9706 · 3.1.2
Partnerships: Changes and Dissolution — FAQ
Frequently asked questions for 9706 Partnerships: Changes and Dissolution. Direct answers first, then deeper explanation — then practise with marking.
Why isn't inherent goodwill shown on the statement of financial position?
According to accounting principles (specifically the principle of objectivity and prudence), assets should only be recorded if their value can be measured reliably, usually through a transaction. Since inherent goodwill is internally generated, its value is subjective. Therefore, it is not recorded in the accounts. It is only calculated and used to adjust partners' capital during a change, then written off.
What is the main difference between a Revaluation Account and a Realisation Account?
A Revaluation Account is used when the partnership continues but its structure changes. It adjusts asset values to be fair to all partners. A Realisation Account is used only when the partnership is ending (dissolving). Its purpose is to close all asset and liability accounts and calculate the final profit or loss from liquidating the business.
How is a retiring partner paid if the partnership doesn't have enough cash?
If the partnership cannot pay the retiring partner immediately, the amount due to them (their final capital balance) is transferred to a 'Loan from Partner' account. This loan becomes a liability of the continuing partnership and will typically accrue interest until it is paid off according to an agreed schedule. The retiring partner effectively becomes a lender to the business.
What happens if a partner's capital account has a debit balance upon dissolution?
A debit balance in a capital account at the end of dissolution means the partner owes money to the partnership. This can happen if their share of realisation losses and drawings exceeds their initial capital and share of profits. The partner is legally required to introduce cash into the partnership to clear this debit balance. If they are unable to pay (insolvent), the remaining solvent partners may have to bear this loss, according to the rule in Garner v Murray, though this is outside the scope of the A-Level syllabus.