AccountancyDissolution of a partnership firm
When the firm itself closes, everything is sold, everyone outside is paid, and whatever remains is shared. One account, the Realisation Account, tells the whole story.
Dissolution of partnership and dissolution of firm
Dissolution of partnership is a change in the relation between partners: admission, retirement, death or change of ratio. The business continues. Dissolution of the firm means the business stops: assets are sold, liabilities paid and accounts closed. Dissolution of the firm always dissolves the partnership, but not the other way round.
How a firm may be dissolved
- By agreement of all partners.
- Compulsorily: when all partners, or all but one, become insolvent, or the business becomes unlawful.
- On certain events, subject to the deed: end of the fixed term, completion of the venture, death or insolvency of a partner.
- By notice, in a partnership at will.
- By order of a court: for example when a partner is of unsound mind, permanently incapable, guilty of misconduct, or the business can only run at a loss.
Order of settlement (section 48 of the Partnership Act)
Losses, including shortfalls of capital, are paid first out of profits, then out of capital, and lastly by the partners individually in their profit sharing ratio. The assets of the firm, including any sums contributed by partners to make up losses, are applied in this order:
- Debts of the firm to third parties.
- Loans and advances from partners (other than capital).
- Capital of each partner.
- The remainder, if any, is divided among partners in their profit sharing ratio.
Accounts prepared
- Realisation Account: to find the profit or loss on selling assets and paying liabilities.
- Partners' Loan Accounts: paid after outside liabilities.
- Partners' Capital Accounts: to find the final amount due to or from each partner.
- Bank (or Cash) Account: which must close with no balance.
Journal entries on dissolution
| Step | Entry |
|---|---|
| Transfer of assets (except cash and bank, and fictitious assets) at book value | Realisation A/c Dr. To Sundry Assets A/c |
| Transfer of outside liabilities | Sundry Liabilities A/c Dr. To Realisation A/c |
| Sale of assets | Bank A/c Dr. To Realisation A/c |
| Asset taken over by a partner | Partner's Capital A/c Dr. To Realisation A/c |
| Payment of liabilities | Realisation A/c Dr. To Bank A/c |
| Liability taken over by a partner | Realisation A/c Dr. To Partner's Capital A/c |
| Realisation expenses paid by the firm | Realisation A/c Dr. To Bank A/c |
| Profit on realisation | Realisation A/c Dr. To Partners' Capital A/cs |
| Loss on realisation | Partners' Capital A/cs Dr. To Realisation A/c |
| Partner's loan paid | Partner's Loan A/c Dr. To Bank A/c |
| Reserves and accumulated profits | Reserve A/c Dr. To Partners' Capital A/cs |
| Final payment to partners | Partners' Capital A/cs Dr. To Bank A/c |
Provisions against assets, such as provision for doubtful debts, are transferred to the credit of the Realisation Account, and the asset is transferred at its gross value.
Solved example
Manu and Neel share profits 3 : 2. They dissolve their firm on 31 March 2026, when the balance sheet was:
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Creditors | 80,000 | Machinery | 1,20,000 |
| Bank loan | 40,000 | Stock | 90,000 |
| Capital: Manu | 1,50,000 | Debtors | 1,00,000 |
| Capital: Neel | 1,00,000 | Cash at bank | 60,000 |
| 3,70,000 | 3,70,000 |
- Assets realised: machinery ₹1,00,000, stock ₹85,000, debtors ₹92,000.
- Creditors were paid ₹78,000 in full settlement. The bank loan was repaid.
- Expenses of realisation were ₹5,000.
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Machinery A/c | 1,20,000 | By Creditors A/c | 80,000 | ||
| To Stock A/c | 90,000 | By Bank Loan A/c | 40,000 | ||
| To Debtors A/c | 1,00,000 | By Bank A/c (assets realised: 1,00,000 + 85,000 + 92,000) | 2,77,000 | ||
| To Bank A/c (creditors 78,000 + loan 40,000) | 1,18,000 | By Loss: Manu's Capital A/c (3/5) | 21,600 | ||
| To Bank A/c (expenses) | 5,000 | By Loss: Neel's Capital A/c (2/5) | 14,400 | ||
| 4,33,000 | 4,33,000 |
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Realisation A/c (loss) | 21,600 | By Balance b/d | 1,50,000 | ||
| To Bank A/c (final payment) | 1,28,400 | ||||
| 1,50,000 | 1,50,000 |
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Realisation A/c (loss) | 14,400 | By Balance b/d | 1,00,000 | ||
| To Bank A/c (final payment) | 85,600 | ||||
| 1,00,000 | 1,00,000 |
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| To Balance b/d | 60,000 | By Realisation A/c (liabilities paid) | 1,18,000 | ||
| To Realisation A/c (assets realised) | 2,77,000 | By Realisation A/c (expenses) | 5,000 | ||
| By Manu's Capital A/c | 1,28,400 | ||||
| By Neel's Capital A/c | 85,600 | ||||
| 3,37,000 | 3,37,000 |
Loss on realisation is ₹36,000. The Bank Account closes exactly, which proves the working.
Special items
- Unrecorded asset (for example an old typewriter written off earlier, now sold for ₹3,000): Bank A/c Dr. To Realisation A/c. There is no transfer entry, because it was not in the books.
- Unrecorded liability paid: Realisation A/c Dr. To Bank A/c.
- Asset given to a creditor in settlement: no entry for the asset given. Only the cash paid or received for the difference is recorded.
- Realisation expenses borne by a partner for an agreed fee: Realisation A/c Dr. To Partner's Capital A/c with the fee. If the firm pays the actual expenses on his behalf, debit his capital account.
- Goodwill in the balance sheet is transferred to the Realisation Account like any other asset; anything received for it is credited there.
- Partner's loan is not transferred to the Realisation Account. It is paid from the bank after outside liabilities.
- Loan given by the firm to a partner is transferred to the debit of that partner's capital account.
When a partner's capital account shows a debit balance
If, after his share of loss, a partner owes money to the firm, he brings in cash: Bank A/c Dr. To Partner's Capital A/c. Only then can the other partners be paid in full.
Revaluation Account and Realisation Account compared
| Basis | Revaluation Account | Realisation Account |
|---|---|---|
| When prepared | On reconstitution of the firm | On dissolution of the firm |
| Assets and liabilities | Only the changes in value are recorded | All assets and outside liabilities are transferred at book value |
| Books | Continue; assets remain at revised values | Are closed |
| Result | Profit or loss on revaluation | Profit or loss on realisation |
Questions students ask
What is the difference between dissolution of partnership and dissolution of firm?
Dissolution of partnership changes the relationship among partners while the business continues. Dissolution of firm closes the business: assets are sold and all accounts are settled.
Is a partner's loan transferred to the Realisation Account?
No. It is kept in its own account and paid after the outside liabilities and before the partners' capitals.
Which assets are not transferred to the Realisation Account?
Cash and bank balances, and fictitious assets such as an accumulated loss, which is written off to the partners' capital accounts.
More Class 12 topics
For study, and independent. These pages explain accountancy as it is generally taught in Class 11, Class 12 and B.Com courses in India, in our own words with our own examples, reviewed in November 2026. This site is not connected with NCERT, CBSE, ICAI or any board or university. Syllabuses change: follow your own board's or university's current syllabus and textbook. Nothing here is professional accounting, tax or legal advice.