Question

Explain with the support of an illustration the process of termination and liquidation of a partnership? (With supportive example)

Answer 1

The bankruptcy of an individual partner can force the termination of the partnership.

A dissolution refers to the cessation of a partnership.

Termination of partnership refers to changes in the composition of a partnership whereas liquidation is the selling of a partnership's assets.

Liquidation can also be required by the death, retirement, or withdrawal of one of the partners.

Following is the illustration related to the process of termination and liquidation of a partnership:

Q.

X, Y, and Z are partners of the firm XYZ & Co., sharing Profits and Losses in the ratio of 4:3:2. Following is the Balance Sheet of the firm as at 31st March 2012:

                                                          Balance Sheet as at 31st March,2012

Liabilities	Amount	Assets	Amount
Partners’ Capital: X Y Z General Reserve Sundry Creditors	4,00,000 3,00,000 2,00,000 90,000 3,20,000	Fixed Assets Stock in trade Sundry Debtors Cash in hand	5,00,000 3,00,000 5,00,000 10,000
	13,10,000		13,10,000

Partners of the firm decided to dissolve the firm on the above said date.

Fixed assets realized $5,20,000 and book debts $4,40,000.

Stocks were valued at $2,50,000 and it was taken over by partner Y.

Creditors allowed discount of 5% and the expenses of realization amounted to $6000.

You are required to prepare:

Realization account;

Partners capital account;

Cash account.

Solution:

(i)                                                       Realization Account

	Amount		Amount
To Fixed Assets To Stock in trade To Debtors To cash-expenses To creditors (3,20,000*95%)	5,00,000 3,00,000 5,00,000 6,000 3,04,000	By Creditors By Cash (5,20,000+4,40,000) By Y (Stock taken over) By loss transferred to Partners’ capital accounts X Y Z	3,20,000 9,60,000 2,50,000 35,555 26,667 17,778
	16,10,000		16,10,000

(i)                                                       Partners’ Capital Accounts

	X	Y	Z		X	Y	Z
	Amount	Amount	Amount		Amount	Amount	Amount
To Realisation Account To Relaisation Account To Cash	35,555 - 4,04,445	26,667 2,50,000 53,333	17,778 - 2,02,222	By Balance b/d By General Reserve	4,00,000 40,000	3,00,000 30,000	2,00,000 20,000
	4,40,000	3,30,000	2,20,000		4,40,000	3,30,000	2,20,000

(i)                                                       Cash Account

	Amount		Amount
To Balance b/d To Relisation Account (Fixed assets and book- debts realized)	10,000 9,60,000	By Realization A/c (Expenses) By Realization A/c (Creditors) By X By Y By Z	6,000 3,04,000 4,04,445 53,333 2,02,222
	9,70,000		9,70,000