Insolvency of All Partners :

If all the partners become insolvent, creditors will not be able to get their amounts in full. All the cash available together with whatever can be received from the private estates of the partners will be paid to the creditors after the expenses of realisation have been met. In case of insolvency of all the partners, creditors should not be transferred to Realisation Account; only assets should be transferred to this account. Amount realised from assets should be credited to Realisation Account. Expenses should be debited to Realisation Account. Now the balance in Realisation Account should be transferred to the Capital Accounts in profit sharing ratio. Now Cash Account should be prepared. After recording the amounts which are received from the estates of the partners, the entire cash should be distributed among the creditors ratably. The balances in the accounts of creditors and in the capital accounts should be transferred to Deficiency Account. Thus, all the accounts will be closed.

Illustration 21:

On 31st March, 2013 the following was the balance sheet of A, B and C when the firm was dissolved:

Liabilities	Rs.	Assets	Rs.	Rs.
Capital Accounts:		Goodwill		10,000
A	30,000	Plant and Machinery		20,000
B	30,000	Furniture		8,000
C	30,000	Investments		10,000
General Reserve	9,000	Stock		51,060
B’s Loan	5,000	Debtors	23,600
Mrs. A’s Loan	5,000	Less: Provision for Bad
Current Accounts		Debts	1 020	22,580
A	2,860
C	1,240	Bill Receivable		5,000
Bill Payable	10,000	Cash at Bank		2,760
Sundry Creditors	6,530	Unexpired Insurance		125
		B’s Current Account		105
	1 29 630			1 29 630

 

Investments were taken over by A for r 13,000 whereas bills receivable were taken over by B for r 4,800, fixed assets fetched r 17,000 whereas stock realised r 60,000. All the debtors paid the amounts due from them. Total rebate of r 110 was received on retiring all bills payable immediately. Expenses of realisation came to r 1,441. Pass Journal entries to close the books of the firm and show Realisation Account, Bank Account, and the Capital Accounts of all the partners.

 

Solution:

Journal Entries

Particulars	Dr. (Rs.)	Cr. (Rs.)
Realisation Account                                                                                                                                                                        Dr.	1,27,785
To Goodwill		10, 000
To Plant and Machinery		20,000
To Furniture		8,000
To Investments		10,000
To Stock		51,060
To Debtors		23,600
To Bills Receivable		5,000
To Unexpired Insurance		125
(Transfer of assets to Realisation Account)
Provision for Bad Debts                                                                                                                                                                   Dr.	1,020
Mrs. A’s Loan                                                                                                                                                                                      Dr.	5,000
Bills Payable                                                                                                                                                                                       Dr.	10,000
Sundry Creditors                                                                                                                                                                               Dr.	6,530
To Realisation Account		22,550
(Transfer      of   liabilities  to        outsiders   to      Realisation  Account)
Note: Mrs. A is also an outsider
Bank                                                                                                                                                                                                        Dr.	1,00,600
To Realisation Account		1,00,600
(Sale proceeds of fixed assets and stock and amount received from debtors)

 

