Dissolution of a Partnership Firm: ISC Class 12 Accounts Notes and Problems

What Dissolution of a Partnership Firm is about

Weightage: Dissolution of a Partnership Firm is part of the syllabus unit that carries 8 of the 80 theory marks. It is in the compulsory Section A (60 marks).Source: CISCE ISC Accountancy (Accounts) syllabus, examination year 2027, distribution of marks

Key concepts

Dissolution of partnership versus dissolution of the firm

Dissolution of partnership is a change in the relationship among partners (admission, retirement, death, change in ratio); the firm continues and assets are revalued (Revaluation A/c).

Dissolution of the firm ends the relationship among all partners; the business closes and assets are realised (Realisation A/c). A firm may be dissolved by agreement, compulsorily (insolvency of all but one partner, business becoming illegal), on the happening of certain contingencies (expiry of term, completion of venture, death or insolvency of a partner where the deed so provides), by notice in a partnership at will, or by the court.

A Revaluation A/c is not prepared on dissolution of the firm.

Worked example

Suppose a firm's partner retires and the other two continue, while in another firm all partners agree to close the business. Which is dissolution of the firm, and which account is prepared in each case? [2 marks]

Try it first, then show the solutionSolution

1. Retirement with continuation: dissolution of partnership only; Revaluation A/c.
2. All partners closing the business: dissolution of the firm; Realisation A/c.

Answer: The second; Revaluation A/c in the first case, Realisation A/c in the second.

Section 48: settlement of accounts

Section 48 of the Indian Partnership Act, 1932 fixes the order of settlement.

(a) Losses, including deficiencies of capital, are paid first out of profits, then out of capital, and lastly by the partners individually in their profit sharing ratio.

(b) The assets of the firm, including sums contributed by partners to make up deficiencies, are applied in this order:

1. Paying the debts of the firm to third parties.
2. Paying each partner rateably what is due to him for advances (loans), as distinct from capital.
3. Paying each partner rateably what is due to him on account of capital.
4. The residue, if any, is divided among partners in their profit sharing ratio.

Worked example

Suppose a firm on dissolution has ₹3,00,000 after selling its assets. Creditors are owed ₹1,40,000, partner A has lent ₹40,000 to the firm, and capitals are A ₹70,000 and B ₹30,000 (ratio 1 : 1). How is the money applied? [3 marks]

Try it first, then show the solutionSolution

1. Creditors ₹1,40,000 first; then A's loan ₹40,000; balance ₹1,20,000.
2. Capitals ₹70,000 and ₹30,000 returned; residue ₹20,000.
3. Residue (a realisation profit) shared 1 : 1: A ₹10,000, B ₹10,000.

Answer: Creditors 1,40,000 → A's loan 40,000 → capitals 70,000 and 30,000 → surplus 10,000 each.

Realisation Account: what goes in and what stays out

Debit side: all assets at book value except cash/bank, fictitious assets (advertisement suspense, P&L debit balance, deferred revenue expenditure) and loans to partners; liabilities paid (creditors, bills payable, bank loan, outstanding expenses); realisation expenses borne by the firm; unrecorded liabilities paid.

Credit side: all outside liabilities at book value (not partners' loans, capitals, or reserves); provisions and reserves related to an asset or liability taken to Realisation (provision for doubtful debts, provision for depreciation, investment fluctuation reserve); cash from sale of assets; assets taken over by partners (Partner's Capital A/c Dr); unrecorded assets realised.

CISCE rules when the question is silent:

• Tangible assets and investments: realised at book value.
• Intangible assets, accrued income, prepaid expenses: realised at nil.
• Liabilities: paid in full.
• Bank overdraft: paid through the Bank A/c, not Realisation; bank loan: through Realisation.

Worked example

Suppose on dissolution: debtors ₹50,000 with a provision of ₹2,000; goodwill ₹8,000; prepaid insurance ₹1,200; investments ₹20,000; bank overdraft ₹6,000. No realised values are given except debtors realised ₹47,000. State how each is treated. [3 marks]

Try it first, then show the solutionSolution

1. Debtors ₹50,000 to Realisation debit; provision ₹2,000 to Realisation credit; ₹47,000 received credited.
2. Goodwill and prepaid insurance (intangible, prepaid) to Realisation debit; realised nil. Investments (tangible/investment) realised at book value ₹20,000.
3. Bank overdraft is paid through the Bank A/c (Bank Overdraft A/c Dr To Bank A/c); it does not go to Realisation.

