Dissolution of a Partnership (Cambridge International A-Level Accounting)

Spec point — how to prepare partners’ capital and current accounts to record changes required in respect of goodwill and revaluation of assets on: – the dissolution of a partnership

Dissolution of a partnership

What is meant by the dissolution of a partnership?

• A partnership is said to be dissolved if it formally ceases to trade

How do I update partners' capital accounts when a partnership is dissolved?

• STEP 1 Calculate the net profit or loss on realisation for each of the partners using the profit-sharing ratio

  • Debit the capital accounts if it is a net loss
  • Credit the capital accounts if it is a net profit

• STEP 2 Transfer each partner's current account balance to their capital account

  • Credit the capital account if the current account has a credit balance
  • Debit the capital account if the current account has a debit balance

• STEP 3 Make any entries for assets taken by partners

  • Debit the capital account with the value of any assets that the partners are taking

• STEP 4 Balance the capital accounts to calculate how much the partners are owed

  • Debit the capital account with the money taken from the bank for the balancing figure

Exam Hint A revaluation account is not used for a dissolution. You need to remember to use the realisation account.

Worked Example Iona and Jayden were in partnership sharing profits and losses in the ratio 5:3 respectively.

The partnership's statement of financial position at 31 December 2025 was as follows:

	$	$
Assets
Non-current assets		150 000
Current assets
Inventory	23 000
Trade receivables	22 000	45 000
Total assets		195 000
Capital and liabilities
Capital
Capital account - Iona	95 000
- Jayden	55 000	150 000
Current account - Iona	19 000
- Jayden	(10 000)	9 000
Current liabilities
Bank overdraft	15 000
Trade payables	21 000	36 000
Total capital and liabilities		195 000

The partners agreed to dissolve the partnership on 31 December 2025 due to a serious dispute.

The following transactions took place as part of the dissolution process.

1. As part of her settlement, Iona took a vehicle with a net book value of $24 000.
2. As part of his settlement, Jayden took a vehicle with a net book value of $17 000.
3. All remaining non-current assets were sold for $93 000.
4. Inventory was sold for $18 000.
5. The amounts due from trade receivables were settled in full with the exception of irrecoverable debts for $500.
6. The amounts due to trade payables were paid in full.
7. Dissolution costs of $2 500 were paid.

Prepare the realisation account and the partners' capital accounts to show the dissolution of the partnership.

Answer:

Prepare the realisation account

• The balancing figure is the net profit or loss on realisation

$218 500 - $194 500 = $24 000

• Split the amount using the profit-sharing ratio

Iona: 5 / 8×$ 24 000=$ 15 000

Jayden: 3 / 8×$ 24 000=$ 9 000

	$		$
Non-current assets	150 000	Capital - Iona (Vehicle)	24 000
Inventory	23 000	Capital - Jayden (Vehicle)	17 000
Trade receivables	22 000	Bank (Non-current assets)	93 000
Bank (Trade payables)	21 000	Bank (Inventory)	18 000
Bank (Dissolution costs)	2 500	Bank (Trade receivables)	21 500
		Trade payables	21 000
		Capital - Iona (Loss on realisation)	15 000
		Capital - Jayden (Loss on realisation)	9 000
	218 500		218 500

Prepare the capital accounts

• Debit each capital account with the loss on realisation
• Debit the capital accounts with the motor vehicles
• Transfer the current account balances to the capital accounts
• The balancing figures are the bank values

Capital Accounts

	Iona $	Jayden $		Iona $	Jayden $
Realisation (Loss)	15 000	9 000	Balance b/d	95 000	55 000
Realisation (Vehicles)	24 000	17 000	Current account	19 000
Current account		10 000
Bank	75 000	19 000
	114 000	55 000		114 000	55 000