Dissolution of Partnership vs Dissolution of Firm: Key Accounting Differences
In accounting, 'Dissolution of Partnership' and 'Dissolution of Firm' sound similar, but they represent entirely different events for the business.
head-to-Head Comparison
| Basis | Dissolution of Partnership | Dissolution of Firm |
|---|---|---|
| Business Continuation | The business continues. Only the relationship among partners changes (e.g., admission, retirement). | The business comes to an end. All operations are permanently closed. |
| Books of Accounts | Books of accounts are not closed. Revaluation account is prepared. | Books of accounts are closed. Realization account is prepared. |
| Assets & Liabilities | Assets and liabilities are revalued and restated in the new balance sheet. | Assets are sold and liabilities are paid off. Remaining cash is paid to partners. |
| Court Intervention | Never requires court intervention. | May be dissolved by court order under Section 44 of the Act. |
The 'Revaluation vs Realization' Trap
In **Dissolution of Partnership**, we use a **Revaluation A/c** to adjust asset values because the business continues. In **Dissolution of Firm**, we use a **Realization A/c** to sell assets and pay off debts because the business is shutting down.
Common Ground (Similarities)
- Both involve a change in the original partnership agreement/constitution.
- Both require profit and loss calculations up to the date of dissolution.
Test Your Understanding
Q1: In which case is a Realization Account prepared?
Admission of a partner
Retirement of a partner
Dissolution of the firm ✅
Death of a partner
Explanation: A Realization Account is prepared to close books of accounts when the entire firm is dissolved.