Financial Accounting Unit 9/12

Partnership

The relation between two or more persons who have agreed to share the profits from a business carried by either all of them or any of them on behalf of/acting for all as defined in The Indian Partnership Act 1932.

Private Limited Company

A company that is privately held for small businesses where the liability of the members is limited to the number of shares held and shares cannot be publicly traded.

Purchase Consideration

Consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of the vendor company.

Lump-sum Method

Method of calculating purchase consideration where a lump sum is paid as per the valuation of the purchasing company.

Net Assets Method

Method of calculating purchase consideration by subtracting the agreed value of liabilities taken over from the agreed value of assets taken over.

Net Payment Method

Method of calculating purchase consideration by aggregating total payments made by the purchasing company, such as cash and shares.

Realization Account

An accounting record used to capture the profit or loss on the sale of assets and settlement of liabilities during the conversion of a partnership to a company.

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.

Dissolution of Partnership

The end of a partnership agreement due to reasons like admission, retirement, death, or insolvency of a partner.

Dissolution of a Firm

The dissolution of the partnership between all the partners, ending the firm's existence and halting business transactions, except for closing activities.

Agreement for Dissolution

Dissolution of a partnership firm with the consent of all partners or in line with a pre-existing contract.

Compulsory Dissolution

Mandatory dissolution of a firm under circumstances such as partner insolvency or the firm's business becoming illegal.

Dissolution by Notice

Dissolution of a partnership at will when a partner gives written notice to dissolve the partnership.

Court-ordered Dissolution

Dissolution of a firm ordered by the court due to reasons such as a partner's mental illness, misconduct, or transfer of interest to a third party.

Equitable Lien

A partner's right to have the firm's property used to pay outside debts and distribute the surplus among partners.

Realisation Account

An account used to record the conversion of assets into cash and settlement of liabilities during dissolution, showing profit or loss on realization.

Partners' Capital Account

An account reflecting each partner's capital balance, reserves, accumulated profits/losses, and realization profit/loss.

Partners' Current Account

An account used when the fixed capital method is in place, showing debit or credit balances, which are eventually transferred to the Partners' Capital Account.

Partners' Loan Account

An account where a partner's loan is recorded and paid off separately after settling debts to external parties.

Cash/Bank Account

Account opened to track cash and bank transactions of partnership firm during dissolution; must equal the amount due to the partners.

Simple Dissolution

Dissolution of a partnership firm when all partners are solvent and decide to dissolve the firm for any reason.

Dissolution of Partnership

May or may not involve dissolution of firm.

Dissolution of Firm

Involves dissolution of Partnership too.

Reconstitution of Partnership

Occurs when a partner dies, leading to adjustments such as distribution of accumulated profits, revaluation of assets/liabilities, and determination of new profit-sharing ratios.

Adjustments on Death of a Partner

Include distribution of accumulated profits/losses, revaluation of assets/liabilities, determining new profit-sharing ratio, goodwill adjustment, current year's profit/loss adjustment, and settling the amount due to the deceased partner.

Legal Representatives

Entitled to the deceased partner's capital account balance, interest on capital, share of goodwill, profit/reserve share, profit share from revaluation, profit shares up to death date, and Joint Life Insurance Policy participation.

Time Basis (Profit Calculation)

Assumes profit is earned consistently throughout the year; profit for the period until death is calculated proportionally based on the previous year's profit.

Turnover or Sales Basis (Profit Calculation)

Calculates profit up to the date of death based on the previous year's earnings and total sales, assuming profit is earned at the same rate.

Expulsion of a Partner

Refers to exclusion of partner from the firm mutually by consent of the partners due to reasons of welfare of the firm, poor conduct of the partner etc.

Outgoing Partner

A partner who ceases to be associated with the firm due to retirement, death, or expulsion.

Section 32

Of the Indian Partnership Act deals with the retirement of a partner. It states that a partner may retire if the following conditions are met: With the permission of all other partners; With the partners' express permission; If it's a willful partnership, then by notifying all of the other partners that you're retiring.

Section 33

Of the Indian Partnership Act governs the removal/expulsion of a partner, requiring it to be in the partnership's best interests, with notice given, and a chance for the partner to be heard.

Section 37

Of the Indian Partnership Act deals with an outgoing partner's entitlement to share future profits in certain circumstances.

Amalgamation of Partnership Firms

The merger or combination of two or more business units carrying on the same type of business to form a new business unit. Also known as a new partnership.

Objectives of Amalgamation

To eliminate competition, reduce expenses, increase capital position, and leverage diverse expertise.

Realization Method

A method used to calculate the purchase price of an organization, where all assets and all liabilities are transferred to Realization A/c at book value.

Revaluation

A change in the value of an asset or stock, recorded in a Revaluation or Profit & Loss Adjustment A/c during the revaluation method.

Insolvency

A situation where a debtor cannot pay their debts.