Chapter 4 of Class 12 Accountancy focuses on the concept of dissolution of a partnership firm, which means the formal closure of a business and settling all accounts. This includes selling assets, paying off liabilities, and distributing the remaining cash among partners. Students need to understand how to prepare the Realisation Account, handle partners’ capital, and adjust liabilities during dissolution. This chapter is very important from an exam point of view, as it carries a decent weightage and also helps students understand practical accounting scenarios.
I chose to write about this topic because many students confuse dissolution of a firm with reconstitution. But these two are very different. Reconstitution is a change in the partnership structure, whereas dissolution is the complete ending of the business. Understanding this chapter is not just essential for exams but also for real-life accounting jobs or business scenarios. This topic also includes application-based questions and journal entries that often appear in CBSE board papers. So, having a strong grip on this chapter will give you clarity about the end procedures of a partnership firm and help improve your overall performance in the Accountancy paper.
Key Concepts in Chapter 4 – Dissolution of Partnership Firm
When a partnership firm is dissolved, it stops doing business, and the main goal becomes settling all liabilities and distributing any remaining assets among the partners.
Here are the major concepts explained in this chapter.
1. Meaning of Dissolution
Dissolution means the ending of the business by selling off all assets, settling all outside liabilities, and distributing any leftover amount among partners.
Types of Dissolution:
- Dissolution by Agreement
- Compulsory Dissolution
- Dissolution by Notice (in case of partnership at will)
- Dissolution by Court
- On completion of the venture
2. Difference Between Dissolution of Firm and Dissolution of Partnership
| Basis | Dissolution of Partnership | Dissolution of Firm |
|---|---|---|
| Meaning | Only partnership changes | Entire business ends |
| Business Continues? | Yes | No |
| Legal Process Required? | Not necessarily | Yes, in most cases |
| Settlement of Assets/Liabilities | Not required | Required |
3. Realisation Account
This is the most important part of the chapter. It is prepared to:
- Sell all assets of the firm
- Settle all liabilities
- Calculate gain or loss on dissolution
4. Settlement of Liabilities
- First, pay off external liabilities like creditors and bank loans
- Next, pay any partner’s loan
- Finally, settle the capital accounts
5. Treatment of Unrecorded Assets and Liabilities
- If an unrecorded asset is sold, the amount received is credited to Realisation A/c
- If an unrecorded liability is paid, the amount paid is debited to Realisation A/c
6. Capital Account Adjustments
Partners’ capital accounts are adjusted for:
- Realisation profit or loss
- Share of any remaining reserves
- Final distribution of cash after liabilities are settled
7. Journal Entries
You will have to learn journal entries for:
- Transfer of assets and liabilities to Realisation A/c
- Payment to creditors and partners
- Final settlement with partners
Download PDF – NCERT Class 12 Accountancy Chapter 4
If you want to revise this chapter or practise from the official material, the NCERT PDF is the best source. It contains theory, formats, illustrations, and in-text questions.
