2. Partnership Accounts- Dissolution, Insolvency, sale to a Company and Piecemeal Distribution

3. DISSOLUTION Definition :
According to Section 39 of the Indian Partnership Act, 1932, “the Dissolution of partnership between all the partners of a firm is called the Dissolution of the firm.”
Dissolution of a Firm is the complete breakdown of a partnership and partners do not continue the firm.
Dissolution of the Partnership means a reconstitution of the firm due to the retirement of a partner and the remaining partners provide for the continuance of the firm in pursuance of an express or implied agreement to that agreement to that effect.
On Dissolution of a firm, the firm’s assets are realized and the liabilities are discharged because the firm is to be closed, whereas on Dissolution of a partnership, the share of the outgoing partner is ascertained and the firm is not closed.

4. Modes of Dissolution of Firm :
Sections 40 to 44 of the Indian Partnership Act, 1932 deal with the various ways in which a firm may be dissolved. A firm may be dissolved in any of the following ways :
Dissolution by agreement : A firm is dissolved when all the partners agree that it should be dissolved. A partnership firm is the creation of an agreement; similarly a firm can be dissolved by an agreement.
Dissolution on the happening of contingencies : A firm is dissolved in any of the following ways unless there is a contract between the partners to the contrary :
By the expiry of the term of duration of the firm.
By the completion of the adventure for which the firm was constituted.
By the death of a partner.
By the adjudication of a partner as insolvent.
Dissolution by the notice of partnership at will : When the partnership is at will, the firm may be dissolved
at any time by any partner giving notice in writing to all the other partners of his intention to dissolve the
Firm.
Compulsory dissolution or dissolution by the operations of law : A firm is compulsorily dissolved in any of
the following ways :
When all the partners except become insolvent.
When al the partners become insolvent.
When the business becomes illegal.
When the numbers of partners exceed twenty in case of ordinary business or ten in case of banking business.

5. Dissolution by the court : At the suit of a partner a court may order the dissolution of the firm in any of the following ways :
When a partner becomes of unsound mind.
When a partner suffers from permanent incapacity and becomes incapable of performing his duties as a partner.
When a partner is guilty of misconduct affecting the business of the firm.
When a partner commits willful or persistent breaches of agreement.
When a partner has transferred the whole of his interest in the firm to a third party or when his share has been attached under a decree or sold under process of law
When the business of the firm cannot be carried on except at a loss.
When the court is satisfied as to grounds which render it just and equitable dissolve the firm.

6. REALISATION ACCOUNT AND REVALUATION ACCOUNT
It is prepared in order to realise the assets of the firm and the amount so realised is utilised for the payment of liabilities of firm according to the provisions of the Act. If there are any expenses incurred by the firm in realising the assets of the firm (known as realisation expenses), they are debited to this account. The difference between two sides of this account discloses either the profit or loss on realisation and will be transferred to Partners’ Capital Accounts in their profit sharing ratio. Realisation Account is different from the Revaluation Account.
Basis :
Time factor
Recording of assets
Purpose
Expenses
Effect
Realisation account :
It is prepared at the time of dissolution of the firm.
It records the book value of and the realised value of assets and liabilities.
Its main purpose is to realize the assets of the firm and to utilize this amount in payment of liabilities of the firm and hence distribute the profit or loss due to this effect among all the partners.
It contains an entry for the expenses of dissolution.
It records the effect of realisation of various assets and payment of liabilities. After opening this account, all the accounts in the ledger are closed i.e. there is winding up.
Revaluation account :
It is prepared at the time of admission retirement, death of the partner etc.
It records increase or decrease in the value of assets and liabilities.
Its main purpose is to revalue the assets and liabilities of the firm on admission, retirement or death of the partner in order to ensure that no partner benefits or suffers due to change in partnership.
It does not contain any entry for the expenses incurred on revaluation of assets and liabilities.
It records the effect of revaluation of assets and liabilities. The firm continues after opening this account.

