notes and prepare well, it can be scoring as well. Here in this blog, we shall discuss the dissolution of the partnership firm in brief. If you are preparing for your class 12 board exams then it would be of great help to you.

Important Definitions of Dissolution of Partnership Firm

There are important definitions in Dissolution of Partnership firms that you should be aware of. Here are the words and their definition:


Act of discontinuance of existing relationship among partners. 

Dissolution of Partnership 

The existing relationship between partners might be changed but the firm may continue its business like before. If there is dissolution of partnership among all the partners in the firm then the business of the firm also comes to an end.

Modes of Dissolution of Partnership Firm

The modes of dissolution of partnership firm are listed below:

  • Dissolution by mutual agreement 
  • Compulsory dissolution
  • Dissolution on the happening of an event 
  • Dissolution by notice
  • Dissolution by court

Reasons for Dissolution of partnership

  1. Death of a partner
  2. Admission of a new partner
  3. Insolvency of an existing partner
  4. Early retirement of a partner
  5. Due to expiry of a partnership period after a certain time as mutually agreed upon by all partners

Settlement of Accounts in Case of Dissolution of Firm

In the case of dissolution of firm, there are certain criteria in which you can settle accounts. Since the firm has ceased to exist, it is important to dispose and settle the accounts of that firm accordingly. Here is the procedure to do that:

  • Treatment of Losses
  • Application of Assets
    • Payment to outsiders/creditors
    • Loans and advances of partners
    • Payment of capital of partners
    • The balance shall be divided among the partners in their profit-sharing ratio

Treatment of Firms Debt and Private Debts

The following rules, as stated in Section 49 of the Act, shall apply in cases where the debts of the firm and private debts of a partner co-exist:

  • In payment of firm’s debts the firm’s property is applied first and in case there is any surplus, then the share of each partner is applied in the payment of his private debts or simply paid to him.
  • In payment of a partner’s private debts, partner’s private property is applied first and the surplus (if any) in payment of firm’s debts if the firm’s liabilities exceed the firm’s assets.

Accounting Treatment on Dissolution of Firm

The books of the firm are closed after dissolution and the process is completed by opening the following accounts:

Realisation account: A nominal account that is prepared at the time of dissolution of partnership firm to showcase the profit or loss on realisation of assets and payment of liabilities.

Partners’ Capital Account

  • Balance of partner’s capital and current account are recorded in this account.
  • Asset if any of the firms is taken over by the partner and recorded on the debit side while the liability taken over is recorded on the credit side.
  • Undistributed profits and reserves are recorded on the credit side and undistributed losses or fictitious assets are recorded on the debit side.
  • When capital accounts are maintained following a fixed capital account method, partners have current accounts also. These current accounts may have credit or debit balance.
  • Current accounts are closed by transferring them to the concerned partner’s fixed capital accounts. The entries are as follows:
    • In case of debit balance in a current account of a partner
      • Concerned Partners’ Capital A/c         Dr    To Concerned Partners’ Current A/c
    • In case of credit balance in a current account of a partner
      • Concerned Partners’ Current A/c      Dr     To Concerned Partners’ Capital A/c
  • The balance of the partner’s capital account is closed in the following manner
    • For making final payment to a partner (In case of credit balance)
      • Partner’s Capital A/c              Dr                       To Cash/Bank A/c
    • When a partner is required to bring in cash (In case of a debit balance)
      • Cash/Bank A/c          Dr           To Partner’s Capital A/c
  • Partner’s Loan Account
    • Partner’s loan will be paid after all outside liabilities are paid 
      • Partner’s Loan A/c       Dr  To Cash/Bank A/c
  • Bank or Cash Account
    • The debit side shows the opening balance, the amount realised through the sale of assets and any amount paid in by the partners.
    • The credit side shows the payments for liabilities, realisation expenses and a final settlement made to partners.
    • In case both cash and bank balances appear in the balance sheet, it is always better to open a single account. It is a self-balancing account.

Preparation of Memorandum Balance Sheet for Ascertaining Sundry Assets

  • The purpose of the memorandum balance sheet is to calculate the missing figures of sundry assets.
  •  Often, the total value of sundry assets is not given, although the value realised from the assets and the partners capitals another liability is given. 
  • In such a case, sundry assets are ascertained by preparing the old balance sheet. The amount of capitals and other liabilities are added. The sum total is the total amount of assets.

How is a partnership dissolved?

In most cases, when a partner stops taking part in the business operation, the partnership ends or is dissolved. Three separate processes can lead to the disintegration.

  • When a partner agrees to end the partnership at a specific period, this is referred to as an act of the partners. For example, parties may decide that a partnership shall last for a period of five years. At the conclusion of the five (5) year period, the partners may terminate the agreement. A partner’s suspension under a particular circumstance may occasionally be noted. The partnership may end if one of the partners violates one of the rules.
  • By virtue of the law A legally binding agreement has the effect of forming a partnership. As a result, the partnership agreement may be terminated for any obstruction to the agreement or illegal commercial operations. For instance, it is illegal to form a partnership to trade illegal goods.
  • By court order: A partner may request the dissolution of the partnership, and the law will only permit the dissolution under the following circumstances: a partner’s inability to work; a partner’s breach of the agreement; a partner’s mental instability; and a partner’s inappropriate behaviour that negatively affects the partnership.
  • Statement of Dissolution – The statement must be sent to the secretary of state. The form is available on the secretary of state’s website. Name, date, and grounds for dissolution of the partnership must all be on the form.
  • Giving Personal Notice—To accomplish this, personally notify the partnership’s creditors. Additionally, notify those connected to the cooperation by placing a press notice.


Explain what it means when a partnership firm dissolves.

When a partnership firm dissolves, the company that operates under its name does so as well. In this instance, all debts owed to the partnership firm are finally settled by selling off assets or transferring them to a specific partner, resolving all outstanding debts.

When is it possible to dissolve a partnership firm?

A partnership firm could be forced to dissolve itself: when all of the firm’s partners, or all of the partners with the exception of one, are deemed bankrupt; when a circumstance arises that makes it unlawful for the firm to conduct business.

What does the idea of dissolution mean?

Dissolution is a broad term for the act of breaking down or dissolving. The verb dissolve, which most frequently means to mix with and melt inside a liquid but also has other meanings such to break apart, has a noun form called “dissolution.”

So, this was all about the Dissolution of Partnership Firms. We hope it helps you prepare for your exams and also aids you in revising. If you are confused about which career path to choose after class 12th commerce then get in touch with our experts at Leverage Edu. They will help you choose a stream that suits you perfectly and help you carve a niche for yourself. Sign up for a free session today! 

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