Partnership Accounts - Dissolution of a Partnership Firm

 

Partnership Accounts

Dissolution of a Partnership Firm

 

Part A: Discussion of basic theories including Journal Entries

Part B: 5 Illustrations with Solutions

Part A

When all the partners are solvent

Dissolution of firm and Dissolution of partnership are not the same. There is dissolution of partnership whenever a new partner is admitted or an old partner is retired or died. The dissolution of the partnership does not necessarily mean that the business is to be discontinued. On the other hand, dissolution of firm is the process of breaking up and discontinuing a partnership business. The dissolution of the firm implies an end to the existing business. A firm may be dissolved by the partners themselves or by the court.

Whatever may be the reason for dissolving the firm, the accounts have to be closed. A special account – called Realisation Account – is opened for this purpose. Accounts of all the assets and liabilities (with some exceptions) as appearing in the last balance sheet are closed by transferring to the realisation account at their respective book values. Amounts realised from the disposal of assets and amounts paid off for the settlement of liabilities are also posted in the realisation account. Finally, the realisation account is closed by transferring the balance (i.e. profit or loss on realisation) to the partners’ capital accounts in their profit sharing ratio.

Following items of balance sheet are not transferred to the realisation account:

1.     Cash and bank accounts – a separate cash and bank account will be opened with the balance as appearing in the last balance sheet. Bank overdraft, if any, is also not transferred to the realisation account, because it is also transferred to the cash and bank account as opening credit balance along with the opening cash and bank debit balance, if any. However, bank loan must be transferred to realisation account.

2.     Reserves and funds – these are transferred to partners’ capital account in their profit sharing ratio. If any reserve or fund is created against any asset which is appearing in the balance sheet and which has been transferred to realisation account, the corresponding reserve or fund will also be transferred to the realisation account. However, provident fund must be transferred to realisation account.

3.     Fictitious assets – fictitious assets like preliminary expenses, advertisement suspense, etc. are transferred to partners’ capital account in their profit sharing ratio.

4.     Partner’s loan – if any partner has advanced any loan to the business, a partner’s loan account will be opened with the balance as appearing in the last balance sheet. Partners’ loans or advances, if any, should be paid off after the Realisation Account is closed and the profit or loss on realisation has been transferred to the Partners’ Capital Accounts. However, partner’s wife’s loan, if any, will be transferred to realisation account.

5.    Loan given to a partner – it will be transferred (debited) to his Capital Account.

6.     Partners’ capital accounts – separate partners’ capital accounts will be opened with the balances as appearing in the last balance sheet on the date of dissolution.

7.     Partners’ current accounts – partners’ current account balances, if any, as appearing in the last balance sheet will be transferred to the respective capital accounts of the partners.

Journal entries

Date	Particulars	LF	Debit (Rs)	Credit (Rs)
1	Realisation A/c                        Dr
	To Sundry assets A/c
	(Sundry assets transferred to Realisation Account at their book values)
2	Sundry liabilities A/c                Dr
	To Realisation A/c
	(Sundry liabilities transferred to Realisation Account at their book values)

 

Note: The assets should be transferred to the debit side of the realisation account at their gross figures and provisions / reserves / funds against any such assets should be transferred to the credit side of the realisation account.

 

Date	Particulars	LF	Debit (Rs)	Credit (Rs)
3	Cash and bank A/c                    Dr
	To Realisation A/c
	(Amount realised on sale of assets)
4	Realisation A/c                          Dr
	To Cash and bank A/c
	(Amount paid on settlement of liabilities)
5	Partner’s capital A/c                   Dr
	To Realisation A/c
	[Assets (including unrecorded assets) taken over by a partner/ partners at agreed values]
6	Realisation A/c                           Dr
	To Partner’s capital A/c
	[Liabilities (including unrecorded liabilities) agreed to be discharged by partner/ partners]
7	Realisation A/c                          Dr
	To Cash and bank A/c
	(Amount paid to the creditors after adjusting the agreed value of the assets taken over) Note: No entry is required to be passed for assets taken over by the creditors.
8	Cash and bank A/c                    Dr
	To Realisation A/c
	(Unrecorded assets sold)
9	Realisation A/c
	To Cash and bank A/c
	(Unrecorded liabilities paid off)

 

