Partnership Accounts: Admission of New Partner, Dissolution, Insolvency Commerce YouTube Lecture Handouts

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Partnership Accounts: Admission of New Partner, Dissolution, Insolvency | Commerce

Meaning

According to the Indian partnership act, 1932 “A partnership is a relationship between two or more people who have agreed to split the earnings from a business that is operated by all of them or by one of them acting on behalf of all of them” .

Features of Partnership

Features of Partnership

Admission of a New Partner

  • Admission of a new partner is the process of adding a new person as a partner or associate to an existing business.
  • At the time of admission of a new partner various adjustments are required:
    • Goodwill, revaluation of assets and liabilities, results and other accumulated earnings and
    • losses and the capitals of the existing partners are some of the items that need to be
    • adjusted in the records of the firm when a new partner is admitted (if agreed) .

Accounting Treatment

Adjustments Required at the Time of Partners Admission

Goodwill, revaluation of assets and liabilities, reserves and other accumulated earnings and losses and the capitals of the existing partners are some of the items that need to be adjusted in the records of the firm when a new partner is admitted (if agreed) .

Required Adjustments

  • Determination of sacrificing ratio and new profit-sharing ratio
  • Treatment of goodwill
  • Adjustment for revaluation of assets and reassessment of liabilities
  • Adjustment for reserves an accumulated profit and losses
  • Determining/adjusting partners capital account

Retirement/Death of Existing Partner

When a partner retires, he or she ceases to be a partner in the firm. In the following circumstances a partner may leave the firm:

  • If there is a written agreement to that end; or
  • All of his partners agree to his retirement; or
  • By natural death; or
  • By giving written notice to the surviving or continuing partners, a partnership can be ended at any time.

Adjustments Required at the Time of Partners Retirement/Death

Goodwill, revaluation of assets and liabilities, reserves and other accumulated earnings and losses and the capitals of the existing partners and the balance due to the Executor are some of the items that need to be adjusted in the records of the firm at the time of retirement and death.

Required Adjustments

  • Calculation of new profit-sharing ratio and gaining ratio
  • Treatment of goodwill
  • Revaluation of assets and liabilities
  • Calculation of amount to be paid to retiring partner or deceased partner

Dissolution of Partnership Firm

Dissolution of Partnership Firm
  • The firm՚s business ceases to exist when it is dissolved because of its affairs are wound up by selling the assets, paying the liabilities, and discharging the claims of the partners. The term ‘firm dissolution’ refers to the dissolution of a partnership among all the farms participants.
  • The firm՚s books must be closed upon dissolution. The dissolution process begins with the establishment of following accounts in the company՚s books:
    • Realization account
    • Partners loan account
    • Partners՚ capital account
    • Bank or cash account

There is no balance in the bank/cash account after partners claim have been settled, and the firm is said to be dissolved.

Insolvency of Partnership Firm

  • Where all the partners in a firm are adjudicated as insolvent then the partnership firm is also declared as insolvent.
  • When a partnership firm is unable to satisfy its obligations and is in financial distress, the court steps in, at the request of the creditors or the debtor himself, and negotiate a settlement in which the debtor relinquishes all of his property and is relieved.
  • The accounts that must be prepared at the time of insolvency of a partnership firm are stated as follows:
    • Statement of affairs
    • Deficiency account

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