A’s Current Account                                                                                                                                                                           Dr.	13,000
B’s Current Account                                                                                                                                                                           Dr.	4,800
To Realisation Account		17,800
(For investments taken over by A for Z 13,000 and bills receivable taken over by B for 24,800)
Realisation Account                                                                                                                                                                         Dr.	21,420
To Bank		21,420
(Payment made to pay off liabilities to   outsiders  Z 5,000 to Mrs. A. Z 9,890 for bills payable and Z 6,530 to creditors)
Realisation Account                                                                                                                                                                     Dr.	1,441
To Bank		1,441
(Payment of expenses of realisation amounting Z 1,441)
A’s Current Account                                                                                                                                                                                                     Dr.	3,232
B’s Current Account                                                                                                                                                                                                     Dr.	3,232
C’s Current Account                                                                                                                                                                                                      Dr.	3,232
To Realisation Account		9,696
(Transfer of loss on realisation)
B’s Loan Account                                                                                                                                                                                                            Dr.	5,000
To Bank		5,000
(Payment of B’s loan)
General Reserve                                                                                                                                                                                                           Dr.	9,000
To A’s Current Account		3,000
To B’s Current Account		3,000
To C’s Current Account		3,000
(Transfer of General Reserve)
A’s Capital Account                                                                                                                                                                                                          Dr.	10,372
B’s Capital Account                                                                                                                                                                                                          Dr.	5,137
To A’s Current Account		10,372
To B’s Current Account		5,137
(Transfer of debit balances of current accounts of A and B to their capital accounts)
C’s Current Account                                                                                                                                                                                         Dr.	1,008C
To C’s Capital Account		1,008
(Transfer of credit balance in C’s current account to C’s capital account)
A’s Capital Account                                                                                                                                                                                         Dr.	19,628
B’s Capital Account                                                                                                                                                                                         Dr.	24,863
C’s Capital Account                                                                                                                                                                                        Dr.                                                   31,008
To Bank                                                                                                                                                                                                                                                                       75,499
(Payment to partners)

 

 

Ledger Accounts

Dr.                                                                                                           Realisation Account                                                                                                                                  Cr.

Particulars	Rs.	Particulars	Rs.
To Sundry Assets:		By Provision for Bad Debts	1,020
Goodwill	10,000	By Mrs. A’s Loan	5,000
Plant and Machinery	20,000	By                Bills Payable	10,000
Furniture	8,000	By Sundry Creditors	6,530
Investments	10,000	By Bank	1,00,600
Stock	51,060	By A’s Current Account
Debtors	23,600	(Investments)	13,000
Bills Receivable	5,000	By B’s Current Account
Unexpired Insurance	125	(B/R)	4,800
To                   Bank (Liabilities)	21,420	By A’s Current Account
To Bank (Expenses)	1,441	(1/3rd loss)	3,232
		By B’s Current Account
		(1/3rd loss)	3,232
		By C’s Current Account
	___________	(1/3rd loss)	3,232
	1 50 646		1 50 646

 

 

Dr.                                                                                                                    Bank                                                                                                                                                 Cr.

Particulars	Rs.	Particular	Rs.
To     Balance b/fd	2,760	By  Realisation (liabilities)	21,420
To    Realisation A/c		By   Realisation (expenses)	1,441
(Sale proceeds of assets)	1,00,600	By   B’s Loan Account	5,000
		By     A’s Capital Account	19,628
		By  B’s Capital Account	24,863
		By     C’s Capital Account	31,008
	1 03 360		1 03 360

                                                                                                             

Dr.                                                                                                                   Partners’ Current Accounts                                                                                                                       Cr.

 

Particulars	A	B	C	Particulars	A	B	C
To Balance b/fd	–	105	–	By Balance b/fd	12,860		1,240
To Realisation	13,000	4,800	–	By General Reserve	3,000	3,000	3,000
To Realisation (loss)	3,232	3,232	3,232	By A’s Capital	10,372	–	–
To C’s Capital	–	–	1,008	By B’s Capital	–	5,137	–
	16,232	8,137	4,240		16,232	8,137	4,240

 

Dr.                                                                                                                    Partners’ Capital Accounts                                                                                                                     Cr.

Particulars	A	B	C	Particulars	A	B	C
To A’s Current A/c	10,372	–	–	By Balance b/fd	30,000	30,000	30,000
To B’s Current A/c	–	5,137	–	By C’s Current A/c	–		1,008
To bank	19,628	24,863	31,008		_________	_________	_________
	30,000	30,000	31,008		30,000	30,000	31,008

 

Illustration :
A, B and C commenced business on 1st April, 2012. They agreed to share the profits and losses in the ratio of 2: 2: 1. Their capitals were Rs. 30,000,Rs. 22,500 and Rs. 15,000 respectively. The partnership deed provided for interest on capital at 6% per annum. During 2012-13 the firm earned a profit of Rs.  20,050 (before providing for interest on capital). During the year the partners’ drawings were A – Rs. 7,000; B –Rs. 6,250; and C – 4,000. The relations between partners were not good. They decided to dissolve the firm on 31st March, 2013. The assets were sold which realised ` 75,000. There were creditors to the extent of Rs. 12,000 which were paid off at a discount of 5%. Expenses of realisation amounted to Rs. 1,200. Prepare the necessary accounts to close the books of the firm.

