CBSE Class 12 Accountancy – Dissolution of Partnership Firm

Introduction

Dissolution of a Partnership Firm is an important topic in CBSE Class 12 Accountancy – Partnership Accounts.

In simple words, dissolution means closing the business of the partnership firm and settling all the accounts of the firm.

When a firm is dissolved, its assets are realised (sold or otherwise settled), liabilities are paid, and the remaining amount is distributed among the partners according to their rights.

This chapter mainly deals with:

Meaning of dissolution of partnership
Meaning of dissolution of partnership firm
Difference between dissolution of partnership and dissolution of firm
Types of dissolution of a firm
Settlement of accounts
Realisation Account
Partners' Capital Accounts
Cash/Bank Account
Important journal entries
Treatment of assets and liabilities
Treatment of unrecorded assets and liabilities
Loss or profit on realisation
Distribution of final cash among partners

CBSE Exam Scope: These notes cover the prescribed topics and exclude piecemeal distribution, sale to a company and insolvency of partner(s).

1. Meaning of Dissolution of Partnership

Dissolution of partnership means a change in the existing relationship among partners due to a change in the constitution of the firm.

The business may continue after such dissolution.

For example:

A, B and C are partners. C retires from the firm and A and B continue the business.

The old partnership between A, B and C is dissolved, but the business of the firm continues with A and B.

Therefore:

Dissolution of Partnership ≠ Necessarily Closure of Business

It may simply mean a change in the relationship among partners.

2. Meaning of Dissolution of Partnership Firm

Dissolution of a partnership firm means the dissolution of partnership among all the partners of the firm, resulting in the closure of the business of the firm.

At dissolution:

The business is closed.
Assets are realised.
Liabilities are paid.
Accounts are settled.
Any remaining amount is distributed among partners.

Simple Meaning

Dissolution of Partnership Firm = End of the partnership firm and closure of its business.

3. Difference Between Dissolution of Partnership and Dissolution of Firm

This is a very important theory question for CBSE examinations.

Basis	Dissolution of Partnership	Dissolution of Firm
Meaning	Change in relationship among partners	Complete closure of the firm
Business	May continue	Business is closed
Assets	Not necessarily realised	Assets are realised
Liabilities	Not necessarily settled	Liabilities are settled
Partners	Some partners may leave/join	Relationship among all partners comes to an end
Example	Retirement of a partner	Firm closes its business

Remember

Every dissolution of firm involves dissolution of partnership, but every dissolution of partnership does not necessarily result in dissolution of the firm.

4. Types of Dissolution of a Partnership Firm

Under the Indian Partnership Act, 1932, a firm may be dissolved in different ways.

The main types are:

Dissolution without the order of the Court
Dissolution by Court

Dissolution without the order of the Court can further occur through:

Dissolution by Agreement
Compulsory Dissolution
Dissolution on the happening of certain contingencies
Dissolution by Notice of Partnership at Will

5. Dissolution by Agreement

A firm may be dissolved:

With the consent of all partners, or
According to the terms of the partnership agreement.

Example

A, B and C are partners. All three agree to close the business.

The firm is dissolved by agreement.

6. Compulsory Dissolution

A firm is compulsorily dissolved in certain circumstances prescribed by law.

For example, when all the partners or all except one become insolvent, subject to the applicable legal provisions.

A firm may also be compulsorily dissolved when an event makes the business of the firm unlawful.

Example

A, B and C are partners in a business that becomes unlawful due to a change in law.

The firm may have to be dissolved compulsorily.

7. Dissolution on the Happening of Certain Contingencies

A firm may be dissolved on the happening of certain events, unless the partnership agreement provides otherwise.

Important contingencies include:

1. Expiry of Fixed Term

If the partnership was formed for a fixed period, the firm may dissolve when that period expires.

2. Completion of Venture

If the firm was created for a particular venture, it may dissolve after the venture is completed.

3. Death of a Partner

Subject to the partnership agreement, death of a partner may result in dissolution of the firm.

4. Adjudication of a Partner as Insolvent

Subject to the provisions of the law and agreement, adjudication of a partner as insolvent may result in dissolution of the firm.

8. Dissolution by Notice

In the case of a partnership at will, any partner may dissolve the firm by giving notice in writing to all the other partners.

The dissolution takes effect from the date mentioned in the notice or, if no date is mentioned, from the date of communication of the notice, subject to the applicable law.

