Procedure of settlement of accounts - class-XII

A loan from a partner's relative is an external liability of the firm. Therefore, it must be paid off to outsiders before any payments are made to partners, and it is transferred to the Realisation Account.

All assets are transferred at book value because the main purpose to open realization account is to ascertain the profit or loss due to realization of assets and liabilities. If assets are not recorded at book value actual profit or loss can not be ascertained

All the assets of the firm which can be converted into cash are transferred to Realisation Account. If goodwill is already appearing in the Balance Sheet, it is treated like any other asset, and is transferred to the Realisation Account at the value given in the Balance sheet. Following entry is passed for it:
Realisation A/c Dr. 
    To Goodwill A/c 

Realisation account is prepared to find out the profit or loss on realisation of assets and payment of liabilities.To calculate the actual profit or loss it is necessary that all the assets should be transferred to realisation account at its gross figure. That's why provision is not shown as a deduction from debtors.It is transferred to credit side of realisation account like other liabilities.

Loan from a partners’ wife is to be treated as a normal creditor. 

Following entry is made for transfer of assets to realisation account
Realisation A/c Dr.   
         To Assets A/c 
(Being assets are sold)
Cash/Bank A/c Dr. 

A Joint Life Policy (JLP) is an insurance policy which is taken out by the partnership firm on the joint lives of all partners. The amount of policy is payable by the insurance company either on the death or maturity of policy, whichever is earlier. The firm pays annual premium to the insurer against the policy.

A Joint Life Policy is taken by a firm on the lives of partners to ensure that sufficient funds are available to pay the legal heirs of a partner in the event of their death.

The total amount of debts payable by a business to the outsiders (other than the owners) are called external liabilities. All external liability accounts including provisions, if any, are closed by transferring them to the credit of Realisation account. The journal entry for transfer of liabilities is :

Drawing means the goods or money withdrawn from business concern for personal use. It has two aspects : 1.  It reduces the assets of business. 2. It reduces capital of partner. So it is closed by deducting from capital account.

All asset accounts excluding cash, bank and the fictitious assets, if any are closed by transfer to the debit of Realisation account at their book values. It may be noted that sundry debtors are transferred at gross value and the provision for doubtful accounts is transferred to the credit side of Realisation account along with liabilities. The same is applied for fixed assets, if provision for depreciation account is maintained. The general entry passed for the transfer of will be: 

When the partnership is not at will dissolution can be made by application to court. Any partner can file a suit in the court for dissolution. Where the partnership is at will partner in a partnership can dissolve the firm by giving notice of dissolution to other parties. Where the partnership is for a fixed period, the partnership comes to an end on a date specified in partnership deed.

Joint Life Policy is specifically designed to provide liquidity to the firm to settle the claims of a deceased partner's estate.

Dissolution of partnership is different from dissolution of firm. Dissolution between partners does not lead to dissolution of firm. But if dissolution is between all the partners of a firm then it leads to dissolution of firm because if there are no partners to work then firm will automatically get dissolved. For partnership minimum two persons are required. If there are no partners then there is no partnership firm. 

Dissolution of the firm by the court can be done in both the cases when there is insanity of a partner or if a partner misconduct according to Section 44 of the Indian Partnership Act. Section 44 provides the various grounds for dissolution of firm by court.

Retirement, Death, Expulsion does not result in dissolution of firm. It only result in dissolution of partnership. Remaining partners can still agree to continue the business of partnership firm. But dissolution of firm resulted in a complete closure of business. All the assets are sold and liabilities are paid and business ceases to exist.

Dissolution of partnership is different from dissolution of firm. Dissolution between partners does not lead to dissolution of firm. But if dissolution is between all the partners of a firm then it leads to dissolution of firm because if there are no partners to work then firm will automatically get dissolved. No firm can work without partners. For partnership minimum two persons are required. If there are no partners then there is no partnership firm. 