Solution:

Profit and Loss Account
Dr.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
2013 Mar. 31	To Capital Accounts (interest)		2013  Mar. 31	By Net Profit	20,050
	Rs.
	A 1,800
	B 1,350
	C 900	4,050
	To Profit transferred to:
	Rs.
	A 6,400
	B 6,400
	C 3,200	16,000			________
		20,050			20,050

 

Dr.                                                                                                      A’s Capital Account                                                                                                                                                 Cr.

Date	Particulars	Rs.	Date	Particulars	Rs..
2013			2012
Mar.31	To Drawings	7,000	Apr.1	By Bank	30,000
	To Balance c/d	31,200	2013
			Mar.31	By Profit & Loss A/c
				(interest)	1,800
				By Profit & Loss A/c
				(share of profit)	6,400
		38,200			38,200
2013			2013
Mar. 31	To           Realisation (loss)	3,160	Mar. 31	By Balance b/d	31,200
	To Bank	28,040
		31,200			31,200

 

Dr.                                                                                                       B’s Capital Account                                                                                                                                             Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
2013			2012
Mar. 31	To Drawings	6,250	Apr. 1	By Bank	22,500
	To Balance c/d	24,000	2013
			Mar. 31	By Profit & Loss A/c
				(interest)	1,350
				By Profit & Loss A/c
				(share of profit)	6,400
		30,250			30,250
2013			2013
Mar. 31	To  Realisation (loss)	3,160	Mar. 31	By Balance b/d	24,000
	To Bank	20,840
		24,000			24,000

 

Dr.                                                                                                       C’s Capital Account                                                                                                                                            Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
2013			2012
Mar. 31	To Drawings	4,000	Apr. 1	By Cash	15,000
	To Balance c/d	15,100	2013
			Mar. 31	By Profit & Loss A/c
				(interest)	900
				By Profit & Loss A/c
				(share of profit)	3,200
		19,100			19,100
2013			2013
Mar. 31	To          Realisation (loss)	1,580	Mar. 31	By Balance b/d	15,100
	To Bank	13,520
		15,100			15,100

Balance Sheet as at 31st March, 2013

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	12,000	Sundry Assets	82,300
Capital Accounts:
A 31,200
B 24,000
C 15,10	70,300
	82,300		82,300

 

Dr.                                                                                                         Realisation Account                                                                                                                                       Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
2013			2013
Mar. 31	To Sundry Assets	82,300	Mar.31	By                    Sundry Creditors	12,000
	To Cash (expenses)	1,200		By Cash
	To Cash (creditors			(assets realised)	75,000
	Z 12,000			By                   Loss transferred to:
	less 5%)	11,400		A — 3,160
				B — 3,160
				C —1,580	7 900
		94,900			94,900

 

Cash Account

Date	Particulars	Rs.	Date	Particulars	Rs.
2013			2013
Mar. 31	To      Realisation A/c		Mar. 31	By      Realisation
	(assets realised)	75,000		(expenses)	1,200
				By      Realisation A/c
				(creditors)	11,400
				By Capital Accounts:
				Rs.
				A — 28,040
				B — 20,840
				C —13,520	62 400
		75,000			75,000

 

 

Illustration 23:

On 31st March, 2013 the following was the balance sheet of A, B and C who shared profits and losses in the ratio of 2:1:1 respectively.

