DISSOLUTIONS
A partnership may be dissolved due to various reasons which include:
- Poor trading that has led to losses
- A partner dying or leaving the firm
- The time period for which the partnership was formed has elapsed.
The main objective of accounting for dissolutions is to ensure that the dissolution transactions are recorded properly. These transactions involve; Selling the assets of the business and thereafter paying off dissolution expenses and liabilities of the partnership. The remaining costs are now paid off to the partners.
In the process of selling off the assets, the assets may be sold off at a profit or loss this profit or loss is supposed to be shared by the partners according to the profit sharing ratio before the final payments are made to them.
To facilitate the process of dissolution, a new account called realization account in which the assets being sold are transferred and the cash proceeds received on the sale of the assets. Generally, the realization account is supposed to record all profits or losses in return to dissolution and therefore dissolution expenses will also be posted here discounts received from creditors, and also discounts allowed to debtors.
The balance on the realization account is the profit or loss on dissolution that is closed off to the capital accounts.