Dissolution

Definition

Dissolution is the process of legally ending a partnership, resulting in the cessation of business operations and distribution of assets to settle liabilities. It involves terminating the existing contractual relationship among partners and liquidating the partnership's assets.

5 Must Know Facts For Your Next Test

1. Dissolution can be triggered by mutual agreement, expiration of term, death, bankruptcy, or withdrawal of a partner.
2. All assets must be liquidated and used to pay off partnership liabilities before any remaining amounts are distributed to partners.
3. A dissolution requires recording journal entries to close out accounts and distribute remaining assets according to the profit-sharing ratio.
4. Partners must settle any outstanding debts with creditors before distributing any surplus among themselves.
5. Legal procedures for dissolution may vary based on jurisdiction but often require formal notification to all stakeholders and regulatory authorities.

Review Questions

• What events can trigger the dissolution of a partnership?
• How are assets and liabilities handled during the dissolution process?
• Why is it important to notify all stakeholders during a partnership dissolution?

Related terms

Liquidation: The process of converting assets into cash to pay off creditors before distributing any remaining funds among partners or shareholders.

Partnership Agreement: A legal document outlining the terms, conditions, and responsibilities of each partner within a partnership.

Profit-Sharing Ratio: The agreed-upon proportion in which profits and losses are distributed among partners in a partnership.