7. Less : reserve for discounts 1,000 Reserve for contingencies
ILLUSTRATION 1 :
Jyoti and Vikas were equal partners in a manufacturing business. On June 30, 2010, they dissolved the firm on which date their balance sheet was as below :
Liabilities
Amount
Assets
Creditors ,000
Less : reserve for discounts 1,000
Reserve for contingencies
Mrs. Vikas loan
Reserve fund
Jyoti’s loan
Jyoti’s Capital account
Vikas’s Capital account
27,000
5,000
10,000
15,000
8,000
21,000
18,000
1,04,000
Cash at bank
Debtors ,000
Less : Provision for
Doubtful debts ,000
Stock
Furniture
Plant and Machinery
Prepaid expenses
2,500
40,000
32,000
3,500
25,000
1,000
Stock, Debtors, Plant and Machinery and Goodwill realised Rs. 27,000; Rs. 38,000; Rs. 20,000 and Rs. 5,000 respectively. Furniture did not realise any value. An amount of Rs. 6,000 was paid on account of contingent liabilities. The expenses of realisation were Rs. 1,000.
The firm had previously made some investment in shares of a joint stock company and had written off this investment on finding it useless. The investment now realised Rs. 1,500.
Close the books of the firm and show the necessary ledger accounts.

8. SOLUTION :
Date
Particulars
L.F.
Debit(Rs.)
Credit(Rs.)
2010
June 30
Realisation account Dr.
To Debtors
To Stock
To Furniture
To Plant and Machinery
To Prepaid expenses
(Being transfer of assets at book values on the dissolution of the firm)
1,03,000
42,000
32,000
3,500
25,000
1,000
Creditors Dr.
Reserve for contingencies Dr.
Mrs. Vikas loan Dr Provision for doubtful debts Dr.
To realisation account
(Being transfer of liabilities to third parties ad Provision for doubtful debts on the dissolution of the firm)
28,000
5,000
10,000
2,000
45,000
To Reserve for discounts on creditors
(Being transfer of reserve for discounts on creditors on the dissolution)

9. June 30
Reserve fund Dr.
To Jyoti’s Capital account
To Vikas’s Capital account
(Being transfer of reserve fund to capital accounts in the profit sharing ratio)
15000
Bank account Dr.
To Realisation account
(Being assets realised :
Stock 27,000
Debtors 38,000
Plant and Machinery 20,000
Goodwill 5,000
Investment in shares 1,500
91,500 )
91500
Realisation account Dr.
To Bank account
(Being payment of liabilities as follows :
Creditors 27,000
Contingent liabilities 6,000
Mrs. Vikas loan 10,000
43,000 )
43,000

10. June 30
Realisation account Dr.
To Bank account (Being payment of realisation expenses)
1,000
Jyoti’s Capital account Dr.
Vikas’s Capital account Dr.
To Realisation account
(Being payment of realisation expenses.)
6,000
12,000
Jyoti’s loan account Dr.
To Bank account
(Being payment of Jyoti’s loan)
8,000
(Being payment of the amount due to partners)
22,500
19,500
42,000

11. Ledger accounts Realisation account
Particulars Amount Particulars Amount
To Debtors a/c
To Stock a/c
To Furniture a/c
To Plant and Machinery a/c
To Prepaid expenses a/c
To Reserve for discount on creditors a/c
To Bank (liabilities paid)
To Bank (Realisation expenses)
42,000
32,000
3,500
25,000
1,000
43,0001,000
By Creditors a/c
By Provision for doubtful debts a/c
By Reserve for contingencies a/c
By Mrs. Vikas’s loan a/c
By Bank (Assets realised)
By Loss on realisation transferred to Capital accounts :
Jyoti ,000
Viaks ,000
28,000
2,000
5,000
10,000
91,500
12,000
1,48, ,48,500