Liabilities	Rs.	Assets	Rs.
Creditors	16,000	Cash in hand	200
General Reserve	5,000	Stock	18,800
Capital Accounts:		Debtors	11,300
A	30,000	Furniture	12,500
B	20,000	Plant & Machinery	20,000
C	1 000	Goodwill	9 200
	72,000		72,000

 

The firm was dissolved on this date due to C’s insolvency. Assets realised M2,000. Expenses of dissolution came to r 200. C’s estate paid 50% of what was due to C. Close the books of the firm assuming that the loss due to C’s insolvency has been divided:

• in the ratio of fixed capitals.
• in the ratio of fluctuating capitals.

Solution:

Case (i) Loss due to deficiency is divided in the ratio of fixed capital accounts

Dr.                                                                                                          Realisation Account                                                                                                                                          Cr.

	Particulars	Rs.		Particulars	Rs.
To	Stock	18,800	By	Creditors	16,000
To	Debtors	11,300	By	Cash (Assets)	32,000
To	Furniture	12,500	By	A’s Capital Account	20,000
To	Plant & Machinery	20,000	By	B’s Capital Account	10,000
To	Goodwill	9,200	By	C’s Capital Account	10,000
To	Cash (Creditors)	16,000
To	Cash (Expenses)	200
		88,000			88,000

 

Dr.                                                                                                         Capital Account                                                                                                                                                    Cr.

Particulars	A	B	C	Particulars	A	B	C
	(Rs.)	(Rs.)	(Rs.)	(	(Rs.)	(Rs.)	(Rs.)
To Realisation	20,000	10,000	10,000	By Balance
				b/d	30,000	20,000	1,000
To C’s Capital	–	2,325	1,550	By   General
				Reserve	2,500	1,250	1,250
To Cash A/c	30,175	19,700	–	By   Cash A/c	20,000	10,000	3,875
				By   A’s Cap	–	–	2,325
				By   B’s Cap	–	–	1,550
	52,500	31,250	10,000		52,500	31,250	10,000

 

Dr.                                                                                                         Cash Account                                                                                                                                                       Cr.

Particulars		Rs.	Particulars		Rs.
To	Balance b/fd	200	By	Realisation A/c (creditors)	16,000
To	Realisation A/c (assets)	32,000	By	Realisation A/c (expenses)	200
To	A’s Capital Account	20,000	By	A’s Capital Account	30,175
To	B’s Capital Account	10,000	By	B’s Capital Account	19,700
To	C’s Capital Account	3,875
		66,075			66,075

 

Note: Since, current accounts have not been specified in the question the adjustments have been made in capital accounts.

Case (ii) Loss due to deficiency is divided in the ratio of fluctuating capital accounts Realisation Account will be the same as in the case (i)

Capital Accounts

Particulars	A	B	C	Particulars	A	B	C
	(Rs.)	(Rs.)	((Rs.)		(Rs.)	(Rs.)	(Rs.)
To      Realisation	20,000	10,000	10,000	By Balance
				b/d	30,000	20,000	14,000
To       C’s Capital	2,343	1,532	–	By Gen. Res.	2,500	1,250	1,250
To Cash A/c	30,157	19,718	–	By Cash A/c	20,000	10,000	3,875
				By A’s Capital
				(26/43ths share)	–	–	2,343
				By B’s Capital A/c	–
				(17/43ths share)		1,532	–
	52,500	31 250	10,000		52,500	31,250	10,000

 

Balances in A’s Capital Account and B’s Capital Account after adjustment for General Reserve are Z 32,500 and Z 21,250 respectively. Hence, A and B will bear the loss of Z 3,875 due to C’s insolvency in the ratio of 32,500 : 21,250 or 26 : 17 respectively.

A’s share = Z 3,875 x ^26/43 = Rs. 2,343

                                      

B’s share = Z 3,875 _x 1_⁷ =Rs. 1,532

                                        43

Dr.                                                                                                                 Cash Account                                                                                                                                             Cr.