Answer: As above; the loss on realisation includes ₹1,000 on debtors (50,000 − 2,000 provision − 47,000 received) plus ₹9,200 written off on goodwill and prepaid insurance.

Partners' loans, reserves, fictitious assets and fixed capitals

• Loan from a partner: paid through the Bank A/c after outside liabilities, even if that partner's capital shows a debit balance (Partner's Loan A/c Dr To Bank A/c).
• Loan to a partner (by the firm): transferred to the debit of his Capital A/c.
• Accumulated profits and reserves not related to any asset (General Reserve, P&L credit, Workmen Compensation Reserve less any claim): credited to partners in the profit sharing ratio. A workmen compensation claim is a liability, paid in full; only the excess of the reserve over the claim belongs to the partners.
• Fictitious assets and losses (advertisement suspense, deferred revenue expenditure, P&L debit balance): debited to partners in the profit sharing ratio.
• Fixed capitals: transfer current account balances to the capital accounts first; then pass every adjustment through the capital accounts.

Worked example

Suppose on the dissolution of the firm of Sanjana and Mitesh (ratio 3 : 2), the Balance Sheet shows Deferred Revenue Expenditure of ₹25,000 and Mitesh's Current A/c with a debit balance of ₹6,000. Give the entries. [2 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Sanjana's Capital A/c ... Dr	15,000
   Mitesh's Capital A/c ... Dr	10,000
   To Deferred Revenue Expenditure A/c		25,000
   (Being deferred revenue expenditure written off)
   Mitesh's Capital A/c ... Dr	6,000
   To Mitesh's Current A/c		6,000
   (Being current account balance transferred to capital account)

Answer: Deferred revenue expenditure debited 3 : 2 to capitals; Mitesh's current debit balance closed to his capital.

Realisation expenses: five situations

Situation	Entry
Paid by the firm (borne by the firm)	Realisation A/c Dr To Bank A/c
Paid by a partner on behalf of the firm	Realisation A/c Dr To Partner's Capital A/c
Borne and paid by a partner (no claim on the firm)	No entry
To be borne by a partner but paid by the firm	Partner's Capital A/c Dr To Bank A/c
Partner agreed to bear expenses for a remuneration (or is reimbursed with a firm asset)	Remuneration: Realisation A/c Dr To Partner's Capital A/c; reimbursed with an asset: Realisation A/c Dr To Partner's Capital A/c for the expenses, and Partner's Capital A/c Dr To Realisation A/c for the asset at its agreed value

Read who pays and who bears: only expenses borne by the firm reach the Realisation A/c.

Worked example

Suppose realisation expenses of ₹5,000 are to be borne by partner Kiran but are paid by the firm. Give the entry. [1 mark]

Try it first, then show the solutionSolution

1. The firm pays on Kiran's behalf, so Kiran's capital is reduced; the firm's Realisation A/c is not affected.

Answer: Kiran's Capital A/c Dr ₹5,000 To Bank A/c ₹5,000.

Settling liabilities early: discount and rebate

If a debtor pays before the due date, or a bill payable is settled before maturity, the amount is reduced by interest for the unexpired period at the agreed rate per annum.

• Amount received from a debtor = Debt − Debt × rate × unexpired months/12.
• Amount paid on bills payable = Bill − rebate; rebate = Bill × rate × unexpired months/12.
• Rate of rebate = Rebate ÷ (Bill × unexpired months/12) × 100.

Always count the months from the date of dissolution to the due date, not a full year.

Worked example

Suppose bills payable of ₹36,000 due on 31st July 2026 are settled on 31st March 2026 (dissolution) at a rebate of ₹720. Find the rate of rebate per annum. [1 mark]

Try it first, then show the solutionSolution

1. Unexpired period = 4 months.
2. Rate = 720 ÷ (36,000 × 4/12) × 100 = 720 ÷ 12,000 × 100 = 6% p.a.

Answer: 6% per annum.