12. Capital accounts Bank account
To Realisation a/c (Loss)
To Bank account
6,000
22,500
19,500
By balance b/d
By Reserve fund
21,000
7,500
18,000
Particulars Jyoti Vikas Particulars Jyoti Vikas
28, , , ,500
Bank account
To balance b/d
To Realisation a/c (Assets realised)
2,500
91,500
By Realisation a/c (liabilities paid)
By Realisation a/c (expenses)
By Jyoti’s loan a/c
By Joyti’s Capital a/c
By Vikas’s Capital a/c
43,000
1,000
8,000
22,000
19,500
Particulars Jyoti Particulars Vikas
94, ,000

13. ILLUSTRATION 2 :
P, Q and R are partners sharing and losses equally. On 31st march, 2020, their Balance Sheet stood as follows :
The firm was dissolved on the above mentioned date. P agreed to pay creditors at par. Q took over the entire furniture for Rs. 36,000. The remaining assets are sold for Rs. 5,53,000. Bills payable were retired at a discount of Rs. 100 received for payment before the due date of maturity. Expenses of dissolution amounted to Rs. 1,200.
Prepare important ledger accounts and Cash book. Current accounts and Capital accounts may be prepared in columnar form.
Liabilities
Amount
Assets
Bills Payable
Creditors
Loan from Q
P’s Current account
Q’s Current account
P’s capital account
Q’s Capital account
R’s Capital account
16,000
1,19,000
25,000
30,000
15,000
2,00,000
1,00,000
6,20,000
Cash at bank
Debtors
Stock
Furniture
Machinery
R’s Current account
1,25,000
2,90,000
40,000
1,20,000

14. Realisation account SOLUTION : To Debtors a/c To Stock a/c
To Furniture a/c
To Machinery a/c
To P’s Current a/c (creditors)
To Bank (Bills payable paid Rs. 16,000- Rs.100 )
To Bank (expenses)
To Profit transferred to Current a/c’s : P Q R
1,25,000
2,90,000
40,000
1,20,000
1,19,000
15,900
1,200
12,900
7,24,000
By Bills Payable a/c
By Creditors a/c
By Q’s Current a/c (Furniture)
By Bank (Debtors, Stock and Machinery sold)
16,000
36,000
5,53,000
Particulars Rs Rs.

15. Current accounts
Particulars P Q R
To balance b/d
To Realisation a/c (Furniture)
To P’s Capital a/c -
1,48,000
36,000
30,000
By balance b/d
By General Reserve a/c
By Realisation a/c (Creditors)
By Realisation a/c (Profit)
By Q’s Capital a/c
By R’s Capital a/c
15,000
10,000
1,19,000
4,300
6,700
15,700
1,48, , , ,48, , ,000
Capital accounts
Particulars P Q R
To Q’s Current a/c
To R’s Current a/c
To Bank a/c -
3,48,000
6,700
93,300
15,700
By Balance c/d
By P’s Current a/c
2,00,000
1,48,300
1,00,000
3,48, ,00,000 1,00, ,48, ,00, ,00,000

16. Bank account Particulars Amount (Rs.) To balance b/d
To Realisation a/c (assets realised)
15,000
5,53,000
By Realisation a/c
By Realisation a/c (expenses)
By Q’s loan a/c
By Capital a/c’s P Q R
15,900
1,200
25,000
3,48,000
93,300
84,300
5,68, ,68,000

17. INSOLVENCY Definition :
If a partner’s capital account shows a debit balance on the dissolution of the firm, he is to pay the debit balance to the firm to settle this account. But if such a partner insolvent, i.e., unable to satisfy his debt to the firm, then his deficiency which he is not able to bring will be borne by the other solvent partners in accordance with decision in Garner vs. Murray.
In this case it was ruled, in the absence of any agreement to the contrary, the deficiency of the insolvent partner’s Capital account must be borne by the firm. The effect of this ruling is to make a distinction between an ordinary loss due to trading or realisation of assets and loss on account of insolvency of a partner.
The loss in case of insolvency is a capital loss should be borne by other solvent partners in their capitals.
Another ruling is that the solvent partners should bring in cash equal to their share of loss on realisation. This ruling has been given to bring the capitals accounts of the solvent partners to the figures they stood before transferring the loss of realisation.

