What is Dissolution?

Dissolution means the partnership firm stops operating, all assets are sold, liabilities are paid, and the remaining balance is distributed to partners. It is important to distinguish between:

• Dissolution of a partnership: The business relationship ends but the business may continue with new partners
• Dissolution of a partnership firm: The business closes completely; all assets are realised and liabilities settled

Forms of Dissolution

When dissolving a partnership firm, follow these steps:

Step-by-Step Procedure

1. Transfer assets to Realisation Account: Transfer all assets (except cash and bank) at book values to the debit side of the Realisation Account.

2. Record assets sold: When assets are sold for cash, debit Bank Account and credit Realisation Account.

3. Record assets taken by partners: If a partner takes over an asset, debit that partner's Capital Account and credit Realisation Account.

4. Record dissolution expenses: Debit Realisation Account and credit Bank Account for expenses paid.

5. Pay external liabilities: Debit the liability account and credit Bank Account.

6. Transfer profit or loss on realisation: The balance on the Realisation Account represents profit or loss. Transfer to partners' capital accounts in their profit-sharing ratio.

7. Transfer accumulated reserves: Transfer any reserves or profits to partners' capital accounts in profit-sharing ratio.

8. Settle partners' capital accounts: Pay any credit balances to partners or collect any debit balances from partners.

Key Accounting Entries

Example: A, B and C were partners sharing profits and losses in the ratio 5:3:2. They decided to dissolve the firm on 31 December 2023. The statement of financial position was as follows:

Additional information:

• C took plant and machinery at TZS 450,000 (cost TZS 400,000); remaining plant realised TZS 500,000
• B took motor vehicles at TZS 550,000
• Receivables: bad debts TZS 10,000; rest realised with 10% discount
• A took inventory costing TZS 40,000 at TZS 50,000; rest sold at 20% above book value
• Payables: TZS 25,000 untraceable; others paid with 15% discount
• Furniture realised nothing
• Dissolution expenses: TZS 100,000

Solution

Realisation Account

Workings:

• Receivables realised: (355,000 - 10,000) × 90% = TZS 310,500
• Inventory sold: (150,000 - 40,000) × 120% = TZS 132,000
• Payables paid: (300,000 - 25,000) × 85% = TZS 233,750
• Discount received: TZS 300,000 - 25,000 - 233,750 = TZS 41,250

When a partner is insolvent (has a debit balance in their capital account) during dissolution, the Garner versus Murray rule applies:

• The insolvent partner cannot pay the deficiency
• The solvent partners must share the deficiency in the ratio of their last agreed capital balances
• This amount is debited to solvent partners' capital accounts

Example: If partners A, B and C have capital balances of TZS 21,900,000, TZS 14,600,000 and TZS 3,500,000 respectively, and C can only contribute TZS 3,200,000 (deficiency of TZS 1,800,000), the deficiency is shared between A and B in ratio 21.9:14.6.

What is Amalgamation?

Amalgamation occurs when two or more partnership firms combine to form a new partnership firm. The old firms are liquidated, and a new firm takes over their assets and liabilities.

Objectives of Amalgamation

• Eliminate wasteful competition among firms in the same industry
• Reduce unnecessary expenses
• Pool financial and physical resources
• Achieve maximum efficiency and economy in administration

Accounting Entries for Amalgamation

Example: Mariam and Neema (profit-sharing 1:1) decided to amalgamate with Queen and Jamal (profit-sharing 3:2) to form MNQJ Supplies on 1 January 2025.

Mariam and Neema's position:

• Plant and machinery: TZS 2,000,000
• Furniture: TZS 1,000,000
• Stock: TZS 2,000,000
• Debtors: TZS 2,000,000
• Cash: TZS 1,000,000
• Creditors: TZS 3,000,000
• Mariam's capital: TZS 3,000,000
• Neema's capital: TZS 2,000,000

Revaluation agreed:

• Plant and machinery: TZS 1,600,000
• Stock: TZS 1,800,000
• Debtors: TZS 1,680,000
• Goodwill: TZS 1,200,000

Solution

Journal Entries in Mariam and Neema's books

The new firm's statement of financial position combines all assets and liabilities at revalued amounts, with partners' capitals brought forward according to the new profit-sharing ratio (3:3:2:2).

In Tanzania, many small businesses operate as partnerships, such as shops in Kariakoo, transport companies with multiple owners, or farming collectives. When partners disagree or one partner wants to leave, dissolution accounting ensures fair settlement. Similarly, when two wholesale businesses decide to merge and form a larger company to compete better in markets like Arusha or Mwanza, amalgamation accounting helps properly combine their assets, liabilities, and capital to create the new firm's books accurately.