10.     Journal entries for dissolution expenses

	Transaction	Debit	Credit
1	To be borne by the firm and also paid by the firm	Realisation A/c	Bank A/c
2	To be borne by the firm but actually paid by a partner	Realisation A/c	Partner’s Capital A/c
3	To be borne by a partner and also paid by the partner	NO JOURNAL ENTRY	NO JOURNAL ENTRY
4	To be borne by a partner but actually paid by the firm	Partner’s Capital A/c	Bank A/c

 

Date	Particulars	LF	Debit (Rs)	Credit (Rs)
11	Realisation A/c                          Dr
	To Partners’ capital A/c
	(Profit on realisation credited to partners’ capital accounts in the profit sharing ratio)
12	Partners’ capital A/c                   Dr
	To Realisation A/c
	(Loss on realisation debited to partners’ capital accounts in the profit sharing ratio)
13	Partners’ current A/c                   Dr
	To Partners’ capital A/c
	(Partners’ current account credit balances transferred to their respective capital accounts)
14	Partners’ capital A/c                    Dr
	To Partners’ current A/c
	(Partners’ current account debit balances transferred to their respective capital accounts)
15	Reserves / Funds A/c                   Dr
	To Partners’ capital A/c
	(Reserves / Funds transferred to partners’ capital accounts in the profit sharing ratio)
16	Partners’ capital A/c                     Dr
	To Preliminary expenses A/c
	To Advertisement suspense A/c
	(Fictitious assets transferred to partners’ capital accounts in the profit sharing ratio)
17	Partner’s loan A/c                        Dr
	To Cash and bank A/c
	(Loan from partner paid off)
18	Cash and bank A/c                       Dr
	To Partner’s loan A/c
	(Loan to partner received back)
19	Cash and bank A/c                       Dr
	To Partner’s capital A/c
	(Debit balance in partner’s capital account received in cash)
20	Partner’s capital A/c                     Dr
	To Cash and bank A/c
	(Credit balance in partner’s capital account paid in cash)

 

Note: There will be no balance in the cash and bank account after the partners’ capital accounts are closed.

 

When some (not all) of the partners are insolvent

At the time of dissolution of a partnership firm, if one partner is insolvent, his deficiency must be shared by all the other solvent partners having credit balances in their capital accounts after making adjustments for accumulated profits or losses, accumulated reserves, drawings, interests on capitals, interests on drawings, remunerations to partners, Current Account balances of the partners, fictitious assets, etc. to the date of dissolution but before making adjustments for profit or loss on realisation in accordance with the decision in the English case of Garner vs. Murray.

Deficiency (on dissolution of the firm) of a partner means the final debit balance in the capital account of the partner after making all necessary adjustments in regard to interest on capital, interest on drawings, reserves, fictitious assets, profit or loss on realisation, Current Account balance of the partner, if any, amount recovered from his private estate, if any, etc.

In other words,

Deficiency (on dissolution of the firm) = Amount supposed to be brought in by a partner after all adjustments including profit or loss on realisation – Amount the partner is able to bring in from his Net Private Assets.

According to Garner vs. Murray decision, deficiency of the insolvent partner has to be borne by the other solvent partners in the ratio of their last agreed capitals. The provisions of the Indian Partnership Act are not contrary to Garner vs. Murray rule. However, if the partnership deed provides for a specific method to be followed in case of insolvency of a partner, the provisions as per deed should be applied. Therefore, if no specific method is mentioned in the problem to be followed as to how the deficiency of the insolvent partner has to be borne by the other solvent partners, such deficiency of the insolvent partner shall be borne by the other solvent partners in the ratio of their last agreed capitals as per the Garner vs. Murray decision.

 

GARNER Vs. MURRAY PRINCIPLE

1.     Deficiency of insolvent partner will be shared by the solvent partners having credit balances in their capital accounts after making adjustments for accumulated profits or losses, accumulated reserves, drawings, interests on capitals, interests on drawings, remunerations to partners, Current Account balances of the partners, fictitious assets, etc. up to the date of dissolution but before making adjustments for profit or loss on realisation in the ratio of their last agreed capitals. Here, last agreed capital means the capital after making adjustments for accumulated profits or losses, accumulated reserves, drawings, interest on capital, interest on drawings, remunerations to partners, Current Account balances of the partners, fictitious assets, etc. up to the date of dissolution but before making adjustment for profit or loss on realisation.