18. Fixed and Fluctuating Capitals :
While determining the capital ratio of the solvent partners, distinction should be observed between fixed and fluctuating capitals.
If the capitals of the partners have been agreed to be fixed, then no adjustment is required for accumulated profits or losses, interest on capitals, drawings etc. and deficiency of the insolvent partner is borne by the solvent partners in proportion to their agreed fixed capitals.
If the capital accounts are maintained on fluctuating basis, then capital accounts should be adjusted for reserves, profit or losses, interest on capitals, drawings and unrecorded assets and liabilities on the date of the balance sheet just before the dissolution of the fir.
Date/ Sr. no.
Particulars
L.F
Debit
Credit
Solvent Partners’ Current a/c Dr.
To Insolvent Partners’ Capital a/c
(Being transfer of the deficiency of the insolvent partner to the solvent partners’ current accounts in proportion to their agreed fixed capitals)
Date/ Sr. no.
Particulars
L.F
Debit
Credit
Solvent Partners’ Capital a/c Dr.
To Insolvent Partners’ Capital a/c
(Being transfer of the deficiency of the insolvent partner to the solvent partners’ capital accounts)

19. ILLUSTRATION
X, Y and Z are partners sharing profits and losses in the ratio of 4 : 2 : 3. On 1st January 2010, they agreed to dissolve the partnership. Their Balance sheet was as follows :
The assets realised : Investments Rs. 20,400; Bills receivable and Debtors Rs. 28,200; Stock Rs. 14,500; Furniture Rs. 2,050; Machinery Rs. 8,600; Buildings Rs. 26,400. all the liabilities were paid off. The cost of realisation was Rs. 600, Z had become bankrupt and Rs. 1,024 only was recovered from his estate once and for all. Partners were finally paid off. Show the Realisation account, the Bank account, and the Capital accounts of the partners when the capitals are fluctuating.
Liabilities
Amount
Assets
Profit and Loss
Reserve Fund
Bills Payable
Sundry Creditors
Loan from X
Capital Accounts : Z Y X
4,500
12,600
4,100
9,000
4,000
3,000
46,000
68,000
1,51,200
Buildings
Machinery
Furniture
Stock
Debtors
Investments
Bills Receivable
Cash in Bank
Cash at hand
45,000
15,000
3,700
19,400
31,000
24,000
5,600
6,500
1,000

20. Realisation account SOLUTION : Particulars Rs. To Buildings
To Machinery
To Furniture
To Stock
To Debtors
To Investments
To Bills Receivable
To Bank (Bills Payable & Creditors)
To Bank (Cost of Realisation)
45,000
15,000
3,700
19,400
31,000
24,000
5,600
13,100
600
1,57,400
By Bills Payable
By Sundry Creditors
By Bank (assets realised)
By Loss on realisation transferred to capital a/cs
X 19,600
Y 9,800
Z 14,700
4,100
9,000
1,00,000
44,100

21. Bank account Particulars Rs. To Balance b/d To Cash in hand
To Realisation a/c (assets realised)
To X’s Capital a/c (Realisation Loss brought in)
To Y’s Capital a/c (Relaisation Loss brought in)
To Z’s capital a/c
6,500
1,000
1,00,000
19,600
9,800
1,024
1,38,124
By Realsation a/c (payment of Bills Payable and Creditors)
By Realisation a/c (Cost of Realisation)
By X’s Loan a/c
By X’s Capital a/c
By Y’s Capital a/c
13,100
600
4,000
72,632
47,792

22. Capital accounts Particulars X Y Z To Realisation a/c (Loss)
To Z’s Capital a/c
(Rs. 4,976 in the ratio of 75,600 : 49,800)
To bank a/c
19,600
3,000
72,600
95,200
9,800
1,976
47,824
59,600
14,700
By balance b/d
By Profit and Loss a/c
By Reserve Fund
By Bank (Realisation loss brought in)
By Bank
By X’s Capital a/c (126/209 share of Z’s deficiency)
By Y’s capital a/c
(83/209 share of Z’s deficiency)
68,000
2,000
5,600
46,000
1,000
2,800
1,500
4,200
75,600
49,800
8,700
1,024

