Dissolution of Partnership Firm: The dissolution of a firm implies the discontinuance of partnership business and separation of economic relations between the partners.
In the case of a dissolution of a firm, the firm closes its business altogether and realises all its assets and pays all its liabilities. The payment is made to the creditors first out of the assets realised and, if necessary, next out of the contributions made by the partners in their profit sharing ratio.
When all accounts are settled and the final payment is made to the partners for the amounts due to them, the books of the firm are closed.
Dissolution of Partnership: A partnership gets terminated in case of admission, retirement death, etc. of a partner. This does not necessarily involve dissolution of the firm.
Realisation Account: The Realisation Account is prepared to record the transactions relating to sale and realisation of assets and settlement of creditors. Any profit or loss arising act of this process is shared by partners’ in their profit sharing ratio. Partners’ accounts are also settled and the Cash or Bank account is closed.