Read the following information carefully and answer the next five questions.

G, K and B were partners running a partnership for last 10 years, sharing profit and loss in the ratio of 5:3:2. Post Covid, their firm was affected badly and started incurring losses. On 31st March,2023 they all decided to dissolve the firm due to continuous losses. Their capital balances were ₹4,00,000, ₹3,00,000 and ₹2,00,000 respectively. Firm had liabilities ₹80,000, cash balance ₹40,000, other sundry assets ₹8,50,000 and P&L A/c constituted the rest. Assets realised at 80% and liabilities were paid in full. There was unrecorded liability of ₹50,000 which was settled at ₹40,000. Realisation expenses amounted to ₹30,000 being paid by G on behalf of the firm.

What is the mode of dissolution of the firm followed by G, K and B?

Dissolution by agreement

The correct answer is option 1- dissolution by agreement.

The key detail in the question is that G, K, and B mutually decided on 31st March 2023 to dissolve the firm due to continuous losses. When all partners jointly agree to end the partnership, it is called dissolution by agreement. It is voluntary and based on mutual consent, regardless of the reason (here, financial losses post-COVID).

In case of Dissolution by Agreement: A firm is dissolved :
(a) with the consent of all the partners or
(b) in accordance with a contract between the partners.