23. When all Partners are Insolvent :
When all partners are insolvent and are not able to bring the amount due from them, then the creditors of the firm cannot be paid in full. Then there are two methods for closiig the books of accounts of the firm.
(a) Where outside liabilities are not transferred to Realisation account :
Following procedure is followed :
Sundry assets (except cash and bank balance) are transferred to the debit side of Realisation Account as usual.
On Realisation of assets, Realisation account is credited.
For Realisation expenses, Realisation account is debited and Cash account is credited.
If any liability is secured, then that liability will be paid on priority basis to the extent of realisation of the asset kept as security.
Amount brought by any partner from his private estate is credited to his Capital account and debited to Cash account.
Cash account is prepared in order to calculate the amount available for payment to unsecured outside liabilities. The balance in unsecured outside liabilities account represents amount not paid to these creditors and is closed by transfer to Deficiency acccount.
Capital accounts (after all entries) are closed by transferring their balances to Deficiency account.
Deficiency account, if prepared, will tally.

24. ILLUSTRATION :
Following is the balance sheet as on 31st march, 2010 of a firm having three partners, Alfa, Beta ad Gama sharing profits and losses equally :
The firm was dissolved due to insolvency of all the partners. Stock was sold for Rs. 9,000 while furniture fetched Rs. 5,000. Rs. 4,100 were received from debtors. Realisation expenses totalled Rs Nothing could be recovered from Beta and Gama, but Rs. 600could be collected from Alfa’s private estate.
Close the books of the firm.
Liabilities
Amount
Assets
Sundry Creditors
Loan (Secured by furniture )
Capital Accounts :
Alfa
Beta
Gama
20,000
10,000
8,000
6,000
1,000
45,000
Debtors
Stock
Furniture
Profit and Loss account
Cash
4,720
15,630
9,530
12,000
3,120

25. Realisation account Cash account
SOLUTION :
Realisation account
Particulars
Amount (Rs.)
To Sundry Assets
Stock
Debtors
Furniture
To Cash (Realisation expenses)
15,630
4,720
9,530
220
30,100
By Cash :
Stock ,900
Furniture ,000
Debtors ,100
By Loss transferred to Capital a/cs
Alfa ,700
Beta ,700
Gama ,700
19,000
11,100
Cash account
Particulars
Amount (Rs.)
To balance b/d
To Realisation a/c
To Alfa’s Capital a/c
3,120
19,000
600
22,720
By Realisation a/c (expenses)
By loan a/c (upto realisable value of furniture)
By Sundry Liabilities
220
5,000
17,500

26. Sundry Liabilities account
Particulars
Amount (Rs.)
To Cash a/c (70% paid)
To Deficiency a/c
17,500
7,500
25,000
By Loan
By Creditors
5,000
20,000
Capital accounts
Particulars
Alfa
Beta
Gama
To Realisation a/c
To Profit & Loss a/c
To Deficiency a/c
3,700
4,000
900
8,600 -
7,700
By Balance b/d
By Cash
By Deficiency
8,000
600
6,000
1,700
1,000
6,700
Deficiency account
Particulars
Amount (Rs.)
To Beta’s Capital a/c
To Gama’s Capital a/c
1,700
6,700
8,400
By Sundry Liabilities
By Alfa’s Capital a/c
7,500
900

27. (b) If the effect of realisation of all assets and liabilities is to be passed through Realisation Account :
In this case outside liabilities are also transferred to Realisation account. Outside liabilities are paid with the amount available for unsecured outside liabilities which can be ascertained by preparing Cash account. Secured creditors (to the extent of relisation of security) are always paid on priority basis as compared to unsecured creditors. The realisation loss is transferred to Capital accounts. The balances in Capital accounts are transferred to Deficiency account. Deficiency account, when prepared, will tally.
This will be more clear from the following Illustration :