Dissolution of a Partnership Firm in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Realisation Account
• Settlement of Accounts under Section 48
• Partners' Capital and Bank Account on Dissolution

Dissolution of a Partnership Firm: key facts

Realisation profit or loss

Credit side total (liabilities, related provisions, proceeds, assets taken) − Debit side total (assets, payments, expenses)

Rebate on bills payable

Bill × rate × unexpired months/12

Rate of rebate

Rebate ÷ (Bill × unexpired months/12) × 100

Final payment to a partner

Capital + share of reserves + realisation profit + expenses paid for firm − losses − assets taken − loan from firm

Check

Bank A/c closes at zero: opening bank + receipts = payments to outsiders + partner loans + final payments

How the board asks Dissolution of a Partnership Firm

The question patterns to expect, and the method that works for each.

Tricks to remember Dissolution of a Partnership Firm

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Section 48 order: "O-L-C-S"

  Outsiders, Loans of partners, Capitals, Surplus.

  Use it when: Order of application of assets.

• Silent rules: "Tangible at book, intangible at nil, liability in full"

  If no value is given: tangible assets and investments at book value; intangibles, accrued income and prepaid expenses at nil; liabilities paid in full.

  Use it when: CISCE dissolution limits.

• Who pays, who bears

  Only what the firm bears reaches Realisation.

  Use it when: Realisation expenses.

Dissolution of a Partnership Firm: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section A style)

Read the situation, then answer every part. In the board paper this is a 6-mark question split into 1 + 1 + 3 + 1 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Dissolution of a Partnership Firm

The slips examiners see most often, and what to write instead.

• ✗Mistake: Confusing dissolution of partnership with dissolution of the firm

  CISCE examiners' comments, 2024: "Chose (c) by mistaking dissolution of partnership (admission, retirement, death) for dissolution of partnership firm".

  ✓Do this: Revaluation for a continuing firm; Realisation when the firm closes.

  Usually costs: 1 mark.

• ✗Mistake: Taking a full year for a discount or rebate

  CISCE examiners' comments, 2024: "Calculated the discount for the full year instead of 3 months"; CISCE examiners' comments, 2025: "Bills payable at rebate posted as 5,000 or to Bills Payable A/c instead of 'By Realisation A/c 4,900'."

  ✓Do this: Count the months to the due date; in the Bank A/c write the contra account (Realisation A/c), not the liability.

  Usually costs: 1 mark.

• ✗Mistake: Wrong treatment of fixed capitals, partner loans and accumulated losses

  CISCE examiners' comments, 2024: "Credited partners' capital accounts with the accumulated loss"; "Passed adjustments through current accounts and transferred the balance instead of closing current accounts first"; "did not transfer the loan given to partner to his capital account".

  ✓Do this: Close current accounts into capital first; debit losses; debit a loan given to a partner to his capital.

  Usually costs: 1-2 marks.

• ✗Mistake: Writing the asset name instead of "Realisation A/c"

  CISCE examiners' comments, 2024: "Wrote 'To Loss on Realisation' instead of 'To Realisation A/c'"; CISCE examiners' comments, 2025: "Wrote 'To Stock A/c' instead of 'To Realisation A/c'".

  ✓Do this: After assets are transferred, every later posting is against the Realisation A/c.

  Usually costs: ½ mark each.

• ✗Mistake: Reversed entry for a fictitious asset; wrong side for a debit capital

  CISCE examiners' comments, 2025: "Some passed the reverse entry." (deferred revenue expenditure); "Wrote Farhan's capital balance on credit side instead of debit."

  ✓Do this: Fictitious assets are written off: Partners' Capital A/cs Dr To the asset. A debit opening balance goes on the debit side of the Capital A/c.

  Usually costs: 1 mark.

Practice questions on Dissolution of a Partnership Firm

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Which of these is NOT transferred to the Realisation A/c?
   (a) Bank loan
   (b) Provision for doubtful debts
   (c) Bank overdraft
   (d) Investment Fluctuation Reserve

   Hint

   CISCE rule on the bank.

   Answer

   (c) Bank overdraft, which is paid through the Bank A/c.