2.     Profit or loss on realisation will be transferred to all partners’ capital account in their profit sharing ratio as usual.

3.     Practically, at the time of solving problems of dissolution of firm with one partner being insolvent and applying the Garner vs. Murray principles, partners will bring in the amounts equivalent to their respective shares of the loss on realisation subject to the maximum possible amounts available from their private estates. In other cases, where the Garner vs. Murray principles are not required to be applied, partners are not such required to bring in their shares of the loss on realisation.

4.     The whole of the above discussion is based on the assumption that partners’ capitals are maintained under fluctuating capital method. But if the partners’ capitals are maintained under fixed capital method, the last agreed capital will mean the fixed capital balance (given in the balance sheet) without any adjustment.

 

DEFINITION OF INSOLVENCY:

A partner will be declared solvent if he is able to bring in the amount he is supposed to bring in on dissolution of the firm. Therefore, it can also be said that a solvent partner is that partner who is not having "deficiency” on dissolution of the firm. On the other hand, a partner will be declared insolvent if he is unable to bring in the amount he is supposed to bring in on dissolution of the firm, partly or wholly. Therefore, it can also be said that an insolvent partner is that partner who is having "deficiency” on dissolution of the firm.

When all the partners are insolvent

At the time of dissolution of a partnership firm, if all the partners are insolvent and the firm’s assets fall short of its liabilities, the outside liabilities of the firm cannot be paid in full. The available cash with the firm (cash in hand + cash realised from sale of assets + cash realised from debtors + cash received from the private estates of the partners as final dividend) is used first for paying the realisation expenses. The balance amount available with the firm is used to pay off the creditors and others in the following order of priority:

1.     To pay off preferential creditors (e.g. government rates and taxes, etc).

2.     To pay off secured creditors (a secured creditor gets a priority over the other ordinary creditors up to the amount realised from that particular asset by which his claim is secured by the firm, and for the balance of his claim he is considered at par with the other ordinary creditors).

3.     To pay off other ordinary creditors (in the ratio of their individual claim).

4.     To pay off partners’ loans.

5.     To pay off partners’ capitals.

In order to close the accounts of the firm, a Realisation Account is prepared in the usual manner. But this time, over and above the usual items of balance sheet which are not transferred to the realisation account, creditors and other liabilities are also not transferred to the realisation account. Creditors’ account and accounts of other liabilities are opened separately with their respective balances as appearing in the last balance sheet. All liabilities including creditors and partners’ loans are discharged directly to the extent possible in the order of priority as stated above. Any balance left unpaid is transferred to a new account called Deficiency Account. The partners’ capital accounts are also closed by transferring the balances to the Deficiency Account.

 

Journal entries (over and above the usual journal entries)

Date	Particulars	LF	Debit (Rs)	Credit (Rs)
1	Liabilities A/c                            Dr
	To Cash and bank A/c
	To Deficiency A/c
	(Liabilities paid off and the balance transferred to Deficiency Account)
2	Deficiency A/c                           Dr
	To Partners’ capital A/c
	(Balances in partners’ capital accounts transferred to Deficiency Account)

 

Part B 

Illustration: 1

A, B and C sharing profits in 3: 1: 1 agree upon dissolution. They each decide to take over certain assets and liabilities and continue business separately.

Balance Sheet

As on date of dissolution

Liabilities	Rs	Rs	Assets	Rs	Rs
Capitals:			Furniture		1,000
A	27,500		Stock		7,800
B	10,000		Debtors	24,200
C	7,000	44,500	Less: Prov. For B/Debts	(1,200)	23,000
Loan		1,500	Sundry assets		17,000
Creditors		6,000	Cash at bank		3,200
		52,000			52,000

 

It is agreed as follows:

(1)      Goodwill is to be ignored.

(2)      A is to take over the furniture at Rs 800; Debtors amounting to Rs 20,000 at Rs 17, 200. The Creditors of Rs 6,000 to be assumed by A at the figure.

(3)      B is to take over all the stocks at Rs 7,000 and certain of the sundry assets at Rs 7,200 (being book value less 10%)

(4)      C is to take over the remaining sundry assets at 90% of book values less Rs 100 allowances and assume responsibility for the discharge of the loan, together with accruing interest of Rs 30 which has not been recorded in the books of the firm.

