The NCERT Notes Class 12 Accountancy Chapter 4 Dissolution of Partnership Firm condense the closing chapter of the Partnership Accounts cluster into a compact 18-page revision file, anchored on the Realisation Account framework and the Section 48 order of payment under the Indian Partnership Act, 1932. The notes are aligned to the 2026-27 NCERT Reprint and built for the typical 6 to 8 mark Long Answer that surfaces in every CBSE Board paper.
- CBSE Weightage: 6 to 8 marks (Part A, Partnership Accounts unit)
- Notes Length: 18-page revision PDF with one full solved dissolution problem and the Garner versus Murray application
The notes cover the distinction between dissolution of partnership and dissolution of firm, all five modes of dissolution under Sections 39 to 44, the Realisation Account format with its eight standard journal entries, treatment of unrecorded assets and liabilities, accounting for realisation expenses across four scenarios, partner’s loan handling, the Section 48 settlement order, firm debts versus partner’s private debts under Section 49, and the deficiency rule from Garner versus Murray (trimmed in the current CBSE prescription).
These Notes are reviewed by Chartered Accountants and senior Commerce educators, mapped to the 2026-27 NCERT Accountancy Part A textbook, and cross-checked against the last five years of CBSE Class 12 Board papers.
Also Check:
- Dissolution of Partnership Firm Class 12 NCERT Solutions
- Retirement of a Partner Class 12 Accountancy Notes
- CBSE Class 12 Accountancy Syllabus 2026-27
NCERT Notes Class 12 Accountancy Chapter 4 Dissolution of Partnership Firm: Section Map
The revision file is organised around ten focused blocks so a student can walk top-to-bottom and finish a clean revision in roughly 100 minutes. The Exam Yield column reflects how the same idea has appeared in CBSE Board papers from 2021 to 2025.
| Block | What It Covers | Exam Yield |
|---|---|---|
| 1. Dissolution: Partnership vs Firm | Five axes of difference including books, court relief and continuity | 3 to 4 marks theory |
| 2. Modes of Dissolution | Sections 39 to 44, five recognised modes | 3 marks theory |
| 3. The Realisation Account | Format plus eight standard journal entries | Core 4-mark machinery |
| 4. Unrecorded Items | Four-case treatment for hidden assets and liabilities | 2 to 3 marks |
| 5. Realisation Expenses | Four cases by who paid and who bore | 3 to 4 marks |
| 6. Partner’s Loan | Asset side handling versus liability side handling | 2 marks |
| 7. Section 48 Settlement Order | External, then Loans, then Capital, then Surplus | 3 marks theory |
| 8. Section 49: Firm Debts vs Private Debts | Two separate pools with surplus rule | 2 to 3 marks |
| 9. Deficiency of Capital (Garner vs Murray) | Insolvent partner; current CBSE-trimmed form | 3 to 4 marks |
| 10. Full Dissolution Solved Example | End-to-end nine-step protocol | 6 marks |
Class 12 Accountancy Chapter 4 Dissolution Of Partnership Firm Notes
Source: Rajat Arora on YouTube
Dissolution of Partnership versus Dissolution of Firm
This distinction is the single most repeated theory question in Class 12 Accountancy. A change in the partnership relationship does not necessarily end the firm; dissolution of the firm ends business itself.
| Basis | Dissolution of Partnership | Dissolution of Firm |
|---|---|---|
| Continuity of business | Business continues with a reconstituted firm | Business ends; books are closed |
| Closure of books | Books are not closed; only reconstituted | All books are closed permanently |
| Settlement of accounts | Not required | Required under Section 48 |
| Court intervention | Not applicable | May be ordered by the court under Section 44 |
| Economic relationship | Only the contract among partners changes | Economic relationship between firm and outsiders ends |
Every dissolution of firm necessarily ends the partnership, but the reverse is not true.
Modes of Dissolution under the Indian Partnership Act, 1932
- Section 40, By Agreement: with consent of all partners.
- Section 41, Compulsory Dissolution: insolvency of all but one, or business becoming unlawful.
- Section 42, On Contingencies: expiry of term, completion of venture, death, or insolvency of a partner.
- Section 43, By Notice: in a partnership at will, by written notice.
- Section 44, By Court Order: insanity, permanent incapacity, misconduct, persistent breach, transfer of interest, or business running at a loss.
