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Wednesday, September 8, 2010

Accounting for Closing Partnership Books on Dissolution

Apart from special circumstances, the following outline of the steps necessary to close the books of a partnership when the assets are sold en bloc, may be found useful:
  1. Open a realization account, and debit there to the book value of the assets, crediting the various asset accounts. The realization account will also be debited with any expenses of realization, and cash credited.
  2. Debit cash and credit realization account with the amount realized on the sale of assets.
  3. Pay off the liabilities, crediting cash and debiting sundry creditors. Any discount allowed by creditors on discharging liabilities should be debited to the creditors’ accounts and credited to realization account.
  4. The balance of the realization account will be the amount of the profit or loss on realization, which will be divided between the partners in the proportion in which they share profits and losses and transferred to their capital accounts.
  5. Pay off partners’ advances as distinct from capital, first setting off any debit balance on the capital account of a partner against his loan account.
  6. The balance on the cash book will now be exactly equal to the balances on the capital accounts, provided they are in credit; credit cash and debit the partners’ capital accounts with the amounts paid to them to close their accounts.

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