(5)      The expenses of dissolution were Rs 270. The remaining debtors were sold to a debt collecting agency for 50% of book values.

 

Prepare Realisation Account, Partners’ Capital Accounts and Bank Account.

Solution:

In the books of partners ‘A’, ‘B’ and ‘C’

Realisation Account

Particulars	Rs	Particulars	Rs	Rs
To Furniture	1,000	By Prov. For bad debts		1,200
To Stock	7,800	By Loan		1,500
To Debtors	24,200	By Creditors		6,000
To Sundry assets	17,000	By A’s Capital (Furniture)		800
To A’s Capital (Creditors)	6,000	By A’s Capital (Debtors)		17,200
To C’s Capital (Loan)     [1,500 + 30 (Interest)]	1,530	By B’s Capital (Stock)		7,000
To Bank (Dissolution exp.)	270	By B’s Capital (S/Assets)		7,200
		By C’s Capital (S/assets)	W.N. 1	8,000
		By Bank (Debtors)     [4,200 × 50%]		2,100
		By Capital Accounts:
		A (3/5)	4,080
		B (1/5)	1,360
		C (1/5)	1,360	6,800
	57,800			57,800

 

Partners’ Capital Accounts

Particulars	A (Rs)	B (Rs)	C (Rs)	Particulars	A (Rs)	B (Rs)	C (Rs)
To Realisation	18,000	14,200	8,000	By Balance b/d	27,500	10,000	7,000
To Realisation	4,080	1,360	1,360	By Realisation	6,000		1,530
To Bank (b/f)	11,420			By Bank (b/f)		5,560	830
	33,500	15,560	9,360		33,500	15,560	9,360

 

Bank Account

Particulars	Rs	Particulars	Rs
To Balance b/d	3,200	By Realisation	270
To Realisation	2,100	By A’s Capital	11,420
To B’s Capital	5,560
To C’s Capital	830
	11,690		11,690

 

Working note:

1.    Value at which sundry assets are taken over by C:

Particulars	Rs
Total book value of sundry asset	17,000
Less: Book value of sundry assets taken over by B         [7,200 × (100 ÷ 90)]	(8,000)
Book value of sundry assets taken over by C	9,000
∴ Value at which sundry assets are taken over by C        [9,000 × 90% − 100]	8,000

 

Illustration: 2

X, Y and Z sharing profits & Losses in the ratio of 2: 2: 1 agreed upon dissolution of their partnership on 31^st December, 2019 on which date their Balance Sheet was as under:

Liabilities	Rs	Rs	Assets	Rs	Rs
Capitals:			Fixed Assets		50,000
X	40,000		Joint Life Policy (SV)		10,000
Y	30,000	70,000	Debtors	10,000
Reserve Fund		10,000	Less: Prov. For b/debts	500	9,500
Joint Life Policy Fund		10,000	Stock at Invoice Price	10,000
Creditors	19,000		Less: Price Loading	2,000	8,000
Less: Provision	500	18,500	Investments	8,000
Outstanding Salary		2,000	Less: Fluctuation Fund	500	7,500
			Capital Account - Z		2,000
			Bank		23,500
		1,10,500			1,10,500

 

Investments were taken over by X at Rs 6,000. Creditors of Rs 10,000 were taken over by Y who has agreed to settle account with them at Rs 9,900. Remaining creditors were paid Rs 7,500. Joint Life Policy was surrendered and Fixed Assets realized Rs 70,000, Stock and Debtors realized Rs 7,000 and Rs 9,000 respectively. One customer, whose account was written off as bad, now paid Rs 800 which is not included in Rs 9,000 mentioned above. There was an unrecorded asset estimated at Rs 3,000, half of which is handed over to an unrecorded liability of Rs 5,000 in settlement of claim of Rs 2,500 and the remaining half was sold in the market which realized Rs 1,300.

 

Y took over the responsibility of completing the dissolution and he is granted a salary of Rs 400 per month. Actual expenses amounted to Rs 1,100. Dissolution was completed and final payments were made on 30^th April, 2020.

 

You are required to prepare the Realization Account, Partners’ Capital Accounts and Bank Account.

