Study Material & Notes for the Chapter 7
Partnership - Dissolution of Partnership
III. ACCOUNTING TREATMENT ON DISSOLUTION OF PARTNERSHIP
2(A) Loan Given by Firm to Partner
- A firm may have given to Loan to a partner
- Loan Given to a Partner is an Asset
- On Dissolution Loan given to a Partner is closed and transferred to respective Partner’s capital A/c
Journal Entries
Transaction |
Entry |
Amount |
When Partner has either credit or debt Balance in his/her Capital A/c |
Partner’s Capital A/c……….Dr. To Loan To Partner A/c (Partner Loan A/c is transferred to Partner’s Capital A/c) |
Debit Credit |
Loan to Partner Account
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Balance b/d |
By Partner’s Capital A/c |
||
Total |
Total |
2 (B) Loan Given by Partner to Firm
- A firm may have received Loan from a partner
- Loan from a Partner is not an Outside Liability hence it is not transferred to the Realisation A/c
- Accounting treatment for Loan received from Partner’s is to first close the Partner Capital A/c making all adjustments related to transfer of Free reserves, Fictitious assets, Assets/liabilities taken over, Profit/Loss on realisation etc.
- Treatment of Loan given by a partner depends on the balance in partner’s capital account at this stage:
- If Partner has Credit balance in his/her Capital A/c, balance in his/her Loan A/c is repaid in cash
- If Partner has Debit balance in his/her Capital A/c, balance in his/her Loan A/c is transferred to his/her Capital A/c
Journal Entries
Transaction | Entry | Amount |
(i) When Partner has credit Balance in his/her Capital A/c | Partner’s Loan A/c……….Dr. To Cash/Bank A/c (Repayment of Partner’s Loan A/c by cash) | Debit Credit |
(ii) When Partner has debit balance in his/her Capital A/c | Partners’ Loan A/c……….Dr. To Partner’s Capital A/c (Partner’s Loan transferred to Partner’s Capital A/c) | Debit Credit |
Loan to Partner Account
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Bank or Partner’s Capital A/c |
By Balance b/d |
||
Total |
Total |
3 Partner’s Capital Accounts
After all the adjustments related to partners’ capital accounts and transfer of profit or loss on realisation to the partners’ capital accounts, the capital accounts are closed in the following manner:
Partner’s Capital Account
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Fictitious Assets/Undistributed Losses A/c To Realisation A/c (Assets taken over) To Partner’s Loan A/c To Partner’s Current A/c (Debit balance) To Realisation A/c (Loss) To Cash/Bank A/c (Surplus in Capital A/c) |
By Balance b/d By Reserves/Accumulated Profits By Realisation A/c (Liabilities taken over) By Partner’s Current A/c (Credit balance) By Partner’s Loan A/c By Realisation A/c (Expenses) By Realisation A/c (Gain) By Cash/Bank A/c (Deficit in Capital A/c) |
||
Total |
Total |
Journal Entries
Transaction | Entry | Amount |
(i) In case of Surplus i.e. Credit balance, the partner needs to be paid off balance in his/her account in cash | Partner’s Capital A/c……….Dr. To Cash/Bank A/c (Cash paid to Partner) | Debit Credit |
(ii) In case of Deficit i.e. Debit balance e partner, the partner needs to be bring in balance in his/her account in cash | Cash/Bank A/c……….Dr. To Partner’s Capital A/c (Cash brought-in by the Partner) | Debit Credit |
4 Cash Account
Cash Account
Dr. Cr.
Particulars |
Amount |
Particulars |
Amount |
To Balance b/d To Realisation A/c (sale of assets) To Cash A/c (if both Cash & Bank A/cs) To Partner Capital A/c (settlement) |
By Realisation A/c (payment of liabilities) By Realisation A/c (expenses) By Partner Loan A/c (repayment) By Realisation A/c (Bank overdraft) By Partner Capital A/c (settlement) |
||
Total |
Total |
Journal Entries
Transaction | Entry | Amount |
(i) For Cash deposited into Bank | Bank A/c……….Dr. To Cash A/c (Cash deposited into Bank) | Debit Credit |
((ii) For Cash withdrawn from Bank | Bank A/c……….Dr. To Cash A/c (Cash withdrawn from Bank) | Debit Credit |
Journal Entries
Transaction | Entry | Amount |
(i) In case of Surplus i.e. Credit balance, the partner needs to be paid off balance in his/her account in cash | Partner’s Capital A/c……….Dr. To Cash/Bank A/c (Cash paid to Partner) | Debit Credit |
(ii) In case of Deficit i.e. Debit balance e partner, the partner needs to be bring in balance in his/her account in cash | Cash/Bank A/c……….Dr. To Partner’s Capital A/c (Cash brought-in by the Partner) | Debit Credit |
If both Cash A/c as well Bank A/c are given in the question, assume Cash is deposited into Bank. Pass the journal entry & do Ledger posting accordingly.
Treatment of Workmen Compensation Reserve and Claim
- Payment of Workmen Claim in all the cases is routed through Realisation A/c
- Workmen Compensation Reserve to the extent of Workmen Claim is transferred to Realisation A/c
- Workmen Compensation Reserve in excess of Workmen Claim is distributed to Partner’s Capital A/c
Reserve | Claim | Journal Entry | Amount |
Yes | No | Workmen Compensation Reserve A/c………Dr To All Partners Capital A/c (in their PSR) | Reserve Amount Reserve Amount |
No | Yes | Realisation A/c………………………………………….Dr. To Cash/Bank A/c | Claim Amount Claim Amount |
Yes | Yes | Realisation A/c………………………………………… Dr. | Claim Amount |
Claim>WCR | To Cash/Bank A/c | Claim Amount | |
Workmen Compensation Reserve A/c………Dr. To Realisation A/c | Reserve Amount Reserve Amount | ||
Yes | Yes | Realisation A/c………………………………………… Dr. | Claim Amount |
Claim<WCR | To Cash/Bank A/c | Claim Amount | |
Workmen Compensation Reserve A/c………Dr To Realisation A/c To All Partners Capital A/c (in their PSR) | Reserve Amount Claim Amount Reserve – Claim |
- WCR in excess of Workmen Claim is distributed to Partner’s Capital A/c
Treatment of Workmen Compensation Reserve and Claim
Situation | Type | Born by | Paid by | Journal Entry |
Dissolution expenses borne and paid by the Firm | Expenses | Firm | Firm | Realisation A/c…………………Dr. To Cash/Bank A/c |
Expenses borne by firm and paid by Partner | Expenses | Firm | Partner | Realisation A/c…………………Dr. To Partner’s Capital A/c |
Firm gives contract to Partner (including expenses) | Remuneration | Firm | Due to Partner | Realisation A/c…………………Dr. To Partner’s Capital A/c |
Expenses | Partner | Partner | No Entry | |
Expenses | Partner | Firm | Partner’s Capital A/c……………Dr. To Cash/Bank A/c | |
Firm gives contract to Partner (excluding expenses or question is silent on who paid) | Remuneration | Firm | Due to Partner | Realisation A/c…………………Dr. To Partner’s Capital A/c |
Expenses | Firm | Partner | Realisation A/c…………………Dr. To Cash/Bank A/c | |
Expenses | Firm | Partner | Realisation A/c……………Dr. To Partner’s Capital A/c | |
Expenses borne by firm and paid by Partner | Expenses | One Partner | Another Partner | Partner’s Capital A/c…………Dr. (Bearing expenses) To Partner’s Capital A/c (Paying expenses) |