Particulars	Rs.		Particulars	Rs.
To Balance b/fd	200	By	Realisation A/c (Creditors)	16,000
To         Realisation A/c (Assets)	32,000	By	Realisation A/c (Expenses)	200
To A’s Capital Account	20,000	By	A’s Capital Account	30,157
To              B’s Capital Account	10,000	By	B’s Capital Account	19,718
To C’s Capital Account	3,875
	66,075			66,075

 

Illustration 24:

A, B, C and D are partners in a firm sharing profits and losses in the ratio of 4 : 1 : 2 : 3. The following is the balance sheet as at March 31st, 2013.

Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
Sundry creditors		30,000	Cash in hand		14,000
Capital accounts:			Sundry debtors	35,000
A	70,000		Less: Provision for bad debt	5 000	30,000
D	30,000	1,00,000	Other assets		51,000
			Capital accounts:
			B	20,000
			C	15,000	35,000
		1 30 000			1 30 000

 

On March 31st, 2013, the firm is dissolved. The partnership agreement provides that the deficiency of an insolvent partner will be borne by the solvent partners in the ratio of capitals as they stand just before dissolution.

The following arrangements are agreed upon:

N A is to take over 60% of book debts at 70% and D is to take over the balance at 75%. Further, they are to be allowed x2,100 and 1,100 respectively to cover future losses.

(ii) D is to realise other assets and to pay off the creditors. He is to receive 5% gross commission on the amounts finally payable to other partners but to bear expenses of realisation. He reports the results of realisation as follows:

Other assets realize at a loss of 2% on net collection and pays of the creditors at a discount of 30%. Realisation expenses amount to r 3,000 but the same is paid by the firm. B is declared insolvent and a dividend of 20% in a rupee is realised from his estate.Prepare Cash Account, Realisation Account and Capital Accounts.

Solution:

Dr.                                                                                                                                      Cash Account                                                                                                                      Cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/fd	14,000	By  Realisation A/c
To            Realisation A/c	50,000	(payment to creditors)	21,000
To            B’s Capital A/c		By  D’s Capital A/c (expenses)	3,000
(20% dividend)	4,000	By   A’s Capital A/c	44,000
To C’s Capital A/c	15,000	By   D’s Capital A/c	15,000
	83,000		83,000

 

Dr.                                                                                                                  Realisation Account                                                                                                                                Cr.

	Particulars		Rs.		Particulars		Rs.
To	Debtors		35,000	By	Provision for bad debts		5,000
To	Other assets		51,000	By	Sundry creditors		30,000
To	Cash A/c			By	Cash A/c (realisation
	(30,000 – 9,000)				of other assets)		50,000
	(payment to creditors)		21,000	By	A’s Capital A/c
					(debtors taken over)		12,600
				By	D’s Capital A/c
			————–		(debtors taken over)		9,400
			1,07 000				1,07 000

 

Dr.                                                                                                                              A’s Capital Account                                                                                                                           Cr.

Particulars	Rs.	Particulars	Rs.
To Realisation A/c                        (debtors taken over)	12,600	By Balance b/fd	70,000
To B’s Capital A/c (deficiency)	11,200
To D’s Capital A/c (commission)	2200
To Cash A/c (final payment)	44,000		________
	70,000		70,000

 

Dr.                                                                                                                             B’s Capital Account                                                                                                                           Cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/fd	20,000	By Cash A/c	4,000
		By A’s Capital A/c (7/10ths deficiency)	11,200
		By D’s Capital A/c (3/10ths deficiency)	4,800
	20,000		20,000

 

Dr.                                                                                                                            C’s Capital Account                                                                                                                           Cr.

Particulars	Rs.	Particulars	Rs.
To Balance b/fd	15,000	By Cash A/c	15,000
	________		________
	15,000		15,000

 

Dr.                                                                                                                            D’s Capital Account                                                                                                                           Cr.