The Realisation Account: Format and the Eight Standard Entries
The Realisation Account is the central ledger of dissolution. All assets (except cash, bank, fictitious assets and partner-related balances) are closed to its debit side, and all outside liabilities (except partner-related items) are closed to its credit side. The balancing figure is the profit or loss on realisation, distributed in the current profit-sharing ratio.
- Transfer of assets at book value to Dr. side of Realisation A/c.
- Transfer of external liabilities at book value to Cr. side of Realisation A/c.
- Sale of assets: Bank A/c Dr. to Realisation A/c.
- Payment of liabilities: Realisation A/c Dr. to Bank A/c.
- Asset taken over by a partner: Partner’s Capital A/c Dr. to Realisation A/c.
- Liability assumed by a partner: Realisation A/c Dr. to Partner’s Capital A/c.
- Realisation expenses paid by firm: Realisation A/c Dr. to Bank A/c.
- Profit or loss on realisation: distributed in current PSR through Partners’ Capital A/cs.
Cash, bank and fictitious balances (such as a debit balance of Profit & Loss A/c) are never transferred to Realisation A/c. Fictitious balances move directly to Partners’ Capital A/cs in PSR. Routing the Cash A/c through Realisation A/c is the most common single-mark slip in board scripts.
Unrecorded Assets and Unrecorded Liabilities
An unrecorded item does not appear on the Balance Sheet but surfaces during winding up. The four standard cases are:
- Unrecorded asset sold for cash: Bank A/c Dr. to Realisation A/c.
- Unrecorded asset taken by a partner: Partner’s Capital A/c Dr. to Realisation A/c.
- Unrecorded liability paid in cash: Realisation A/c Dr. to Bank A/c.
- Unrecorded liability assumed by a partner: Realisation A/c Dr. to Partner’s Capital A/c.
No transfer entry is passed for an unrecorded item because there is no opening book value to close out. The realisation gain or loss flows directly through the Realisation A/c.
Realisation Expenses: Four Scenarios
| Case | Who Paid | Who Bore | Treatment |
|---|---|---|---|
| 1 | Firm | Firm | Realisation A/c Dr. to Bank A/c |
| 2 | Firm | Partner | Partner’s Capital A/c Dr. to Bank A/c |
| 3 | Partner | Firm | Realisation A/c Dr. to Partner’s Capital A/c |
| 4 | Partner | Partner | No entry in firm’s books |
If a partner is appointed for a fixed remuneration to wind up the business, debit Realisation A/c with the agreed sum and credit that Partner’s Capital A/c. Actual expenses paid by the firm thereafter belong to the partner, so they are debited to his Capital A/c.
Partner’s Loan: Asset Side and Liability Side
- Loan BY the partner to the firm (liability side): not transferred to Realisation A/c. Settled separately AFTER outside creditors but BEFORE Capital balances. Entry: Partner’s Loan A/c Dr. to Bank A/c.
- Loan BY the firm to a partner (asset side): not transferred to Realisation A/c either. Closed directly against that Partner’s Capital A/c. Entry: Partner’s Capital A/c Dr. to Loan to Partner A/c.
Section 48: The Settlement Order of Payment
Section 48 of the Indian Partnership Act, 1932 prescribes a strict order. Cash realised from the sale of assets, plus any deficiency contribution from partners, is applied in this sequence:
- Expenses of dissolution and outside (External) debts of the firm.
- Loans and advances given by partners to the firm.
- Capital balances due to partners.
- Any Surplus is distributed in the profit-sharing ratio.
A quick way to remember the sequence is the four-letter cue ELCS: External, Loans, Capital, Surplus. Writing the Bank A/c on the answer sheet strictly in this order earns the full presentation mark in Long Answer questions.
Section 49: Firm Debts versus Partner’s Private Debts
Section 49 deals with two parallel pools. Firm property is applied first to firm debts; any surplus is then available to partners as per their share. A partner’s private property is applied first to private debts; any surplus is then available to the firm for unsettled firm debts.
The two pools never mix until the respective primary obligations are fully met.
Deficiency of Capital: The Garner versus Murray Position
When a partner’s Capital A/c shows a debit balance at the end of dissolution and that partner is unable to pay (insolvency), a deficiency arises. The current CBSE prescription has trimmed the historical Garner versus Murray treatment; students are expected to recognise that the deficiency is borne by the solvent partners, and the standard approach now followed in CBSE marking is to share the deficiency in the profit-sharing ratio unless the question explicitly states otherwise.
