Last reviewed: July 2026.
Partnership dissolution ends the existing partnership and converts assets into cash, settles liabilities and distributes the remaining amount among partners. The realisation account is the central educational working used to calculate profit or loss on disposal and settlement.
Legal priority and insolvency rules vary by jurisdiction, so the partnership agreement and applicable law must be reviewed.
Dissolution sequence
| Step | Action | Main account |
|---|---|---|
| 1 | Transfer non-cash assets | Realisation account debited |
| 2 | Transfer external liabilities | Realisation account credited |
| 3 | Record asset disposal proceeds | Cash debited; realisation credited |
| 4 | Record liabilities paid and dissolution expenses | Realisation debited; cash credited |
| 5 | Allocate realisation profit or loss | Partners' capital accounts |
| 6 | Settle partner loans and capital balances | Cash and partner accounts |
Transfer of assets
Transfer non-cash assets to realisation at their carrying amounts:
- Debit realisation
- Credit individual asset accounts
Cash and bank normally remain outside the realisation account because they are used for settlement.
Transfer of liabilities
Transfer external liabilities assumed for settlement:
- Debit liability accounts
- Credit realisation
Partner loans are usually kept separate and settled according to priority.
Sale of assets
When an asset is sold for cash:
- Debit cash
- Credit realisation
The difference between carrying amount transferred and disposal proceeds contributes to realisation profit or loss.
Asset taken over by a partner
If a partner takes an asset at an agreed value:
- Debit the partner's capital account
- Credit realisation
No cash is recorded unless the partner separately pays cash.
Liability taken over by a partner
When a partner accepts responsibility for a liability at an agreed amount:
- Debit realisation
- Credit the partner's capital account
The agreement and creditor release should be documented.
Dissolution expenses
Legal fees, auction costs and other direct dissolution expenses are debited to realisation when paid by the partnership.
If a partner personally bears an agreed expense without reimbursement, account for the arrangement according to the agreement and evidence.
Realisation profit or loss
Balance the realisation account. A credit balance is profit; a debit balance is loss. Allocate it to partners using the profit-sharing ratio unless the agreement requires another basis.
Worked example
A and B share profits 3:2. Assets with carrying amount 300,000 CU are sold for 260,000 CU. Liabilities of 80,000 CU are settled for 75,000 CU. Dissolution expenses are 10,000 CU.
Realisation result is:
260,000 + 80,000 − 300,000 − 75,000 − 10,000 = 45,000 CU loss
- A loss share: 27,000 CU
- B loss share: 18,000 CU
Partner loans
Partner loans are liabilities separate from capital. They are generally settled after external creditors and before capital distribution, subject to law and agreements.
See the partner loan accounting guide.
Capital account settlement
After realisation profit or loss, reserves, drawings and other adjustments are posted, partner capital balances show amounts payable to or due from each partner.
Credit balances are paid when cash is available. Debit balances require partner contributions unless insolvency rules change the allocation.
Insolvent partner
An insolvent partner may be unable to settle a debit capital balance. The deficiency treatment depends on the agreement and applicable law.
Do not apply an examination convention automatically to a real legal case.
Piecement distribution
When assets are realised gradually, cash may be distributed in stages. Use a safe-payment method so no partner receives more than the amount that would be due under a worst-case assumption for remaining assets.
Pre-dissolution adjustments
Before transferring balances, update depreciation, inventory values, accruals, provisions and partner appropriations to the dissolution date. Otherwise the realisation result may include ordinary operating errors.
Review the capital and current accounts guide.
Reserves and undistributed profits
Transfer general reserves and undistributed profits to partners' capital accounts in the agreed profit-sharing ratio before final settlement.
Goodwill on dissolution
Goodwill may be sold with the business, realised separately or have no value. Transfer its carrying amount to realisation if it is recorded as an asset.
Unrecorded goodwill is reflected through proceeds rather than creating an artificial asset immediately before closure.
Final cash account
After all receipts and payments, the cash account should close to zero. Final payments to partners should equal their remaining credit capital balances.
Dissolution controls
- obtain partner approval of asset values and settlements;
- confirm creditor balances and releases;
- maintain a realisation schedule by asset and liability;
- separate partner loans from capital;
- retain legal and tax advice;
- reconcile final cash to partner payments.
Connection to partnership goodwill
If goodwill was previously recognised, its carrying amount enters realisation. If goodwill is sold but not recorded, the proceeds still increase the realisation result.
See the partnership goodwill guide.
Tax and legal closure
Dissolution may trigger tax filings, employee settlements, contract termination, licence cancellation and creditor notices. These obligations should be identified before distributing final cash.
Common mistakes
- transferring cash into realisation;
- transferring partner loans with external liabilities;
- recording assets taken over as cash sales;
- allocating realisation result using capital ratios;
- paying capital before external liabilities;
- ignoring insolvency and legal priority;
- failing to close final cash and capital accounts.
Key takeaway
Dissolution converts the partnership into a settlement process. Use the realisation account, respect creditor and loan priorities and distribute only verified remaining capital.
Official learning references: ACCA accounting for partnerships, ACCA partnership accounts, and ACCA pooling resources.