Financial Accounting II - Modes of Dissolution of a Firm

Vocabulary flashcards for reviewing key terms and concepts related to the modes of dissolution of a firm, as covered in BCOM201 Financial Accounting II, Unit 11.

Dissolution of a Firm

The discontinuation of the business under the name of the said partnership firm, terminating the relationship between the partners.

Section 46 of the Indian Partnership Act, 1932

Provides the rights of partners to have business wind up after the dissolution of the firm.

Sec 39 of The Partnership Act, 1932

Defines the dissolution of the firm as the dissolution of the partnership between all the partners of a firm.

Dissolution of a Partnership

The ongoing partnership is dissolved, and the firm can retain its existence if remaining partners enter into a new partnership agreement.

Modes of Dissolution (Court Perspective)

Dissolution without a court order and dissolution with a court order.

Dissolution by Agreement (Section 40)

A partnership may be dissolved with all partners' approval or in line with a contract between the partners.

Compulsory Dissolution (Section 41)

A company is forced to dissolve if all or most of the partners are declared insolvent, or when a business becomes illegal.

Notice of Dissolution

Relevant in the case of a willful partnership.

Dissolution by Court (Section 44)

The court can order the firm's dissolution if a partner's mental health deteriorates, a partner is permanently unable to perform their duties, or the business can only continue with loss, among other reasons.

Dissolution by Notice

Where a partnership is at will, the firm may be dissolved by any partner after giving notice in writing to all the other partners.

Contingent Dissolution

A partnership firm may be dissolved at the expiry of the period fixed for the partnership firm, after the adventure, when the partnership itself has been declared insolvent etc.

Treatment of Losses (Dissolution Settlement)

Losses, including capital shortfalls, will be paid first from earnings, then from the partners' capital, and finally, if necessary, by the partners individually in their profit-sharing ratio.

Application of Firm Assets (Dissolution Settlement)

The assets of the firm shall be applied to pay the firm's debts to third parties, to pay each partner what is due for advances, and then to pay each partner what is due on account of capital.

Private Obligations and Firm Debts

The firm's property shall be used to pay the firm's debts first, and any excess shall be distributed among the partners; any partner's private property must be used first to pay his private debts, with any surplus being used to cover the firm's debts.

Garner vs. Murray Case

States that the solvent partners must bear such loss in proportion to their capitals on the date of dissolution.

Adjudication

A formal judgment on a disputed matter.

Bills Receivable

A document that a customer formally agrees to pay in the future.

Realization Account

Prepared for closing the books of accounts of the dissolved firm.