The three classical Garner versus Murray conditions are still examinable as theory:
- The partnership deed must be silent on insolvency.
- Solvent partners must maintain capitals on a fluctuating basis.
- The insolvent partner must have a debit balance after closing all his accounts.
How Collegedunia’s Notes Help You Score the Full 6 to 8 Marks
- The Realisation Account is presented as a fixed eight-entry sequence, so a blank answer sheet never feels intimidating.
- The Section 48 ELCS order is reinforced inside the Bank A/c walkthrough, removing the most common ordering error.
- The four-case unrecorded-item table can be memorised in under two minutes and answers two of the standard 2-mark variants.
- The Garner versus Murray treatment is summarised in the form the current CBSE marking scheme actually expects, with the older textbook treatment flagged for reference.
- The end-to-end solved example follows a nine-step protocol that a student can replicate on any 6-mark dissolution question in 10 to 12 minutes.
Common Mistakes in Dissolution of Partnership Firm
- Transferring Cash or Bank balance to the Realisation A/c.
- Routing a partner’s loan through Realisation A/c instead of using a separate Partner’s Loan A/c.
- Splitting the realisation profit or loss in the old admission or retirement ratio rather than the current PSR.
- Forgetting to record unrecorded assets and liabilities surfaced in the adjustments.
- Treating a creditor accepting an asset worth more than the amount owed as a loss instead of a gain.
- Ignoring fictitious balances (such as a Dr. balance of P&L A/c) at the start of the working.
Related Resources
NCERT Notes for Class 12 Accountancy: All Chapters
The complete chapterwise Notes index for Class 12 Accountancy Part A and Part B, all aligned to the 2026-27 NCERT.
| Chapter | NCERT Notes Link |
|---|---|
| Chapter 1 | Accounting for Partnership: Basic Concepts Notes |
| Chapter 2 | Admission of a Partner Notes |
| Chapter 3 | Retirement / Death of a Partner Notes |
| Chapter 5 | Accounting for Share Capital Notes |
| Chapter 6 | Issue and Redemption of Debentures Notes |
FAQs on Class 12 Accountancy Chapter 4 Dissolution of Partnership Firm Notes
Frequently Asked Questions
Ques. What is the difference between dissolution of partnership and dissolution of firm?
Ans.
Dissolution of partnership is a change in the relationship among partners (admission, retirement, death) where the firm continues business with a reconstituted set of partners. Dissolution of firm closes the business itself, settles all accounts under Section 48, and closes the books permanently. Every dissolution of firm involves dissolution of partnership, but not the reverse.
Ques. Why are Cash and Bank not transferred to Realisation A/c?
Ans.
Cash and Bank are the media through which realisation transactions flow. Sale of assets brings cash in; payment of liabilities and expenses takes cash out. If Cash or Bank were closed to Realisation A/c at the start, there would be no live cash account to record those flows. They remain open throughout dissolution and close only when the final Capital balances are paid off.
Ques. What is the Section 48 order of payment?
Ans.
Section 48 of the Indian Partnership Act, 1932 fixes the order as: first pay outside (External) debts and dissolution expenses, then repay partners’ loans and advances, then settle Capital balances, and finally distribute any Surplus in the profit-sharing ratio. The cue ELCS captures the sequence.
Ques. How is the deficiency of an insolvent partner’s capital treated in the current CBSE syllabus?
Ans.
The classical Garner versus Murray rule (deficiency borne by solvent partners in their capital ratio) has been trimmed in the current CBSE prescription. The deficiency is now borne by the solvent partners in the profit-sharing ratio unless the question states otherwise. The three classical conditions of Garner versus Murray remain examinable as a 2 to 3 mark theory question.
Ques. How is a partner’s loan to the firm settled on dissolution?
Ans.
A partner’s loan to the firm is not transferred to Realisation A/c. It is settled through a separate Partner’s Loan A/c after all outside creditors have been paid but before any Capital balance is returned. Entry: Partner’s Loan A/c Dr. to Bank A/c.
Ques. What are unrecorded assets and liabilities, and how are they treated?
Ans.
Unrecorded items do not appear on the Balance Sheet but surface during winding up. Sale of an unrecorded asset is credited to Realisation A/c. Payment of an unrecorded liability is debited to Realisation A/c. If a partner takes the asset or assumes the liability, the corresponding entry routes through that Partner’s Capital A/c. No opening transfer entry is required because the book value is zero.
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