Content Standard 13.4

Dissolution of a Partnership

Pembubaran Perkongsian

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Explanation

Dissolution of a partnership is the formal process of ending a partnership business when it will no longer be carried on. This standard requires students to identify the reasons for dissolution, understand the procedure of dissolution, record the dissolution transactions in the General Journal (Jurnal Am), and prepare the Realisation Account (Akaun Realisasi), the Bank Account (Akaun Bank) and the partners' Capital Accounts (Akaun Modal pekongsi) until each partner's final balance is settled. Common reasons for dissolution include mutual agreement among all partners to close the business, expiry of the partnership agreement term, the death or bankruptcy of a partner, continuous losses that make the business no longer profitable, achievement of the partnership's objective, or a court order. Dissolution, which ends the entire business, must be distinguished from a change of partners (admission or retirement), which only reorganises the partnership.

The procedure of dissolution follows an orderly sequence. All assets (except cash and bank) are sold to raise cash; assets may also be taken over by a partner at an agreed value. Next, all external liabilities such as creditors and bank loans are settled. Dissolution expenses such as legal costs, sales commission and advertising fees are paid. If a partner has made a loan to the business, that loan is repaid before any capital is returned. Finally, the remaining cash is used to settle each partner's Capital Account balance according to their respective capital positions. This order of priority matters because partners only receive their balances after all outside parties have been paid.

All dissolution transactions are first recorded in the General Journal before being posted to the ledger. Key entries include the transfer of assets to the Realisation Account (Debit Realisation Account; Credit each asset at book value), the transfer of the Provision for Doubtful Debts (Debit Provision for Doubtful Debts; Credit Realisation Account), the receipt of proceeds from selling assets (Debit Bank; Credit Realisation Account), assets taken over by a partner (Debit Partner's Capital; Credit Realisation Account), dissolution expenses (Debit Realisation Account; Credit Bank), and settlement of creditors together with any discount received (Debit Creditors; Credit Bank and Credit Realisation Account). The profit or loss on realisation is also journalised before it is closed off to the Capital Accounts.

The Realisation Account is a temporary account opened specifically to determine the profit or loss from selling and settling all assets and liabilities. The book values of the assets are recorded on the debit side, while the actual proceeds from selling assets, the provision for doubtful debts and discounts received are recorded on the credit side. If the credit side exceeds the debit side, there is a profit on realisation; if the debit side is larger, there is a loss on realisation. A profit on realisation is credited to the partners' Capital Accounts in the profit-sharing ratio (Debit Realisation Account; Credit Partners' Capital), while a loss on realisation is debited to the partners' Capital Accounts (Debit Partners' Capital; Credit Realisation Account).

The Bank Account gathers all cash receipts and payments throughout the dissolution. The debit side shows the opening bank balance and the proceeds from selling assets, while the credit side shows dissolution expenses, payments to creditors, repayment of partners' loans and the payment of final capital balances to partners. Each partner's Capital Account is adjusted for their share of the realisation profit or loss, any assets taken over and transfers from the current account, and its final balance is settled through the bank. When the procedure is complete, all accounts must balance: the Bank Account will show a nil balance and each partner's Capital Account is closed, showing that the partnership has been fully dissolved.

Worked examples

Background of Maju Jaya Partnership

Aiman and Balqis share profits and losses in the ratio 3:2. On 31 December 2025 they agreed to dissolve the business. The Statement of Financial Position showed: Premises RM40,000, Fittings RM10,000, Inventory RM8,000, Debtors RM6,000, Provision for Doubtful Debts RM300, Bank RM2,000, Creditors RM5,700, Aiman's Capital RM36,000 and Balqis's Capital RM24,000.

Dissolution details: Premises sold for RM45,000, Fittings sold for RM7,000, Inventory sold for RM6,500, and debtors paid only RM5,600 (RM400 bad debts). Dissolution expenses of RM500 were paid. Creditors were settled by paying RM5,500, with a discount received of RM200.

Key General Journal entries

Transfer assets to Realisation Account: Debit Realisation Account RM64,000; Credit Premises RM40,000, Credit Fittings RM10,000, Credit Inventory RM8,000, Credit Debtors RM6,000.

