RECONSTITUTION OF PARTNERSHIP FIRM -- DISSOLUTION OF PARTNERSHIP FIRM H.S. 2nd Year ACCOUNTANCY NOTES AHSEC ASSAM Higher Secondary PART-A UNIT -5




ACCOUNTANCY
A
UNIT -5

RECONSTITUTION OF PARTNERSHIP FIRM
DISSOLUTION OF PARTNERSHIP FIRM


1.  Define dissolution of a partnership firm?
Ans: Dissolution of partnership: Dissolution of partnership means a change in the existing relationship of partners through reconstitution of the firm without effecting the entity of the firm. The dissolution of partnership does not involve the complete breakdown of relationship among the partners but it merely means a change in the economic relationship.
Dissolution of a partnership firm:
                 According to Section 39 of the Indian Partnership Act, 1932, "The dissolution of partnership between all the partners of a firm is called the dissolution of the firm".

2. What are the different modes of dissolution of partnership firm?
Ans: As per section 40, 41, 42, 43, 44 of the Indian Partnership Act, 1932 which states that there are five modes of dissolution of partnership firm. They are as follows:
a. Dissolution by agreement (Section 40)
b. Compulsory dissolution (Section 41)
c. Dissolution on the happening of certain contingencies (Section 42)
d. Dissolution by notice of partnership at will (Section 43)
e. Dissolution by the court (Section 44)

A. Dissolution By Agreement: A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.
B. Compulsory Dissolution:
A firm is compulsory dissolved in the following cases:
  (i) When all the partners, except one become insolvent.
  (ii) When all the partners become insolvent
  (iii) When the business becomes illegal, and
  (iv) When the number of partners exceed twenty in case of an ordinary business or ten in case of a banking business.

C. Dissolution on the Happening of Certain Contingencies:
A firm may be dissolved on the happening of any one the following contingencies
(i) By the expiry of the term or duration of the firm.
(ii) By the completion of the venture for which firm was constituted.
(iii) By the death of a partner, and
(iv) By the adjudication of a partner as insolvent.

D. Dissolution by Notice of Partnership at Will: When the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.
E. Dissolution by the Court:
The court may dissolve a firm on any one of the following grounds:-
(i) When a partner become of unsound mind.
(ii) Where a partner becomes permanently incapable of performing his duties.
(iii) Where a partner is guilty of misconduct in carrying on the business.
(iv) Where a partner willfully or persistently commits breach of agreement.
(v) Where a partner transferred whole of his interest in the firm to a third party.
(vi) Where the court finds that the business cannot be carried on except for a loss.

3. What are the differences between Dissolution of partnership and Dissolution of firm?
Ans: Following are the differences between Dissolution of partnership and Dissolution of firm:
4. State the procedure to be followed in settlement of accounts under Section 48?
Or
State the procedure of dissolution of partnership firm?
Ans: - Following are the procedure is followed in settlement of accounts, when a firm is dissolved:-
(i)  Realization of assets: All tangible and intangible assets are realized, some assets are sold for  cash and some assets may be taken over by partners at agreed values.
(ii) Payments of realization expenses: Expenses incurred on disposal of assets are to be met out of firm’s cash. Sometimes such expenses are born by a partner when he undertakes to do the work of dissolution for some commission.
(iii) Payment of liabilities to third parties: After the realization of assets and payments of realization expenses, liabilities to third parties are to be paid out of remaining cash
(iv) Payment of partners loans: After the payment of liabilities to third parties, payment of partners loans will be paid off.
(v) Distribution of balance cash or other assets among partners: Balance cash or assets will be distributed among the partners in their final capital ratio. If any partner’s capital account shows a debit balance, the partner has to refund the balance to the firm, so that the partners having credit balance may be paid in full.

5. What is Realisation Account?
Ans: Realisation account is a nominal account. It is prepared at the time of dissolution of partnership firm. It is prepared to find out profit or loss on realisation of assets and payment of liabilities when a firm is dissolved. The closing balance of this account transferred to partner’s capital account in their profit sharing ratio.
6. What are the objectives of preparing Realisation Account?
Ans: Following are the objectives of preparing Realisation Account:
a. It is prepared to close the books of account at the time of dissolution of firm.
b. It is prepared to record sale of assets and payment of liabilities and expenses.
c. It is prepared to find out profit or loss on realisation of assets and liabilities.

7. What are the differences between Revaluation A/c and Realisation A/c?
Ans: - Following are the differences between Revaluation A/c and Realisation A/c:
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