9. Dissolution by Court

A partner may approach the court for dissolution of the firm in situations provided under the law.

Some important grounds include:

Insanity of a partner
Permanent incapacity of a partner
Misconduct of a partner
Persistent breach of agreement
Transfer of whole interest by a partner
Business can be carried on only at a loss
Other circumstances in which the court considers dissolution just and equitable

Exam Tip

For CBSE questions, remember the main grounds rather than trying to memorise lengthy legal language.

10. Settlement of Accounts on Dissolution

When a firm is dissolved, its accounts have to be settled.

The basic order is:

Step 1

Realise the firm's assets.

Step 2

Pay outside liabilities.

Step 3

Pay partner's loan, if any.

Step 4

Settle partners' Capital Accounts.

The order can be remembered as:

Outside Liabilities → Partner's Loan → Partners' Capital → Surplus, if any

This order is extremely important for numerical questions.

11. Realisation Account

A Realisation Account is prepared at the time of dissolution to determine the profit or loss arising from the realisation of assets and settlement of liabilities.

Main Purpose

The Realisation Account records:

Transfer of assets
Sale of assets
Payment of liabilities
Realisation expenses
Unrecorded assets
Unrecorded liabilities
Profit or loss on realisation

12. What is Transferred to Realisation Account?

Generally, all recorded assets except cash/bank and fictitious assets are transferred to the debit side of the Realisation Account.

Journal Entry

Realisation A/c Dr.

To Sundry Assets A/c

For example:

Machinery ₹2,00,000
Stock ₹1,00,000
Debtors ₹80,000

These assets are transferred to Realisation Account at their book values.

13. Assets Not Transferred to Realisation Account

Some items are not transferred to Realisation Account.

Important examples:

Cash
Bank
Fictitious assets such as debit balance of Profit and Loss Account

These remain in their respective accounts.

Important

Cash/Bank is not transferred to Realisation Account.

14. Fictitious Assets

Fictitious assets are not real assets.

Examples may include:

Advertisement Suspense Account
Debit balance of Profit and Loss Account
Preliminary Expenses, where applicable

They are generally dealt with through the partners' Capital Accounts rather than being transferred to Realisation Account as normal assets.

15. Transfer of Liabilities to Realisation Account

External liabilities that are to be settled are transferred to the credit side of Realisation Account.

Journal Entry

Liability A/c Dr.

To Realisation A/c

For example:

Creditors ₹1,00,000

Entry:

Creditors A/c Dr. ₹1,00,000
To Realisation A/c ₹1,00,000

16. Sale of Assets

When an asset is sold for cash:

Journal Entry

Bank/Cash A/c Dr.

To Realisation A/c

Example

Example

A agrees to take over creditors of ₹20,000.

Entry:

Realisation A/c Dr. ₹20,000
To A's Capital A/c ₹20,000

20. Unrecorded Assets

An unrecorded asset is an asset that does not appear in the books of accounts.

If an unrecorded asset is sold for cash:

Journal Entry

Bank/Cash A/c Dr.

To Realisation A/c

Example

An unrecorded asset is sold for ₹10,000.

Bank A/c Dr. ₹10,000
To Realisation A/c ₹10,000

21. Unrecorded Asset Taken Over by a Partner

If a partner takes over an unrecorded asset:

Journal Entry

Partner's Capital A/c Dr.

To Realisation A/c

The amount is recorded at the value agreed upon.

22. Unrecorded Liabilities

If an unrecorded liability has to be paid:

Journal Entry

Realisation A/c Dr.

To Bank/Cash A/c

Example

An unrecorded liability of ₹15,000 is paid.

Realisation A/c Dr. ₹15,000
To Bank A/c ₹15,000

23. Realisation Expenses

Expenses incurred for dissolving the firm are called Realisation Expenses.

Examples:

Legal charges
Advertisement expenses
Brokerage
Commission
Other expenses related to dissolution

When Firm Pays the Expenses

Realisation A/c Dr.

To Bank/Cash A/c

24. Realisation Expenses Paid by a Partner

If a partner agrees to pay realisation expenses personally and the firm does not reimburse the partner:

No entry is made in the books of the firm.

If the firm has agreed to reimburse the partner:

Realisation A/c Dr.

To Partner's Capital/Current A/c

25. Profit or Loss on Realisation

After recording all realisation transactions, the Realisation Account is balanced.