Transfer provision: Debit Provision for Doubtful Debts RM300; Credit Realisation Account RM300. Sale of assets: Debit Bank RM64,100; Credit Realisation Account RM64,100. Dissolution expenses: Debit Realisation Account RM500; Credit Bank RM500. Settle creditors: Debit Creditors RM5,700; Credit Bank RM5,500; Credit Realisation Account RM200.

Realisation, Bank and Capital Accounts

Realisation Account, Debit: assets RM64,000 + expenses RM500 = RM64,500. Credit: provision RM300 + sales RM64,100 + discount received RM200 = RM64,600. Profit on realisation = RM64,600 - RM64,500 = RM100, shared 3:2. Entry: Debit Realisation Account RM100; Credit Aiman's Capital RM60; Credit Balqis's Capital RM40.

Final Capital Accounts: Aiman RM36,000 + RM60 = RM36,060; Balqis RM24,000 + RM40 = RM24,040. Payment of capital: Debit Aiman's Capital RM36,060 and Debit Balqis's Capital RM24,040; Credit Bank RM60,100.

Bank Account, Debit: balance b/d RM2,000 + sale of assets RM64,100 = RM66,100. Credit: expenses RM500 + creditors RM5,500 + Aiman's Capital RM36,060 + Balqis's Capital RM24,040 = RM66,100. The Bank Account balances at RM66,100 with a nil closing balance, showing that the dissolution is complete.

Practice

State four reasons that could lead to the dissolution of a partnership.

Answer: Reasons for dissolving a partnership include: (1) mutual agreement among all partners to end the business; (2) expiry of the partnership agreement term; (3) the death or bankruptcy of a partner; and (4) the business suffering continuous losses so that it is no longer profitable. Other acceptable reasons include the partnership's objective having been achieved and a court order to dissolve the partnership.

Seri Wangi Partnership transferred its assets to the Realisation Account at book value: Vehicle RM30,000 and Inventory RM12,000. The vehicle was sold for RM26,000, the inventory was taken over by partner Cikgu Lim at RM10,000, and dissolution expenses of RM800 were paid. Show the double entries for these transactions.

Answer: Transfer assets: Debit Realisation Account RM42,000; Credit Vehicle RM30,000; Credit Inventory RM12,000. Sale of vehicle: Debit Bank RM26,000; Credit Realisation Account RM26,000. Inventory taken over by partner: Debit Cikgu Lim's Capital RM10,000; Credit Realisation Account RM10,000. Dissolution expenses: Debit Realisation Account RM800; Credit Bank RM800.

A Realisation Account has a total debit of RM55,000 (asset book value RM54,200 + expenses RM800) and a total credit of RM58,000. Partners Danish and Elyana share profits and losses 1:1. Calculate the profit/loss on realisation and show the closing entry.

Answer: Profit on realisation = total credit RM58,000 - total debit RM55,000 = RM3,000. Because the credit side exceeds the debit side, it is a profit. The profit is shared equally 1:1, that is RM1,500 each. Closing entry: Debit Realisation Account RM3,000; Credit Danish's Capital RM1,500; Credit Elyana's Capital RM1,500. This profit increases each partner's capital balance before the final payment is made through the bank.

After all dissolution transactions, the balance of Farid's Capital Account is RM28,000 and Ghani's Capital Account is RM15,000, and the Bank Account has a balance of RM43,000. Explain the final step, its double entry, and describe the state of the accounts afterwards.

Answer: The final step is to pay each partner's capital balance using the remaining cash at bank. Entry: Debit Farid's Capital RM28,000; Debit Ghani's Capital RM15,000; Credit Bank RM43,000. After this payment, both Capital Accounts are closed with a nil balance and the Bank Account also shows a nil balance (RM43,000 - RM43,000). This confirms that the partnership has been fully dissolved because no assets, liabilities or capital balances remain.

Exam tips

Key terms

Dissolution of a partnership (Pembubaran perkongsian): The formal process of ending a partnership business when it is no longer carried on.
Realisation Account (Akaun Realisasi): A temporary account opened to determine the profit or loss from selling and settling all assets and liabilities during dissolution.
Profit/loss on realisation (Untung/rugi realisasi): The difference between the book value of assets and the actual disposal proceeds, shared among partners in the profit-sharing ratio.
Dissolution expenses (Belanja pembubaran): Costs incurred to dissolve the business, such as legal fees and sales commission, debited to the Realisation Account.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 5

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