Accounting Treatment on Dissolution of Partnership :

On dissolution, the books of accounts of the partnership firm are closed. The various steps to be followed are as follows:

1. “Realisation Account” is opened and transfer to it all the assets except cash in hand and at bank. Sundry Debtors will be transferred at gross amount.

2. Realisation Account is created will all liabilities to outsiders and provisions against assets like Provision for Bad Debts. However, accounts denoting accumulated losses or profits will not be transferred to Realisation Account.

3. Now, Realisation Account will be credited with the actual amount realised by sale of assets. If a partner takes over an asset, the capital account of that partner is debited and Realisation Account is credited with the value agreed upon.

4. Actual amount paid to the creditors of the firm is debited to Realisation Account. If a partner takes over a liability, his capital account is credited and Realisation Account is debited with the amount agreed upon.

5. Expenses during the course of dissolution are debited to Realisation Account and credited to cash.

6. Profit or loss revealed by Realisation Account is transferred to all the partners’ capital accounts in their profit sharing ratio. Realisation Account is thus closed.

7. Loans advanced by partners to the firm are repaid.

8. Any reserve or accumulated profit or loss lying in the books of accounts is transferred to capital accounts in the profit sharing ratio.

9. Partners whose capital accounts may be showing a debit balance bring cash to clear their accounts.

10. Payment is made to the partners whose capital accounts are showing credit balances. This will close the books of accounts.