 

Solution:

In the books of X, Y and Z

Realisation Account

Particulars	Rs	Rs	Particulars	Rs
To Fixed assets		50,000	By Joint Life Policy Fund	10,000
To Joint Life Policy		10,000	By Creditors	19,000
To Debtors		10,000	By Outstanding salary	2,000
To Stock		10,000	By Prov. For Bad Debts	500
To Investment		8,000	By Loading on stock	2,000
To Prov. For Creditors		500	By Inv. Fluctuation Fund	500
To Y’s Capital (Creditors)		10,000	By X’s Capital (Investment)	6,000
To Bank (Creditors)		7,500	By Bank (Fixed assets)	70,000
To Bank (Unrecorded liab.)		2,500	By Bank (JLP Surrendered)	10,000
To Y’s Capital (Salary)		1,600	By Bank (Stock)	7,000
To Bank (O/s salary)		2,000	By Bank (Debtors)	9,000
To Bank (Dissolution exp.)		1,100	By Bank (B/D Recovered)	800
To Capital Accounts:			By Bank- Unrecorded asset	1,300
X (2/5)	9,960
Y (2/5)	9,960
Z (1/5)	4,980	24,900
		1,38,100		1,38,100

 

Partners’ Capital Accounts

Particulars	X (Rs)	Y (Rs)	Z (Rs)	Particulars	X (Rs)	Y (Rs)	Z (Rs)
To Balance b/d			2,000	By Balance b/d	40,000	30,000
To Realisation	6,000			By Realisation		10,000
To Bank (b/f)	47,960	55,560	4,980	By Realisation		1,600
				By Realisation	9,960	9,960	4,980
				By Reserve Fund	4,000	4,000	2,000
	53,960	55,560	6,980		53,960	55,560	6,980

 

Bank Account

Particulars	Rs	Particulars	Rs
To Balance b/d	23,500	By Realisation A/c:
To Realisation A/c:		Creditors	7,500
Fixed assets	70,000	Unrecorded liability paid off	2,500
Joint Life Policy	10,000	Outstanding salary	2,000
Stock	7,000	Dissolution expenses	1,100
Debtors	9,000	By Capital Accounts:
Bad debts recovered	800	X	47,960
Unrecorded asset sold	1,300	Y	55,560
		Z	4,980
	1,21,600		1,21,600

 

Illustration: 3

A, B and C are in partnership sharing profit and losses equally and agreed to dissolve the firm on 30.06.2020. On that date their Balance Sheet stood as follows:

Balance Sheet as at 30.06.2020

Liabilities	Rs	Rs	Assets	Rs	Rs
Capitals:			Sundry Assets		50,000
A	34,000		Profit and Loss A/c		12,000
B	24,000	58,000	Capital A/c - C		8,000
Creditors		12,000
		70,000			70,000

 

The assets are realised at 50% of the book value. Realization expenses amounted to Rs 5,000. C became insolvent and only Rs 2,000 could be received from his estates.

 

Close the book of the firm under (i) Fixed Capital Method and (ii) Fluctuating Capital Method applying Garner vs. Murray principles.

 

Solution:

UNDER FIXED CAPITAL METHOD

In the books of ‘A’, ‘B’ and ‘C’

Realisation Account

Particulars	Rs	Particulars	Rs	Rs
To Sundry assets	50,000	By Creditors		12,000
To Bank (Creditors)	12,000	By Bank (Sundry assets)		25,000
To Bank (Realisation exp.)	5,000	By Capital Accounts:
		A	10,000
		B	10,000
		C	10,000	30,000
	67,000			67,000

 

Partners’ Capital Accounts

Particulars	A (Rs)	B (Rs)	C (Rs)	Particulars	A (Rs)	B (Rs)	C (Rs)
To Balance b/d			8,000	By Balance b/d	34,000	24,000
To P/L A/c	4,000	4,000	4,000	By Bank A/c	10,000	10,000
To Realisation	10,000	10,000	10,000	By Bank A/c			2,000
To C’s Cap	11,724	8,276		By A’s Cap(17/29)			11,724
To Bank A/c(b/f)	18,276	11,724		By B’s Cap(12/29)			8,276
	44,000	34,000	22,000		44,000	34,000	22,000

 

Bank Account

Particulars	Rs	Particulars	Rs
To Realisation A/c	25,000	By Realisation A/c (Creditors)	12,000
To A’s Capital A/c	10,000	By Realisation A/c (Expenses)	5,000
To B’s Capital A/c	10,000	By A’s Capital A/c	18,276
To C’s Capital A/c	2,000	By B’s Capital A/c	11,724
	47,000		47,000