Marriage of a partner does not affect the working of partnership. Retirement and a partner joining political parties can also not be a ground for dissolution because remaining partner can continue the business of partnership. But According to Section 44 of Indian Partnership Act, When a partner becomes of unsound mind and is unable to continue further then the court may order for dissolution of firm. Insanity can be ground for dissolution.  

Registration of partnership is not compulsory under law. If partnership firm is not registered, it can not enforce its claims against a third party in the court of law. Partner of non - registered firm can not file a suit against other partner. But if there exist a just and equitable cause for dissolution, partners can file a suit for dissolution in court.

Dissolution of partnership firm means that the firm closes down its business and comes to an end. A realization account is opened. In this all the assets and liabilities are transferred. It records the sale of assets and payment of liabilities because the main object of this account is to calculate the profit or loss on sale of such assets and payment of liabilities.  

Dissolution of partnership is different from dissolution of partnership firm. In dissolution of partnership firm business comes to an end. But Dissolution of partnership means end of old partnership agreement and reconstruction of partnership due to admission, retirement and death of partner. In this business of the firm does not comes to an end. 

If a partner can not clear his debts on dissolution, the amount not paid is a loss to the firm which under the Garner vs Murray rule is to be borne by the solvent partner. The loss is a capital loss which should be borne by the solvent partners in the ratio of the capital in the balance sheet on the date of dissolution.

According to the Garner Vs Murray rule the loss on the account on the insolvency of a partner is a capital loss which should be borne by the solvent partners in the ratio of their capitals standing in the balance sheet on the date of dissolution of the firm.

According to the Indian Partnership Act, if a partner dies and the settlement is delayed, the executor is entitled to either the share of profits earned using their capital or interest at 6% per annum on the amount due, at their option.

According to Garner vs. Murray rule, if the partner becomes insolvent, he is unable to pay back the amount due to him. The amount not paid is a capital loss which should be borne by the solvent partner in the ratio of their capitals standing in the balance sheet on the date of dissolution of the firm. This rule is applicable when one partner is insolvent then other partner can bring the cash. But if only one partner is solvent or all partners are insolvent then there is no one to bring the cash. so this rule can not be applied. And if Partnership  deed provides a method to follow then that method will be followed only. 

Business of a partnership firm may not come to an end due to the death of a partner. Other partners may shall continue to run the business of the firm. Readjustments takes place in case of death of a partner likewise the case of retirement of a partner. Whenever, a partner dies the continuing partners make gain in terms of profit sharing ratio. Therefore, the remaining partners arrange for the amount to b paid to discharge the claim of deceased partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of joint life policy, if any, is taken into account. Revaluation of profit and reserves are transferred to capital or current accounts of partners. Lastly, final amount due to the retiring partner is determined and discharged. 

In case of loss, two situations arise:
1. If partner's capital has a credit balance then his loan amount will be repaid. Following entry will be passed: 
Partner's loan A/c Dr.
   To Bank/Cash A/c
2. If a partner's capital has debit balance then loan amount will not be paid. loan amount is transferred to capital account of partner. Following entry will be passed:
Partner's loan A/c Dr. 
   To Partner's Capital A/c

When the premium is treated as an expense, the surrender value of the policy is distributed among all partners in their old profit-sharing ratio upon the retirement of a partner.

When a partner retires from a firm, other partners continue to run the business of the firm. Readjustments takes place in case of retirement of a partner. Whenever a partner retires, the continuing partners make gain in terms of profit sharing ratio. Therefore, the remaining partners arrange the amount to be paid to discharge the claims of the retiring partners. 

When the JLP amount received exceeds the book value, the difference is a gain. This gain is credited to the partners' capital accounts in the old profit-sharing ratio, or adjusted via the revaluation account.

If the JLP is maintained at surrender value with a corresponding reserve, the reserve is distributed among all partners in the old profit-sharing ratio upon retirement.