3 - Partnership Dissolution

Partnership
3 Dissolution
Circumstances may not always go according to the original
plan of the partners. Situations such as admission of a new partner,
withdrawal, death or incapacity of a partner or incorporating the
partnership may be encountered, resulting to a dissolution of the
partnership.
A new partnership may be formed or a total liquidation of the
partnership may happen. It depends upon the agreement of the
partners whom mutual consent is expected.

LEARNING OUTCOMES:
After reading this module, the learner should be able to:
1. Identify the causes of partnership dissolutions

2. Account for the effects of partnership dissolution on the partnership equity.
TIME:
The time allotted for this module is 4.5hours.
LEARNER DESCRIPTION
The participants in this module are Third Year BSA Students
MODULE CONTENTS:
DISSOLUTION
- It is the termination of the legal life of the partnership.
- termination of the original relationship among partners
Causes of dissolution:
o Admission of a new partner/s
o Withdrawal/retirement of a partner
o Death or incapacity of a partner
o Incorporating a partnership
Revaluation of Assets and recognition of net income or loss are necessary prior
partnership dissolution
TYPES OF ADMISSION
1. Admission of a partner by purchase of interest
• A personal transaction between the selling and the buying partner

• Any gain or loss incurred, is considered as personal gain or loss of the selling
partner.
• Interest of a partner can be sold at book value, more than book value or less
than book value of interest sold.
• No increase in the total partners’ equity (transfer of capital from the selling to
the buying partner).
Proforma Entry:
Selling Partner’s Capital xx
Buying Partner’s Capital xx
To record admission of a partner
2. Admission by Investment
a. It is a transaction between the partnership and the incoming partner.

b. It involves the investment of assets by new partner into the partnership.
c. Total assets and total partners’ equity will increase.
d. Record the admission of the new partner based on the following
procedures:
✓ Record the investment (contributed capital) of the new partner.
✓ Determine the agreed capital of the new partner. This is computed
as follows:
Total Agreed Capital of the Firm x % of Interest of New Partner
✓ Compare the contributed capital and the agreed capital of the new
partner. Record bonus, if there is any.
Journal Entry – Partner’s Investment

A new partner invested cash and non-cash assets in the partnership
Proforma entry:
Cash xx
Non-cash assets xx
New Partner’s Capital xx
To record investment
BONUSES AND CONDITIONS

When bonus is allowed either to the new or old partners
a. If the capital credit of the new partner is greater than his contribution, bonus
is allowed to the new partner.
Proforma entry
Cash xx
Non-cash assets xx
Old Partners’ Capital xx
To record investment and bonus
b. If the capital credit of the old partners is greater than their contributions,
bonus is allowed to the old partners.
Cash xx
Non-cash assets xx
To record investment.

Old Partners’ Capital xx
To record bonus to old partners.
WITHDRAWAL OF PARTNERS
There is a need to update the capital balances of the partners by determining profit
share of each partner from the last balance sheet date to dissolution date.
When a partner retires or withdraws from the partnership, the partnership is

dissolved, but the remaining partners may continue operating the business.
1. The equity of the withdrawing/retiring partner may increase or decrease through
the following:
- withdrawal
- share in income or loss
- changes in valuation of all assets and liabilities
2. Interest or Equity of the withdrawing/retiring partner can be sold to:
a. existing partners
b. outsiders
c. partnership
3. The retiring/withdrawing partner may receive a settlement:
a. equal to his equity
b. more than his equity
c. less than his equity
INCORPORATION OF A PARTNERSHIP
Reasons for incorporating a partnership:
1. Limited liability of shareholders – shareholders are not liable to corporate creditors
beyond their investment in the corporation
2. Ease of raising additional capital – greater capital can be raised from an increased
number of owners. Also, it is easier for a corporation to generate external financing,
as lenders need not worry about the death of the partners.
3. Privacy and confidentiality – unlike in partnerships, the owners of a corporation are
not agents of the corporation.
4. Dispersion of risk – the risk of loss is dispersed to more owners
5. Unlimited life – changes in the relationship of the owners of a corporation do not
dissolve the corporation.
6. Transferability of ownership – transferring an ownership in a corporation is made
simply by selling one’s shares of stocks.
7. Better public relations – many believe that wider ownership of business results to
better public relations.
On the date of incorporation:
a. The partner’s capital balances are adjusted for their respective shares in any profit
or loss and revaluation gains or losses as at the date of incorporation. The adjusted
capital balances may be used in determining the number of shares to be issued to
each partner.
b. Normally, the books of the partnership are closed and the books are established
for the corporation.
ONLINE READING MATERIALS:
• Read notes and examples at

https://www.accountingnotes.net/partnership/dissolution/accounting-for-
partnership-dissolution-accounting/16196
• Read Chapter 19 of Advanced Accounting Book by Sir Antonio Dayag
ONLINE VIDEO LINKS AND MATERIALS:
• Watch the online video lecture of the course instructor uploaded at NEO LMS
and to the class shared Google drive (if applicable).
• For supplemental lessons, watch the online video of Cum Laude CPA Accounting
Tutorial at https://www.youtube.com/watch?v=Bb4pByWPpbM
TEST YOUR KNOWLEDGE:

Refer to Ubian LMS for activity and quiz
LESSON REFERENCES:
Chadhary, S. Accounting for Partnership Dissolution. Accounting Notes. Retrieved from:

https://www.accountingnotes.net/partnership/dissolution/accounting-for-
partnership-dissolution-accounting/16196
Cum Laude CPA Accounting Tutorial (2020, March 19) Partnership Dissolution Part 1.
Retrieved from: https://www.youtube.com/watch?v=Bb4pByWPpbM
Dayag, Antonio J. (2020) Advanced Financial Accounting (A Comprehensive: Conceptual
& Procedural Approach) Good Dreams Publishing. Sampaloc, Manila
Filipino Accounting Tutorial (2019, July 7) Partnership Operations: Division of Profits and
Losses. Retrieved from: https://www.youtube.com/watch?v=8FZpNqfMrsw
Millan, Zeus Vernon B. (2020). Accounting for Special Transactions. CHAPTER 8:
Separate Financial Statements. Bandolin Enterprise. #21 Paramount Vill., Sto.
Tomas, Baguio City

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Partnership

plan of the partners. Situations such as admission of a new partner,

withdrawal, death or incapacity of a partner or incorporating the

partnership may be encountered, resulting to a dissolution of the

A new partnership may be formed or a total liquidation of the

partnership may happen. It depends upon the agreement of the

partners whom mutual consent is expected.

After reading this module, the learner should be able to:

1. Identify the causes of partnership dissolutions

The time allotted for this module is 4.5hours.

The participants in this module are Third Year BSA Students

• A personal transaction between the selling and the buying partner

a. It is a transaction between the partnership and the incoming partner.

Journal Entry – Partner’s Investment

BONUSES AND CONDITIONS

New Partner’s Capital xx

When a partner retires or withdraws from the partnership, the partnership is

ONLINE READING MATERIALS:

• Read notes and examples at

ONLINE VIDEO LINKS AND MATERIALS:

TEST YOUR KNOWLEDGE:

Chadhary, S. Accounting for Partnership Dissolution. Accounting Notes. Retrieved from:

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