If the credit side is greater than the debit side, there is a profit on realisation.

If the debit side is greater than the credit side, there is a loss on realisation.

The profit or loss is transferred to partners' Capital Accounts in their profit-sharing ratio.

26. Entry for Profit on Realisation

If there is a profit:

Realisation A/c Dr.

To Partners' Capital A/c

The profit is credited to partners in their profit-sharing ratio.

27. Entry for Loss on Realisation

If there is a loss:

Partners' Capital A/c Dr.

To Realisation A/c

The loss is debited to partners in their profit-sharing ratio.

28. Complete Realisation Account Format

Realisation Account

Dr.	Amount (₹)	Cr.	Amount (₹)
Assets transferred	xxx	Liabilities transferred	xxx
Bank – Liabilities paid	xxx	Bank – Assets realised	xxx
Realisation Expenses	xxx	Partner's Capital – Asset taken over	xxx
Partner's Capital – Liability taken over	xxx	Unrecorded Assets realised	xxx
Profit on Realisation	xxx	Loss on Realisation	xxx
Total	xxx	Total	xxx

Note: The exact entries depend upon the transactions given in the question.

29. Partners' Capital Accounts

After Realisation Account is prepared, partners' Capital Accounts are prepared.

These accounts show the final amount payable to or receivable from each partner.

Credit Side may include:

Opening capital
Reserves
Accumulated profits
Revaluation profit, if applicable
Profit on realisation
Amount brought in by partner
Other credits

Debit Side may include:

Drawings
Accumulated losses
Fictitious assets
Realisation loss
Assets taken over
Liabilities settled by partner
Amount paid to partner

30. Capital Account Format

Dr.	A (₹)	B (₹)	Cr.	A (₹)	B (₹)
Realisation A/c – Loss	xxx	xxx	Balance b/d	xxx	xxx
Drawings/other adjustments	xxx	xxx	Reserves/Profits	xxx	xxx
Asset taken over	xxx	xxx	Realisation A/c – Profit	xxx	xxx
Bank	xxx	xxx	Other adjustments	xxx	xxx
Total	xxx	xxx	Total	xxx	xxx

The final balance is settled through Cash/Bank.

31. Cash/Bank Account

Cash or Bank Account is prepared to record the final cash transactions of the firm.

It includes:

Receipts

Cash received from sale of assets
Cash received from debtors
Amount brought in by partners
Other cash receipts

Payments

Payment of external liabilities
Realisation expenses
Payment of partner's loan
Payment of partners' capital balances

32. Cash/Bank Account Format

Receipts	Amount (₹)	Payments	Amount (₹)
Balance b/d	xxx	Realisation expenses	xxx
Assets realised	xxx	Outside liabilities paid	xxx
Partner's contribution	xxx	Partner's loan paid	xxx
Other receipts	xxx	Partners' capital paid	xxx
		Balance c/d	xxx
Total	xxx	Total	xxx

A partner's loan is different from the partner's capital.

At the time of dissolution, after payment of outside liabilities, the partner's loan is settled before the partners' Capital Accounts.

Example

A's Loan = ₹50,000

The firm pays A:

A's Loan A/c Dr.

To Bank A/c

₹50,000

Remember

Outside Liabilities → Partner's Loan → Partner's Capital

35. What Happens to the Balance of Cash?

After:

Assets have been realised,
Liabilities have been paid,
Realisation expenses have been paid,
Partner's loans have been settled,

the remaining cash is distributed among partners according to the balances of their Capital Accounts.

36. Solved Illustration – Dissolution of Firm

A and B are partners sharing profits equally.

Their Balance Sheet shows:

Liabilities

Creditors = ₹40,000
A's Capital = ₹80,000
B's Capital = ₹60,000

Assets

Cash = ₹20,000
Debtors = ₹60,000
Stock = ₹50,000
Machinery = ₹50,000

The firm is dissolved.

The assets are realised as follows:

Debtors = ₹55,000
Stock = ₹40,000
Machinery = ₹45,000
Creditors are paid at ₹38,000
Realisation expenses = ₹2,000

Step 1: Transfer Assets

Assets transferred:

Debtors = ₹60,000
Stock = ₹50,000
Machinery = ₹50,000

Total = ₹1,60,000

Cash is not transferred to Realisation Account.

