When a partnership firm is dissolved, its assets are liquidated, liabilities are settled, and the remaining amount is distributed among the partners according to their capital accounts. The process of dissolution can happen voluntarily, when partners mutually agree, or compulsorily, due to court orders in cases like insolvency or misconduct. All assets except cash and fictitious assets are transferred to the realization account, while liabilities except partner’s capital and loan accounts are also transferred to it. The realization account helps determine profit or loss on dissolution, which is then transferred to the partner’s capital accounts. Sometimes, a partner may take over an asset at an agreed price, which is adjusted in their capital account instead of realizing cash. Additionally, if a liability is settled by a partner personally, it is recorded accordingly.