Accounting Treatment on Dissolution of the Firm

Accounting treatment of dissolution of firm

When the Partnership firm dissolved then we need to close the books of accounts by realized assets and will pay liabilities of the firm. To do this we have standard Accounting Treatment on Dissolution of the Firm which we will discuss in this article. 

Realisation Account: –

In the accounting Treatment on Dissolution of the Firm firstly we will prepare the realisation account. The main objective for the preparation of the realisation account is to close down the books of accounts partnership firms and get to know the gains or losses on the dissolution of the partnership firm. 

Accounting Journal Entries for Closing of books of account: –

The following accounting journal entries are recorded in the books: –

Date   Particulars
L. F. Debit Credit
           
(i) Closing all assets account
  Realisation A/c Dr.   XXXX  
            To Asset A/c (by name of Asset)     XXXX
  (Being closing the account of assets)      
         
(ii) Closing all liabilities account
  Liability A/c (by name of Liability ) Dr.   XXXX  
            To Realisation A/c     XXXX
  (Being closing the account of Liabilities)      
         
(iii) Closing provision against any assets account
  Provision A/c (by name of Provision) Dr.   XXXX  
            To Realisation A/c     XXXX
  (Being closing the account of Liabilities)      
         
(iv) Closing the Fictitious assets account
  Partners’ Capital A/c Dr.   XXXX  
            To Fictitious Asset A/c (by name)     XXXX
  (Being closing the account of Fictitious asset)      
         
(v) Closing the Partners’ Current account
(a) If Debit Balance in Current a/c
  Partners’ Capital A/c Dr.   XXXX  
            To Partners’ Current A/c      XXXX
  (Being closing the Partners’ current account)      
         
(b) If Credit Balance in Current a/c
  Partners’ Current A/c Dr.   XXXX  
            To Partners’ Capital A/c      XXXX
  (Being closing the Partners’ current account)      
         
         
(vi) Closing workman compensation reserve 
(a) When there no claim for WCR
  WCR A/c  Dr.   XXXX  
            To Partners’ Capital A/c     XXXX
  (Being transfer the WCR to partners’ Capital account)      
         
(b) When there less amount of claim against WCR
  WCR A/c  Dr.   XXXX  
            To Realisation A/c(amount of claim)     XXX
            To Partners’ Capital A/c     XXXX
  (Being transfer the WCR to realisation and partners’ Capital account)      
         
(c) When there is equal or more amount of claim against WCR
  WCR A/c  Dr.   XXXX  
            To Realisation A/c     XXXX
  (Being transfer the WCR to realisation account)      
 
(vii) Expenses of dissolution of the firm
(a) If expenses born and paid by the firm
  Realisation A/c  Dr.   XXXX  
            To Cash A/c     XXXX
  (Being trasfer the WCR to partners’ Capital account)      
         
(B) If expenses born by the firm but paid by a partner
  Realisation A/c  Dr.   XXXX  
            To Concerned Partner Capital A/c     XXXX
  (Being realisation expenses paid by the partner)      
         
(C) If expenses born by the firm but partly paid by a partner and firm 
  Realisation A/c  Dr.   XXXX  
            To Cash/Bank A/c     XXXX
            To Concerned Partner Capital A/c     XXXX
  (Being realisation expenses partly paid by the partner and firm)      
         
(viii) Balance of Realisation account transferred to Partners’ Capital account
(a) If Debit Balance
  Partners’ Capital A/c Dr.   XXXX  
            To Realisation A/c      XXXX
  (Being balance of realisation account transfer to partners’ capital a/c)      
         
(b) If Credit Balance
  Realisation A/c Dr.   XXXX  
            To Partners’ Capital A/c      XXXX
  (Being balance of realisation account transfer to partners’ capital a/c)      
         

2. Partners’ Loan Account: – 

The loan by the partners to the firm is not a outsiders’ liabilities so that’s why it is not transferred to the realisation account and can not be transferred to the partners’ capital account. It will be settled by making payment of it by after payment made to outsider’s liabilities and before the payment of the capital account.

Accounting Journal Entry for Partners’ Loan Account: – 

Date   Particulars
L. F. Debit Credit
           
(i) Closing Partners’ Loan account to the firm
  Partners’ Loan A/c Dr.   XXXX  
            To Cash/Bank A/c     XXXX
  (Being closing the account of Partners’ Loan)      
         

3. Partners’ Capital Account: – 

After realisation and Partners’ loan account, we will prepare the partners’ capital account and make all adjustment already discussed above in the capital account. and Net balance of the partners’ capital if debit balance then we will collect the balance amount from the partners or if credit balance then we will pay the balance amount to the partners. 

Accounting Journal Entry for Partners’ Capital Account: – 

Date   Particulars
L. F. Debit Credit
           
(i) Closing Partners’ Capital account to the firm
(a) If there is a Credit balance
  Partners’ Capital A/c Dr.   XXXX  
            To Cash/Bank A/c     XXXX
  (Being closing the account of Partners’ Capital account)      
         
(B) If there is a Debit balance
  Cash/Bank A/c Dr.   XXXX  
            To Partners’ Capital A/c     XXXX
  (Being closing the account of Partners’ Capital account)      
         

4. Cash or Bank Account: – 

In the end, we will prepare cash or bank account and will post the first opening balance and then all the receipts from the sale of the assets on the debit side of the account and payment on the credit side of the cash or bank account. there will be no balance left after all adjustments in the cash or bank account. 

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