Step 2: Transfer Creditors

Creditors = ₹40,000

Creditors A/c Dr. ₹40,000
To Realisation A/c ₹40,000

Step 3: Record Sale of Assets

Cash received:

Debtors = ₹55,000
Stock = ₹40,000
Machinery = ₹45,000

Total = ₹1,40,000

Entry:

Bank A/c Dr. ₹1,40,000
To Realisation A/c ₹1,40,000

Step 4: Payment of Creditors

Creditors actually paid = ₹38,000

Realisation A/c Dr. ₹38,000
To Bank A/c ₹38,000

Step 5: Realisation Expenses

Expenses = ₹2,000

Realisation A/c Dr. ₹2,000
To Bank A/c ₹2,000

Step 6: Calculate Profit/Loss on Realisation

Realisation Account

Debit:

Assets transferred = ₹1,60,000
Creditors paid = ₹38,000
Expenses = ₹2,000

Total Debit = ₹2,00,000

Credit:

Creditors transferred = ₹40,000
Assets realised = ₹1,40,000

Total Credit = ₹1,80,000

Therefore:

Loss on Realisation = ₹20,000

A and B share profits equally.

A's share of loss = ₹10,000
B's share of loss = ₹10,000

Step 7: Partners' Capital Accounts

A

Opening Capital = ₹80,000
Less: Realisation Loss = ₹10,000

Amount payable to A = ₹70,000

B

Opening Capital = ₹60,000
Less: Realisation Loss = ₹10,000

Amount payable to B = ₹50,000

Step 8: Final Cash Settlement

Opening Cash = ₹20,000

Add: Assets realised = ₹1,40,000

Total cash available = ₹1,60,000

Less:

Creditors paid = ₹38,000
Realisation expenses = ₹2,000
A's Capital = ₹70,000
B's Capital = ₹50,000

Total payments = ₹1,60,000

Therefore:

Closing Cash = Nil

The accounts are completely settled.

37. How to Solve Dissolution Questions in CBSE Exam

Whenever you see a dissolution numerical, follow this order:

1. Read the Balance Sheet Carefully

Identify:

Assets
Liabilities
Partners' Capital
Partners' Loan
Cash/Bank

2. Prepare Realisation Account

Transfer relevant assets and liabilities.

3. Record Realisation Transactions

Record:

Sale of assets
Assets taken over
Payment of liabilities
Liabilities taken over
Realisation expenses
Unrecorded assets/liabilities

4. Calculate Profit or Loss

Transfer it to partners' Capital Accounts.

5. Prepare Capital Accounts

Adjust:

Realisation profit/loss
Assets taken over
Liabilities taken over
Other relevant items

6. Prepare Cash/Bank Account

Record all receipts and payments.

7. Check the Final Balance

After complete settlement, the firm's accounts should be closed.

38. Important Difference: Realisation Account vs Capital Account

Realisation Account	Partners' Capital Account
Determines profit/loss on realisation	Determines amount payable to partners
Records sale of assets	Records partners' capital adjustments
Records payment of liabilities	Records realisation profit/loss
Records realisation expenses	Records assets/liabilities taken over by partners
Closed by transferring profit/loss	Closed through Cash/Bank settlement

39. Important Difference: Realisation Account vs Cash/Bank Account

Realisation Account	Cash/Bank Account
Determines profit/loss on dissolution	Records actual cash/bank receipts and payments
Assets are transferred here	Cash/Bank itself is not transferred
Liabilities are transferred here	Payments are recorded here
Does not represent cash balance	Shows cash/bank balance

40. Common Mistakes Students Make

Mistake 1: Transferring Cash to Realisation Account

❌ Do not transfer Cash/Bank to Realisation Account.

Mistake 2: Transferring Every Asset

Cash/Bank and fictitious assets are treated separately.

Mistake 3: Forgetting Unrecorded Assets

If an unrecorded asset is sold, record the cash received through Realisation Account.

Mistake 4: Forgetting Realisation Expenses

Expenses related to dissolution affect the Realisation Account.

Mistake 5: Using the Wrong Ratio

Realisation profit/loss is transferred to partners in their profit-sharing ratio.

Mistake 6: Confusing Partner's Loan with Capital

Partner's Loan is settled before partners' Capital Accounts.

Mistake 7: Forgetting the Final Cash Check

After complete settlement, check whether the Cash/Bank balance has been fully distributed.

41. One-Minute Revision Trick

Remember:

A → L → R → C → B

A = Assets

Transfer relevant assets to Realisation.