2. Q2 · 1 mark · Very short answerBoard level

   Give the journal entry for a loan of ₹10,000 given by the firm to partner Meena, on dissolution.

   Hint

   Transferred, not collected.

   Answer

   Meena's Capital A/c Dr ₹10,000 To Loan to Meena A/c ₹10,000.

3. Q3 · 1 mark · Very short answerBoard level

   An unrecorded typewriter was taken over by a partner for ₹2,500. Give the entry.

   Hint

   Unrecorded asset realised.

   Answer

   Partner's Capital A/c Dr ₹2,500 To Realisation A/c ₹2,500.

4. Q4 · 1 mark · Very short answerHarder board level

   Creditors of ₹60,000 accepted machinery of book value ₹45,000 in full settlement. Give the entry, if any.

   Hint

   Both are already in Realisation.

   Answer

   No entry: both the creditors and the machinery are already in the Realisation A/c; the creditors are settled by the asset.

5. Q5 · 2 marks · Short answerHarder board level

   Creditors of ₹50,000 took over stock of ₹30,000 at 10% less and the balance was paid in cash. Give the entry for the cash payment.

   Hint

   Stock accepted at ₹27,000.

   Answer

   Stock accepted at 27,000; cash paid = 50,000 − 27,000 = ₹23,000: Realisation A/c Dr ₹23,000 To Bank A/c ₹23,000.

6. Q6 · 2 marks · Short answerHarder board level

   Prepaid insurance of ₹1,800 and accrued interest of ₹600 appear in the Balance Sheet; no realised value is given. Treat them.

   Hint

   CISCE silent rule.

   Answer

   Both transferred to the Realisation debit at book value and realised at nil, adding ₹2,400 to the realisation loss.

7. Q7 · 3 marks · Short answerHOTS / competency

   Workmen Compensation Reserve is ₹15,000 and a claim of ₹9,000 is paid on dissolution. Show the treatment.

   Hint

   Claim is a liability; excess belongs to partners.

   Answer

   WCR A/c Dr 15,000 To Workmen Compensation Claim A/c 9,000 and To Partners' Capital A/cs 6,000 (in the profit sharing ratio). The claim, a liability, is then paid in full: Workmen Compensation Claim A/c Dr 9,000 To Bank A/c 9,000.

8. Q8 · 2 marks · Short answerHOTS / competency

   After dissolution, a firm's Bank A/c shows: receipts from assets ₹2,80,000; payments to creditors ₹1,10,000 and partner's loan ₹30,000; final payments to partners ₹1,60,000. Find the opening bank balance.

   Hint

   Bank closes at zero.

   Answer

   Opening + 2,80,000 = 1,10,000 + 30,000 + 1,60,000 = 3,00,000; opening bank = ₹20,000.

9. Q9 · 1 mark · Very short answerBoard level

   Bills payable of ₹54,000 due in 6 months were settled at a rebate of ₹1,620. Calculate the rate of rebate p.a.

   Hint

   Rebate ÷ (bill × 6/12).

   Answer

   1,620 ÷ 27,000 × 100 = 6% p.a.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Which section governs settlement on dissolution?Show answer

   Section 48 of the Indian Partnership Act, 1932.

2. 2.Bank overdraft: Realisation or Bank A/c?Show answer

   Bank A/c.

3. 3.Intangible asset with no realised value given?Show answer

   Realised at nil.

4. 4.Partner pays expenses that the firm must bear?Show answer

   Realisation A/c Dr To Partner's Capital A/c.

5. 5.Partner takes over an asset?Show answer

   Partner's Capital A/c Dr To Realisation A/c.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Realisation debit: assets (book value), payments, expenses borne by firm.
• ☐Realisation credit: outside liabilities, related provisions/reserves, proceeds, assets taken by partners.
• ☐Overdraft through Bank; bank loan through Realisation.
• ☐Partner's loan to firm paid through Bank even if capital in debit; firm's loan to partner to his capital.
• ☐Silent: tangible at book, intangible/accrued/prepaid at nil, liabilities paid in full.
• ☐Bank A/c must close at nil.

Dissolution of a Partnership Firm: frequently asked questions