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(Accountancy) Accounts Theory : CBSE Class 12th Partnership (Dissolution of a Firm)

Accounts Theory : CBSE Class 12th Partnership (Dissolution of a Firm)

Q.1. Distinguish between dissolution of a partnership and dissolution of a firm.

(CBSE 1991(Delhi) (C))

Answer: The dissolution of the partnership is not the dissolution of a partnership firm. Any type of change in the partnership agreement is called dissolution of partnership. A partnership may also be dissolved at the time of admission of a new partner into the firm or at the time of retirement or death of a partner. In this case a new partnership agreement is formed, this is why the old partnership comes to an end and a new partnership begins.

However, dissolution of a firm means discontinuation of the firm’s business and the relationship between the partners. According to Sec. 39 of Indian Partnership Act 1932, " Dissolution of firm means a dissolution of partnership between all the partners in the firm." Therefore when a firm is dissolved, assets of the firm are disposed off, liabilities are paid off and the accounts of all the partners are also settled.

Q.2. Distinguish between Revaluation Account and Realisation Account.

(DSSE 1987, AISSE 1988,1989 CBSE 1992)

Answer:

Revaluation Account

Realisation Account

(1) Revaluation account is prepared at the time of admission, retirement of death of a partner.

This account is prepared at the time of dissolution of a partnership firm.

(2) Revaluation account is prepared in order to work out the profit or loss on revaluation of assets and liabilities at the time of admission, retirement or death of a partner.

This account is prepared to work out the profit or loss on realisation of assets and payment to liabilities at the time of dissolution of the firm.

(3) Revaluation profit or loss is distributed only among the old partners of the firm in their profit sharing ratio.

Realisation profit or loss is distributed among all the partners in their profit sharing ratio.

(4) After preparing the revaluation account the firm’s business gets going with the same set of books.

After preparation of this account the firms business comes to an end.

Q.3. Explain the provisions of Sec. 48 of the Indian Partnership Act 1932 dealing with settlement of accounts the time of the dissolution of firm. 

Answer: Sec. 48 of Indian Partnership Act 1932 lays down the following rules regarding the settlement of accounts:

(i) Losses including deficiencies of capital shall be paid:

  1. first out of profits;

  2. then out of capitals; and

  3. lastly, if necessary by the partners individually in their profit sharing ratio.

(ii) The amount realised from the assets of the firm including any sums of money contributed by the partners to make up deficiencies of capital shall be applied in the following order:

  1. First of all in paying the debts of the third party.

  2. Secondly to pay off partner’s loan.

  3. Then to refund partner’s capital balances.

  4. The surplus, if any distributed among the partners in their profit sharing ratio.

In case a partner has provided loan to the firm has debit balance of capital, first the debit balance of capital will be completed by his loan, thereafter, if there is a balance in loan account, it will be paid before the payment of other partner’s capital.

Q.4. Enumerate the circumstances under which a firm is dissolved.

Answer: According to Sec. 40 to Sec. 44 of the Indian Partnership Act 1932, the firm is dissolved in the following ways:

  1. Dissolution by Agreement: When all the partners give their intention to dissolve the partnership firm.

  2. Compulsory Dissolution:

  1. When all the partners or all except one partner is declared insolvent.

  2. When the partnership business becomes illegal.

  3. When all the partners except one decide to retire from the firm.

  4. When one of the partner is the citizen of an enemy country.

  5. When specific purpose or the venture of the partnership firm is completed.

  1. Dissolution by Notice: When the partnership is at will, any partner may dissolve the firm by giving notice in writing to the other partners.

  2. Dissolution by Court:

  1. When one of the partner becomes unsound mind.

  2. When the business of the firm cannot be carried on save at loss.

  3. When a partner becomes permanently incapable of performing his duties as a partner.

  4. When a partner is guilty of misconduct, which is likely to affect the firms business.

  5. When a partner intentionally commits breach of agreement.

  6. When a partner transfers whole of his interest in the firm to a third party.

  7. When the court is satisfied on any just and equitable ground.

Q.5. Distinguish between firm’s debts and private debts.

Answer:

Firm’s Debts:

When a firm owes to an outsider, this debt is called firm’s debt. The firm is basically responsible to pay these debts. At the time of dissolution of the firm these debts are paid first out of the money realised.

Private Debts:

When a partner owes some amount from an outsider this debt is called his private debt. The firm is basically not responsible for these types of debts. Such debts are paid off from the money realised by selling the private property of the partner. If private property of partner exceeds the amount of his private debt, surplus is used to settle the firm’s debts.

Q.6. All the partners want to dissolve the firm. C, a partner, wants that his loan of Rs. 30,000 must be paid off before the payment of capitals to the partners. But A and B, other partners want that capital must be paid before the payment of C’s loan. State who is correct?

Answer: C is correct because according to Sec. 48 of Indian Partnership Act 1932, partner’s loan is repaid before the payment of capitals of partners.




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