This will be the last sub-topic for partnership account and will be relevant to GCSE ‘A’ Level.
You will need to be able to realise that any profit or loss on dissolution should be shared by all the partners in their profit and sharing ratios. If there are circumstances where the partner’s final balance on his capital and current accounts is in deficit, the partner will have to pay that amount into the partnership bank account.
When dissolving the business, you will need to get rid of the assets by either 1) disposing it or 2) the partner(s) to take it. All these entries will need to be made into realisation account.
Net realisable amount is the amount that you will receive in disposing assets. You will need to use this amount because it will be the actual amount that the business will receive.
Do not forget about dissolution costs! You must include them in the realisation account (debit) and bank account (credit).
T-accounts for disposing the assets are only recommended if the question asks you to do so! Otherwise, there is no need to do so! Here is an example of how to do it.
Next, you will need to open up capital account for each partner. This is to calculate how much each partner will receive or pay the business as a result of the dissolution. Remember that all partners have unlimited liability, if the business runs out of cash in dissolving the business, all the partners will have to settle the additional liabilities from their own pockets.
Here is the format for capital account.
Finally, you will need to open a bank account. Bank account will be your last step in dissolution because there are no more extra calculations required, you only need to put all the numbers in the right places. It therefore act as your check if you have done everything correctly.
Things to note in order to score well,
- You must include dissolution costs.
- You must be able to remember all the formats (including the bank account).
- Remember to use only net book value in the debit side and net realisable amount in the realisation account.
- Do remember to include asset taken by partner into their respective capital account.
- You must pay your creditors from your bank account.
3 thoughts on “Partnership Dissolution”
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