Particulars	Rs.	Particulars	Rs.
To Realisation A/c (debtors taken over)	9,400	By Balance b/fd	30,000
To Cash A/c (expenses)	3,000	By A’s Capital A/c (commission)	2,200
To B’s Capital A/c (deficiency)	4,800
To Cash A/c (final payment)	15,000		—————
	32,200		32,200

 

Sundry Debtors taken over by A:
Rs.35,000 x 60% x 70%                                                                                                                                                                                                                                                =	Rs.14,700
Less: Allowance for further loss                                                                                                                                                                                                                               =	Rs.   2,100
	Rs.12,600
Sundry Debtors taken over by D:
` 35,000 x 40% x 75%                                                                                                                                                                                                                                                   =	Rs. 10,500
Less : Allowance for further loss                                                                                                                                                                                                                              =	Rs.  1,100
	Rs. 9,400
D’s Commission
Gross amount payable	Rs. 46,200
Commission  5/105 x 46,200	Rs. 2,200

 

Illustration :

Below is the Balance Sheet of C, D and E as on 31st March, 2013

 

Liabilities	Rs.	Assets	Rs.
Sundry Creditors                                                            2,00,000		Cash	31,200
Loan                                                                                  1,00,000	3,00,000	Stock	1,56,300
Capital Accounts:		Debtors	47,200
C                                                                   80,000		Furniture	95,300
D                                                                  60,000		Profit & Loss Account	1,20,000
E                                                                  10,000	1,50,000		_________
	4,50,000		4,50,000

 

The firm was dissolved due to insolvency of all the partners. Stock was sold for Rs.1,09,000 while furniture fetched Rs. 40,000.Rs. 41,000 were received from Debtors. Expenses were Rs. 2,200. Nothing could be recovered from D and E but C’s private estate showed a surplus of Rs. 6,000. Close the books of the firm.

Dr.                                                                                                        Realisation Account                                                                                                                                            Cr.

	Particulars	Rs.		Particulars	Rs.
	To   Stock	1,56,300		By  Cash A/c (assets)	1,90,000
	To  Debtors	47,200		By    C’s Capital A/c	37,000
	To     Furniture	95,300		By    D’s Capital A/c	37,000
	To   Cash A/c (expenses)	2,200		By     E’s Capital A/c	37,000
		3 01 000			3 01 000

 

Dr.                                                                                                              Capital Account                                                                                                                                  Cr.

Particulars	C (Rs.)	D (Rs.)	E (Rs.)	Particulars	C (Rs.)	D (Rs.)	E (Rs.)
To Profit and				By Balance b/fd	80,000	60,000	10,000
Loss A/c –				By Cash A/c	6,000	–	–
Transfer	40,000	40,000	40,000	By Deficiency	–	17,000	67,000
To Realisation (Loss)	37,000	37,000	37,000
To Deficiency A/c	9,000	–	–
	86,000	77,000	77,000		86,000	77,000	77,000

 

Dr.                                                                                                                                   Cash Account                                                                                                                                Cr.

	Particulars	Rs.		Particulars	Rs.
To	Balance b/d	31,200	By	Realisation A/c (expenses)	2,200
To	Realisation A/c (assets)	1,90,000	By	Loan A/c	75,000
To	C’s Capital Account	6,000	By	Sundry Creditors	1,50,000
		2 27 200			2 27 200

 

Dr.

Loan Account

Cr.

 

Particulars	Rs.	Particulars	Rs.
To Cash A/c	75,000	By Balance b/fd	1,00,000
To Deficiency A/c	25,000
	1 00 000		1 00 000

 

Dr.                                                                                                           Sundry Creditors                                                                                                                                        Cr.

Particulars	Rs.	Particulars	Rs.
To Cash A/c	1,50,000	By Balance b/fd	2,00,000
To Deficiency A/c	50,000
	2 00 000		2 00 000

 

Dr.                                                                                                        Deficiency Account                                                                                                                                            Cr.

	Particulars	Rs.		Particulars	Rs.
To	D’s Capital Account	17,000	By	Loan Account	25,000
To	E’s Capital Account	67,000	By	Sundry Creditors	50,000
			By	C’s Capital	9,000
		84,000			84,000