28. ILLUSTRATION :
A, B and C had the following Balance sheet on 31st December, 2009.
The firm was dissolved. Stock realized Rs. 10,000 and fixed assets and debtors realized Rs. 30,000 in all.
The private position of all the partners was as under :
Private Estate Private Liabilities
A Rs. 10, Rs. 15,000
B Rs. 8, Rs. 6,000
C was able to pay 50 paise in the rupee of what was payable on his own account to the partnership. The partners shared profits and losses in the ratio of 4 : 3 : 3 for A, B and C respectively.
The loss on realisation is to be determined after considering the amount finally paid to the creditors. You are required to close the books of the firm by preparing the necessary Ledger Accounts.
Liabilities
Amount
Assets
Creditors
Loan from Mrs. A (with a charge on Stock)
Loan from A
Capital accounts
A ,000
B ,000
C ,000
40,000
15,000
10,000
50,000
1,15,000
Debtors
Stock
Fixed assets
Cash at Bank
Loss
24,000
20,000
1,000
30,000

29. Realisation account Bank account
SOLUTION :
Realisation account
Particulars
Amount (Rs.)
To Sundry Assets
Stock
Debtors
Fixed assets
To Bank (payment of Mrs. A’s loan to the extent of value of stock realized)
To Bank (Creditors paid)
(Rs. 33,000 + Rs. 5,059)
20,000
24,000
40,000
10,000
38,059
1,32,059
By Creditors
By loan from Mrs. A
By Bank
Stock ,000
Debtors & Fixed Assets 30,000
By Loss to Capital a/c
A ,823
B ,118
C ,118
15,000
37,059
Bank account
Particulars
Amount (Rs.)
To balance b/d
To Realisation a/c
To B’s Capital a/c
To C’s Capital a/c
1,000
40,000
2,000
5,059
48,059
By Realisation a/c
By Sundry Creditors a/c
(Rs. 33,000 + Rs. 5,059)
10,000
38,059

30. Capital accounts Particulars A B C To Loss To Realisation a/c
To deficiency a/c
12,000
14,823
3,177
30,000
9,000
11,118
1,882
22,000 -
20,118
By Balance b/d
By Loan from A a/c
By Bank
By Deficiency
20,000
10,000
2,000
5,059
Deficiency account
Particulars
Amount (Rs.)
To C’s Capital a/c
5,059
By A’s Capital a/c
By B’s Capital a/c
3,177
1,882

31. SALE TO A COMPANY Definition :
Conversion of a partnership means changing the status of the partnership firm into a joint stock company. A new company is formed to take over the business of the firm. Conversion is just like a sale of partnership business to a new company.
Need for conversion of partnership into a company :
Liability of he shareholders will become limited.
The company can collect more fund for expansion of its business.
The entity of the company will be separate from its members. The admission, death, insolvency of the members will not affect the continuity of the company.
To take advantage of less rate of income-tax.
To enjoy the benefits of large production.
To have continuous existence of the business unit.

32. Purchase consideration :
It is the amount paid by the purchasing company to the vendor firm for taking over its assets and liabilities. The company may take over all assets or liabilities or any of them.
Methods of calculation of Purchase condition :
Lumpsum method : When a fixed amount or lumpsum is given by the purchasing company of the vendor firm, it is called lump sum method.
Net payment method : Under this method, the purchase consideration is the total of all the payments made by the company to the vendor firm in the form of shares, debentures and cash.
Net assets method : Under this method, the total of assets taken over by the company at agreed value is calculated and the agreed value of liabilities assumed is deducted.