 

UNDER FLUCTUATING CAPITAL METHOD

In the books of ‘A’, ‘B’ and ‘C’

Realisation Account

Particulars	Rs	Particulars	Rs	Rs
To Sundry assets	50,000	By Creditors		12,000
To Bank (Creditors)	12,000	By Bank (Sundry assets)		25,000
To Bank (Realisation exp.)	5,000	By Capital Accounts:
		A	10,000
		B	10,000
		C	10,000	30,000
	67,000			67,000

 

Partners’ Capital Accounts

Particulars	A (Rs)	B (Rs)	C (Rs)	Particulars	A (Rs)	B (Rs)	C (Rs)
To Balance b/d			8,000	By Balance b/d	34,000	24,000
To P/L A/c	4,000	4,000	4,000	By Bank A/c	10,000	10,000
To Realisation	10,000	10,000	10,000	By Bank A/c			2,000
To C’s Cap	12,000	8,000		By A’s Cap (3/5)			12,000
To Bank A/c(b/f)	18,000	12,000		By B’s Cap (2/5)			8,000
	44,000	34,000	22,000		44,000	34,000	22,000

 

Bank Account

Particulars	Rs	Particulars	Rs
To Realisation A/c	25,000	By Realisation A/c (Creditors)	12,000
To A’s Capital A/c	10,000	By Realisation A/c (Expenses)	5,000
To B’s Capital A/c	10,000	By A’s Capital A/c	18,000
To C’s Capital A/c	2,000	By B’s Capital A/c	12,000
	47,000		47,000

 

Working note:

Capital ratio of A and B for sharing C’s deficiency under Garner vs. Murray Principles when Fluctuating Capital Method is followed by the partners –

A: B = (34,000 + 10,000 – 4,000 – 10,000): (24,000 + 10,000 – 4,000 – 10,000) = 30,000: 20,000 = 3: 2

 

Illustration: 4

Following is the balance sheet of P, Q and R as on 31.12.2019:

 

Balance Sheet as at 31.12.2019

Liabilities	Rs	Rs	Assets	Rs	Rs
Capitals:			Fixed Assets		1,00,000
P	5,000		Cash		10,000
Q	3,000
R	2,000	10,000
Bank Loan		60,000
Sundry Creditors		40,000
		1,10,000			1,10,000

 

All the partners were declared insolvent. Profit sharing ratio: 5: 3: 2. Fixed Assets realized Rs 60,000. Prepare necessary ledger accounts to close the books of the firm.

 

Solution:

In the books of P, Q and R

Realisation Account

Particulars	Rs	Particulars	Rs	Rs
To Fixed assets	1,00,000	By Bank A/c (Fixed assets)		60,000
		By Capital Accounts:
		P (5/10)	20,000
		Q (3/10)	12,000
		R (2/10)	8,000	40,000
	1,00,000			1,00,000

 

Partners’ Capital Accounts

Particulars	P (Rs)	Q (Rs)	R (Rs)	Particulars	P (Rs)	Q (Rs)	R (Rs)
To Balance b/d	20,000	12,000	8,000	By Balance b/d	5,000	3,000	2,000
				By Deficiency	15,000	9,000	6,000
	20,000	12,000	8,000		20,000	12,000	8,000

 

Cash / Bank Account

Particulars	Rs	Particulars	Rs
To Balance b/d	10,000	By Bank Loan (70,000 × 3/5)	42,000
To Realisation A/c	60,000	By Sundry Creditors (70,000 × 2/5)	28,000
	70,000		70,000

 

Bank Loan Account

Particulars	Rs	Particulars	Rs
To Cash / Bank A/c	42,000	By Balance b/d	60,000
To Deficiency A/c	18,000
	60,000		60,000

 

Sundry Creditors Account

Particulars	Rs	Particulars	Rs
To Cash / Bank A/c	28,000	By Balance b/d	40,000
To Deficiency A/c	12,000
	40,000		40,000

 

Deficiency Account

Particulars	Rs	Particulars	Rs
To Capital Accounts:		By Bank Loan A/c	18,000
P	15,000	By Sundry Creditors A/c	12,000
Q	9,000
R	6,000
	30,000		30,000

