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Dissolution Defined: A Partnership Is Characterized by Limited Life. A Partnership Is Dissolved When A Partner Ceases

A partnership is dissolved when a partner ceases to be associated with carrying on the business. Dissolution does not necessarily terminate the business but requires a change in ownership. There are four causes of dissolution: acts of partners, mutual agreement, operation of law, and judicial decree. Reasons partners decide to dissolve include needing more capital, requiring special skills, or dissension among partners forcing someone to retire. When a partnership dissolves, a new partner may be admitted by buying an existing partner's equity or investing new assets. The death or withdrawal of a partner also dissolves the partnership and requires adjusting accounts to fair values. If a partnership incorporates, the books must be adjusted and closed to prepare a statement

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450 views2 pages

Dissolution Defined: A Partnership Is Characterized by Limited Life. A Partnership Is Dissolved When A Partner Ceases

A partnership is dissolved when a partner ceases to be associated with carrying on the business. Dissolution does not necessarily terminate the business but requires a change in ownership. There are four causes of dissolution: acts of partners, mutual agreement, operation of law, and judicial decree. Reasons partners decide to dissolve include needing more capital, requiring special skills, or dissension among partners forcing someone to retire. When a partnership dissolves, a new partner may be admitted by buying an existing partner's equity or investing new assets. The death or withdrawal of a partner also dissolves the partnership and requires adjusting accounts to fair values. If a partnership incorporates, the books must be adjusted and closed to prepare a statement

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Von Andrei Medina
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DISSOLUTION DEFINED- The New Civil Code defines dissolution as a change in the

relation of the partners ceasing to be associated in carrying on the business. It enumerates four
causes:

by the acts of the partners like when the purpose has already been accomplished
by mutual agreement or a decision to withdraw from the partnership
operation of law, such as when an event makes it illegal to continue operating, or a
partner becomes insolvent, or dies.
judicial decree, like insanity, commission of fraud, or internal dissension.

Dissolution does not necessarily terminate the basic business operation of the partnership
but requires only a change in  ownership.  In some instances, though, it may lead to the
termination or liquidation of the firm which is the subject of discussion in the next module. In
this module, with the change in the ownership structure of the partnership, the existing
partnership is dissolved and a new partnership is formed.
Reasons why partners decide to dissolve are the following:

a) More capital is needed or special skill is required may mean inviting new partners
b) Dissension among the partners may force a partner to retire
c) Expansion may require incorporating a partnership

   The accountant refers to the Articles of Co-Partnership for the agreement on how the
dissolution shall be implemented. If it is not provided in the articles, the terms and
conditions for the dissolution should be ascertained from the partners.

The following changes in ownership are discussed in this module:

a new partner is admitted by buying interest directly from a current partner.


a new partner is admitted by investing directly to the partnership
a partner retires whose interest is bought by an outsider, or a co-partner or the firm itself.
the partnership is incorporated.

For a comprehensive discussion of how these changes in ownership are accounted for,
please refer to Chapter 19, pages 1289 to 1338  of your textbook on Advanced Financial
Accounting and Reporting  by Antonio J. Dayag.

You may also refer to this video tutorial  to enhance your understanding  of partnership
dissolution.
 

In capsule:

A partnership is characterized by limited life. A partnership is dissolved when a partner ceases


to be associated in carrying on of the business of the partnership. 
A partnership is not necessarily liquidated. Liquidation is the process of winding up the affairs
of the partnership, which culminates to the termination of the partnership activities and distribution
of partnership assets to creditors and to the partners. 

A new partner may be admitted into the partnership by buying the equity or portion of the
equity of an old partner. The partnership records this transaction by a debit to the capital account of
the old partner and a credit to the capital account of the new partner for the amount of the equity
purchased.
If the capital credit of the new partner is not equal to his/her contribution, a transfer of equity
is made either from the old partners to the new partner or vice versa. Such transfer of a portion of
equity is called bonus.
A new partner may also be admitted into a partnership by investing cash or non-cash assets to
the entity. This increases both the total assets and total partners' equity. 
Admission of a new partner by investment of assets may involve bonus or revaluation of
assets.
The death or withdrawal of a partner also dissolves a partnership. Upon the death or
withdrawal of a partner, partnership accounts should be adjusted to fair values to determine the fair
value of equity of each partner. The amount of settlement for the equity of the deceased or retiring
partner may be equal to, greater than or less than the carrying amount of his/her capital. 
Any difference between the carrying amount of capital of the deceased or retiring partner and
the amount to be paid to settle his/her equity may indicate that some assets or liabilities of the
partnership are overvalued or undervalued. This calls for adjustments in the books to bring the net
assets to fair values or recoverable amount.
In cases when assets and liabilities are fairly valued and the carrying amount of capital of the
deceased or retiring partner does not equal the amount to be paid to settle his/her interest, such
difference is treated as a bonus. 
If the partnership is incorporated, the books have to be adjusted and closed and a statement of
financial position is prepared as a basis for the incorporation.

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