33. ILLUSTRATION :
A, B and C carried on business in partnership sharing profits and losses in the ration of 3:2:1. They decided to convert their business into a private limited company. A new capital, A B C Private limited was duly formed with an authorised capital of Rs.3,00,000 divided into 22,500 equity shares of Rs. 10 each and 7,500, 10% cumulative preference shares of Rs. 10 each. The company took over the firm’s business as on 31st December, 2009, on which date the firm’s Balance sheet stood as under :
Liabilities
Amount
Assets
Capital accounts A B C
Current accounts
A’s loan
Creditors
75,000
50,000
30,000
14,625
10,375
20,000
14,000
Debtors
Stock
Machinery
Motor car
Furniture
Bank
B’s current account
26,000
90,000
32,500
9,000
3,000
43,000
10,500

34. The debtors are all good and are taken over by A who has also agreed to pay the creditors. The company took over machinery at its book value, stock at an agreed value of Rs. 83,000, furniture Rs. 2,250, motor car at Rs. 8,000, goodwill values at one year’s purchase at average profits of previous three years and the bank balance. The profits earned by the firm in the previous three years were : 2009, Rs. 22,000 : 2008, Rs. 21,000 : 2007, Rs. 17,000.
The company agreed to discharge A’s loan by issue to him at par of Rs. 1,500, 10% cumulative preference shares of Rs. 10 each credited a fully paid, and a cash payment of Rs. 5,000. The
Balance of the purchase consideration was to be discharged by the issue at par of 15,000 equity shares of Rs. 10 each, credited as fully paid and balance in cash.
You are required to prepare Realisation account, Capital accounts and A B C private limited’s account in the books of the firm assuming that all the transactions are duly completed.

35. Realisation account A B C Private Limited
SOLUTION :
Realisation account
Particulars
Amount (Rs.)
To Machinery
To Motor Car
To Furniture
To Stock
To Profit transferred to Capital a/c’s :
A ,625
B ,750
C ,875
32,500
9,000
3,000
90,000
43,000
11,250
1,88,750
By ABC Private Ltd.
(Purchase consideration)
A B C Private Limited
Particulars
Amount (Rs.)
To Realisation a/c
1,88,750
By 10% cumulative Preference shares
By Equity Shares
By Cash
15,000
1,50,000
23,750

36. A’s Laon account Capital accounts
Particulars
Amount (Rs.)
To 10% cumulative Preference shares
To Cash
15,000
5,000
20,000
By Balance b/d
Capital accounts
Particulars A B C
To Sundry Debtors
To Current a/c
To Equity Shares a/c
To Cash a/c
26,000
74,000
9,250
1,09,250
10,500
38,440
4,810
53,750
37,560
4,690
42,250
By Balance b/d
By Sundry Creditors
By Realisation A/c (Profit)
By Current a/c
75,000
14,000
5,625
14,625
50,000
3,750
30,000
1,875
10,375

37. Equity Shares accounts
Particulars
Amount (Rs.)
To ABC Private limited
1,50,000
By A’s Capital a/c
By B’s Capital a/c
By C’s Capital a/c
74,000
38,440
37,560
Cash accounts
Particulars
Amount (Rs.)
To ABC Private limited
23,750
By A’s Loan a/c
By A’s Capital a/c
By B’s Capital a/c
By C’s Capital a/c
5,000
9,250
4,810
4,690

38. Gradual Realisation of Assets and Piecemeal Distribution :
On a gradual realisation of assets, the cash realised is distributed in the following order to avoid the excess payment to any partner :
Expenses of realisation are to be paid in the first instance as these get preference over unsecured creditors. Then the debts of the firm to third parties must be paid out in full prior to any partner being paid any amount in respect of his loan and capital; secured creditors should get preference over unsecured creditors.
After the creditors have been paid off, the amount due to a partner as loan should be paid. When the loans are due to more than one partner, the cash available should be paid rateably.
After the payment of outside liabilities and loans due to the partners, the capitals of the partners are paid by two methods :
(i) Proportionate Capital Method
(ii) Maximum Loss Method

39. Proportionate Capital Method :
If the capitals of the partners are in the ratio of their profit sharing arrangement, then each of them is paid out according to his capital ratio at each distribution. If the capitals of the partners are not in the profit sharing ratio, then the first cash available for distribution amongst the partners should be paid to those partners whose capitals are more than their profit sharing ratios to bring their capitals to their profit sharing levels.
Cash available for distribution amongst the partners cannot be distributed according to the profit and loss sharing ratio unless the capitals of the partners are in the profit and loss sharing ratio because that will not leave the unpaid balances of the capital accounts in the profit and loss sharing ratio of the partners.