L = Liabilities

Transfer external liabilities to Realisation.

R = Realisation

Record sale, settlement and expenses and calculate profit/loss.

C = Capital

Transfer realisation profit/loss and settle partners' accounts.

B = Bank

Record all receipts and payments and finally settle the partners.

42. Quick Journal Entry Chart

Transaction	Journal Entry
Assets transferred	Realisation Dr. → Assets
Liabilities transferred	Liabilities Dr. → Realisation
Asset sold	Bank Dr. → Realisation
Asset taken over by partner	Partner's Capital Dr. → Realisation
Liability paid	Realisation Dr. → Bank
Liability taken over by partner	Realisation Dr. → Partner's Capital
Unrecorded asset sold	Bank Dr. → Realisation
Unrecorded liability paid	Realisation Dr. → Bank
Realisation expenses paid	Realisation Dr. → Bank
Realisation profit	Realisation Dr. → Partners' Capital
Realisation loss	Partners' Capital Dr. → Realisation
Partner's loan paid	Partner's Loan Dr. → Bank
Partner's capital paid	Partner's Capital Dr. → Bank

43. Frequently Asked Questions – FAQs

Q1. What is dissolution of a partnership firm?

It means the complete closure of the partnership business and settlement of the firm's accounts.

Q2. What is a Realisation Account?

It is prepared to determine the profit or loss arising from the realisation of assets and settlement of liabilities.

Q3. Which assets are transferred to Realisation Account?

Generally, all recorded assets except Cash/Bank and fictitious assets are transferred.

Q4. Is Cash transferred to Realisation Account?

No. Cash/Bank is not transferred to Realisation Account.

Q5. What happens to the profit on realisation?

It is transferred to partners' Capital Accounts in their profit-sharing ratio.

Q6. What happens to the loss on realisation?

It is debited to partners' Capital Accounts in their profit-sharing ratio.

Q7. In what order are payments made at dissolution?

Generally:

Outside Liabilities → Partner's Loan → Partners' Capital

Q8. What is an unrecorded asset?

An asset that does not appear in the firm's books of account is called an unrecorded asset.

Q9. What is an unrecorded liability?

A liability that does not appear in the firm's books but becomes payable on dissolution is an unrecorded liability.

Q10. What are the main accounts prepared at dissolution?

The main accounts are:

Realisation Account
Partners' Capital Accounts
Cash/Bank Account

44. CBSE Exam-Focused Topics

For board examination preparation, give special attention to:

Meaning of dissolution of partnership
Meaning of dissolution of partnership firm
Difference between dissolution of partnership and dissolution of firm
Types of dissolution
Realisation Account
Treatment of assets
Treatment of liabilities
Unrecorded assets and liabilities
Realisation expenses
Realisation profit/loss
Partners' Capital Accounts
Cash/Bank Account
Order of settlement of accounts

45. Final Revision Summary

Dissolution means the firm is brought to an end and its accounts are settled.

The three most important accounts are:

1. Realisation Account

Used to calculate profit or loss on realisation.

2. Partners' Capital Accounts

Used to determine the final amount payable to or receivable from partners.

3. Cash/Bank Account

Used to record receipts and payments during dissolution.

Final Sequence

Transfer Assets & Liabilities

↓

Realise Assets

↓

Pay Liabilities

↓

Pay Realisation Expenses

↓

Calculate Realisation Profit/Loss

↓

Transfer Profit/Loss to Partners' Capital Accounts

↓

Settle Partner's Loan

↓

Settle Partners' Capital Accounts

↓

Close Cash/Bank Account

Conclusion

Dissolution of a Partnership Firm becomes easy when students understand the purpose of each account.

The most important thing to remember is:

Realisation Account = Profit/Loss on dissolution

Capital Account = Amount due to/from partners

Cash/Bank Account = Actual receipts and payments

For CBSE Class 12 Accountancy, practise questions involving Realisation Account, Partners' Capital Accounts and Cash/Bank Account regularly. Pay special attention to the treatment of unrecorded assets, unrecorded liabilities, assets taken over by partners, liabilities taken over by partners and realisation expenses.

Once the journal entries and sequence are clear, even a lengthy dissolution question can be solved systematically.

📚 Also Read - Important for 2026:
👉 Class 12 All Chapters Notes
👉 Class 11 Commerce Notes

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