Introduction
In partnership accounting, it is important to distinguish between dissolution of partnership and dissolution of partnership firm. Although the terms look similar, they have different legal and accounting implications. Dissolution of partnership refers to a change in the relationship between partners, whereas dissolution of the firm results in the complete closure and winding up of partnership business.
Key Differences Between Dissolution of Partnership and Dissolution of Firm
| Basis | Dissolution of Partnership | Dissolution of Partnership Firm |
|---|---|---|
| 1. Meaning | Change in the relationship among existing partners without closing the business. | Complete termination of partnership business and closure of the firm. |
| 2. Continuity of Business | Business continues with reconstituted partners. | Business permanently ends; no further operations occur. |
| 3. Settlement of Assets and Liabilities | No settlement of entire assets and liabilities required. | All assets are realized and liabilities settled. |
| 4. Causes | Admission, retirement, death, insolvency or change in profit-sharing ratio. | Mutual agreement, insolvency of partners, court order, or completion of venture. |
| 5. Books of Accounts | Books continue; only revaluation and capital adjustments made. | Books are closed permanently using Realisation Account. |
| 6. Legal Position | Partnership technically continues but with altered structure. | Firm ceases to exist as a legal entity. |
| 7. Effect on Partners | Partners continue business under new agreement. | Partners settle accounts and end association. |
| 8. Example | Retirement of a partner leading to reconstitution of the firm. | Partners deciding to close business and distribute remaining assets. |
Detailed Explanation
Dissolution of Partnership occurs when the existing agreement among partners changes. The business continues, but the firm is said to be reconstituted. This occurs in cases such as admission, retirement, death, insolvency of a partner, or changes in the profit-sharing ratio. Only revaluation adjustments and capital account adjustments are made.
Dissolution of Partnership Firm refers to the complete closure of the business. The firm’s books are closed permanently, and a Realisation Account is prepared to transfer assets and liabilities. All liabilities are paid off, and any remaining balance is distributed among partners according to their capital or profit-sharing ratio.
Conclusion
Thus, while the dissolution of partnership merely changes the structure of the firm, dissolution of partnership firm results in complete cessation of business. Understanding this difference is essential for correct accounting treatment and legal compliance in partnership accounts.