 

Illustration: 5

P, Q, R and S, carrying on business as partners and sharing profits and losses in the ratio of 2: 3: 3: 2, decided to discontinue their business from 1-1-2019. On 31-12-2018 their Balance Sheet was as follows:

Liabilities	Rs	Assets	Rs
Creditors	20,000	Plant and Machinery	30,000
Capital A/c – P	10,000	Furniture	10,000
Capital A/c – Q	4,000	Cash at Bank	1,000
Capital A/c – R	4,000	Profit and Loss Account	15,000
Capital A/c – S	3,000
Bills Payable	10,000
Q’s Loan A/c	5,000
	56,000		56,000

 

Further information regarding partners is stated below:

Particulars	P (Rs)	Q (Rs)	R (Rs)	S (Rs)
Private Estate	12,000	22,000	6,000	10,000
Private Liabilities	18,000	8,000	5,000	12,000

 

The assets realised ` 26,000. The expenses of dissolution amounted to ` 1,000. Close the books of the firm.

 

Solution:

In the books of P, Q, R and S

Realisation Account

Particulars	Rs	Particulars	Rs	Rs
To Plant and machinery	30,000	By Creditors		20,000
To Furniture	10,000	By Bills Payable		10,000
To Bank (paid to creditors)	20,000	By Bank (assets realised)		26,000
To Bank (B/P paid off)	10,000	By Capital Accounts:
To Bank (dissolution exp.)	1,000	P (2/10)	3,000
		Q (3/10)	4,500
		R (3/10)	4,500
		S (2/10)	3,000	15,000
	71,000			71,000

 

Partners’ Capital A/c

	P	Q	R	S		P	Q	R	S
P/L A/c	3,000	4,500	4,500	3,000	Balance b/d	10,000	4,000	4,000	3,000
Realisation	3,000	4,500	4,500	3,000	Bank		4,500
R	4,000				Bank			1,000
S		3,000			P			4,000
					Q				3,000
					Bank (b/f)		3,500
	10,000	12,000	9,000	6,000		10,000	12,000	9,000	6,000

 

Bank A/c

Particulars	Rs	Particulars	Rs
Balance b/d	1,000	Realisation (creditors)	20,000
Realisation (assets)	26,000	Realisation (bills payable)	10,000
Q	4,500	Realisation (dissolution expenses)	1,000
R	1,000	Q’s Loan A/c	5,000
Q	3,500
	36,000		36,000

 

Q’s Loan A/c

Particulars	Rs	Particulars	Rs
Bank A/c	5,000	Balance b/d	5,000
	5,000		5,000

 

Working Notes:

1.    Last agreed capitals before dissolution:

Particulars	P (Rs)	Q (Rs)	R (Rs)	S (Rs)
Capital as per the last balance sheet	10,000	4,000	4,000	3,000
LESS: Share of accumulated loss	3,000	4,500	4,500	3,000
LAST AGREED CAPITALS	7,000	(500)	(500)	Nil

 

2.    Deficiency:

Particulars	P (Rs)	Q (Rs)	R (Rs)	S (Rs)
Last agreed capitals	7,000	(500)	(500)	Nil
LESS: Share of loss on realisation	(3,000)	(4,500)	(4,500)	(3,000)
Amount to be taken away/(brought in)	4,000	(5,000)	(5,000)	(3,000)
Amount available from private estates	Not required	5,000 (as required)	1,000 (max. available)	Not available
DEFICIENCY	Nil	Nil	(4,000)	(3,000)

 

3.      Here R and S are the insolvent partners. Total deficiency of R and S, Rs 4,000 + Rs 3,000 = Rs 7,000 will be borne by P alone, because P is the only solvent partner having credit balance of last agreed capital.

4.   But P can bear only up to Rs 4,000 out of the total deficiency of Rs 7,000, because

      (i)   He is having only Rs 4,000 as credit balance in his capital account after adjusting share of accumulated loss and loss        on realisation; and

      (ii)  His private liabilities are more than his private estate.

5.   Remaining deficiency of Rs 7,000 – Rs 4,000 = Rs 3,000 will be borne by Q, because only Q has available balance in his private estate after paying off private liabilities as well as share of firm’s liabilities Rs (22,000 – 8,000 – 4,500) = Rs 9,500.