CBSE Class 12 Accountancy Chapter 5 Notes – Dissolution Of Partnership Firm

CBSE Class 12 Accountancy Chapter 5 Notes for “Dissolution Of Partnership Firm” have been created by our experienced teachers. Chapter-by-chapter PDF notes are available on our Careers Adda website, allowing students to benefit from the notes while also scoring well on CUET 2026 exams. Accountancy Chapter 5 class 12 Notes improve the accuracy of right responses by thoroughly discussing the notes for each chapter.

CBSE Class 12 Accountancy Chapter 5 Notes

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Accountancy Notes for Chapter 5 – Dissolution Of Partnership Firm

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1. Meaning of Dissolution

According to the sources, there is a distinct difference between the dissolution of a partnership and the dissolution of a firm:
• Dissolution of Partnership: This refers to the reconstitution of the firm due to changes in the relationship between partners, such as admission, retirement, death, or change in profit-sharing ratio. In this case, the existing partnership is dissolved, but the firm may continue its business under the same name.
• Dissolution of Firm: According to Section 39 of the Partnership Act 1932, this is the dissolution of partnership between all the partners of a firm. This results in the discontinuance of business, the closure of books of account, the sale of assets, and the payment of all liabilities.

CUET Previous Year Question Paper with Answers

Key Rule: Dissolution of the firm necessarily involves dissolution of the partnership, but dissolution of partnership does not necessarily involve dissolution of the firm. In the analogy: Graduation Day ends the team, but one member leaving doesn’t end the school year.
Ways of Dissolution of a Partnership Firm

Dissolution of a firm entails the discontinuance of the relationship between all partners, leading to the winding up of business affairs. According to the sources, a firm may be dissolved in the following ways:
• Dissolution by Agreement:
o With the consent of all partners.
o In accordance with a contract previously established between the partners.
• Compulsory Dissolution:
o When all partners, or all but one, become insolvent and are incompetent to contract.
o When the business of the firm becomes illegal.
o When an event occurs that makes the partnership unlawful (e.g., a partner becomes an “alien enemy” due to war).
• Dissolution on the Happening of Certain Contingencies:
o Expiry of a fixed term for which the firm was constituted.
o Completion of the specific venture/task for which the partnership was formed.
o Death of a partner.
o Adjudication of a partner as an insolvent.
• Dissolution by Notice:
o In a partnership at will, any partner can dissolve the firm by giving a written notice to all other partners expressing their intention to dissolve.
• Dissolution by Court Order:
o A partner becomes insane.
o A partner becomes permanently incapable of performing duties.
o A partner is guilty of misconduct affecting the business.
o Persistent breach of the partnership agreement by a partner.

o Transfer of a partner’s entire interest in the firm to a third party.
o The business cannot be carried on except at a continuous loss.
o Any other ground the court regards as just and equitable.

Settlement of Accounts (Section 48)

Upon the dissolution of a firm, the settlement of accounts follows specific legal priorities to ensure all stakeholders are paid in a structured order.
Pointers for Settlement Priority:
• Treatment of Losses: Losses (including capital deficiencies) are paid:
o First, out of the firm’s profits.
o Next, out of the partners’ capital.
o Lastly, by partners individually in their profit-sharing ratio (PSR) if necessary.
• Application of Assets: Realised assets and partner contributions are applied in this specific order:
1. Outside Debts: Payment to third-party creditors (e.g., Sundry Creditors, Bank Overdraft).
2. Partner’s Loans: Repayment of loans or advances made by a partner to the firm.
3. Capital Repayment: Payment to partners for their capital account balances.
4. Residue/Surplus: Any remaining balance is divided among partners in their PSR.

Private Debts vs. Firm’s Debts (Section 49)

There distinguish between the liabilities of the firm and the personal liabilities of individual partners.
Pointers for Debt Application:
• Firm’s Property: Must be applied first to pay the firm’s debts. Any surplus is then distributed to partners, which they can use to pay private debts.
• Partner’s Private Property: Must be applied first to pay their private debts. Any surplus can be used to pay firm debts if the firm’s assets are insufficient.
• Net Private Assets: Defined as Private Assets Private Liabilities.