Dissolution of a

partnership firm.
• NAME: ANUPAMA TELANG
• ROLL NO: 53
• SEAT NO: 13-5554
• SUBJECT: FINANCIAL ACCOUNTS
• PROFESSOR: MRS MONICA JAIN
• TOPIC: DISSOLUTION OF A PARTNERSHIP FIRM
 MEANING.
• Dissolution means discontinuance. Dissolution can
be classified in two parts:

(i) Dissolution of Partnership

(ii)Dissolution of firm.
 Difference between
Dissolution of partnership Dissolution of firm
• Dissolution of • Dissolution of the firm
partnership may or necessarily results in
may not result in dissolution of
dissolution of the firm. partnership.
• Business of the firm may • Business of the firm
continue. does not continue.
 Modes of Dissolution of a
Partnership Firm
• The dissolution of partnership between all the partners of a firm is
called the "dissolution of the firm". A firm may be dissolved with the
consent of all the partners or in accordance with a contract between
the partners. The Indian Partnership Act, 1932 provides that a
partnership firm may be dissolved
• in any of the following modes:
• i. Compulsory dissolution;
• ii. Dissolution on the happening of certain contingencies;
• iii. Dissolution by notice of partnership at will;
• iv. Dissolution by the court.
Accounting treatment when
the firm is dissolved due
to insolvency of partners.
When there are more than two partners
and one becomes insolvent…….
• The solvent partners are liable to bear the loss of insolvent partner.
The loss is borne by the solvent partners in the following partners:
• a) When Garner Versus Murray rule is not applicable, the solvent
partners are supposed to bear the loss according to the profit
sharing ratio.
• b) When the Garner versus Murray rule is applicable, the solvent
partners are liable to bear the loss of insolvent partners according to
the current capital ratio.
 where all the partners are
insolvent…..
a) The Realisation Account is prepared without transferring external liabilities to
it.
b) Cash Account should be prepared after the Realisation Account.
c) Cash in hand together with the amount realized on sale of asset and the
amount received from the estate of insolvent partners shall be applied
in the following order:
i) For meeting the realization expenses
ii) For meeting the external liabilities like bank loan, creditors, out standing
expenses, etc.
iii) For meeting partners loan account.
iv) For paying partners’ capital account balances.
Cash distribution
among partners
 With the application of the Garner vs. Murray rule
 When cash is to be distributed as soon as possible
( Piecemeal realization)
Application of Garner vs.
Murray rule
 With the application of Garner vs.
Murray rule
• Any CREDIT balance in each partner’s capital
account represents the amount which can be
withdrawn from the partnership to each partner
• Any DEBIT balance in a partner’s capital
account represents additional cash to be
injected by that partner. If he is insolvency to
repay the amount, the solvency partners will be
shared the amount in:
o Profit & loss sharing ratio
o Any agreed ratio given in the examination question
o GARNER vs. MURRAY rule may be applied
 What is Garner vs. Murray rule?
•
 Garner vs. Murray rule
• Under the rule, a partner is required to contribute
cash to eliminate the debit balance in his capital
account
• In the court case of Garner vs. Murray (1904), it was
held that subject to any agreement to the contrary,
such a debit balance deficiency was to be shared
by the other partner not in their profit and loss
sharing ratio but “ the ratio of their last agreed
capitals”
Piecemeal Realization
 Cash is distributed as it becomes available, instead of
waiting for all the assets to be realized first
 Assets are sold piecemeal, and then outstanding debts are
paid and the remaining cash is finally distributed to the
partners as soon as possible
 This situation occurs because some assets can be sold
quickly, and some assets take longer time to be sold (i.e.
less liquid)
 Assumed Loss/Notional
Loss Method
• This is possible loss by assuming that the remaining
assets do not have any scrap value
• Any unsold assets will be assumed loss in each
distribution
THANK YOU!