40. ILLUSTRATION :
A, B and C share profits and losses in the proportion of ½, 1/3 and 1/6. Their Balance sheet is as follows :
The partnership is dissolved and the assets are realised as follows :
1st Realisation ,000
2nd Realisation ,000
3rd Realisation ,000
4th Realisation ,000
Prepare a statement showing how the distribution should be made.
Liabilities
Amount
Assets
Creditors
A’s Loan
A’s Capital
B’s Capital
C’s Capital
50,000
10,000
40,000
Land & Buildings
Plant and Machinery
Stock
Debtors
Cash
70,000
25,000
20,000
5,000

41. STATEMENT SHOWING DISTRIBUTION OF CASH
SOLUTION :
STATEMENT SHOWING DISTRIBUTION OF CASH
Particulars
Credito-rs
A’s Loan
A’s Capital
B’s Capital
C’s Capital
Amount Due
Cash in hand paid to creditors
50,000
5,000
10,000
40,000
Balance due
Amount of 1st realisation paid to creditors
45,000
Amount of 2nd realisation
Less : Paid to Creditors
Rs.
30,000
Less : A’s Loan paid
25,000
Less : Paid to C
15,000
Balance Due
Amount of 3rd realisation
54,000
8,333

42. Less : Paid to A and C
45,667
50,000
34,250
10,000
16,667
11,417
Balance Due
Amount of 4th realisation
Paid to A and C
7,000
1,000
15,750
750
5,250
250
Less : Paid to A, B and C
6,000
15,000
3,000
2,000
5,000
Balance Unpaid/Loss on Realisation
12,000
8,000
4,000

43. (ii) Maximum Loss Method
An alternative method of piecemeal distribution of cash amongst partners is to calculate the maximum possible loss on every realisation after the outside liabilities and the partners’ loans have been paid.
The amount available for distribution amongst partners is compared with the amount of capitals payable to partners and the maximum possible loss is ascertained on the assumption that in future assets will not realize any amount.
The maximum loss so ascertained is deducted from the capitals of the partners in the profit and loss sharing ratio and the balance left in the capital accounts after the deducting the maximum possible loss will be the amount payable to the partners.
But if a partner’s share of maximum possible loss is more than the amount standing to the credit of his capital account, he should be treated as insolvent and his deficiency should be debited to the capital accounts of the other partners in their proportion of their capitals which stood on the dissolution date as stated in the case of Garner vs. Murray.

44. ILLUSTRATION :
Following is the Balance Sheet of X, Y and Z who share profits and losses equally :
The firm dissolved on and assets were realised as follows :
First installment Rs. 6,000
Second installment Rs. 9,000
Third installment Rs. 15,000
Last installment Rs. 18,000
Show the distribution of cash under Maximum Loss Method.
Liabilities
Amount
Assets
Capital Accounts
X ,000
Y ,000
Z ,000
Creditors
60,000
10,000
Sundry Assets
Cash at bank
Profit and Loss a/c
4,000
6,000

45. STATEMENT SHOWING DISTRIBUTION OF CASH
SOLUTION :
STATEMENT SHOWING DISTRIBUTION OF CASH
Particulars
Balance Due as per Balance Sheet
Less : Loss distributed among partners
Balance of cash at bank paid to creditors
1st Realisation
Paid to Creditors
6,000
Nil
2nd Realisation
Maximum Loss Rs. 45,000
(i.e. Rs. 54,000- Rs. 9,000)
9,000
Deficiency of Z o be borne by X & Y in Capital Ratio 3:2
Amount Paid to Partners
Balance Due
Creditors
10,000
4,000
6,000
Nil
X’s Capital
29,000
2,000
27,000
15,000
12,000
-3,600
8,400
18,600
Y’s capital
20,000
2,000
18,000
15,000
3,000
-2,400
600
17,400
Z’s Capital
11,000
2,000
9,000
15,000
-6,000
+6,000
Nil