Closing the Business

When a partnership firm permanently closes its business, settles its liabilities and disposes of its assets, the process is called dissolution of the firm. Amalgamation means combining two or more firms, expansion means increasing the scale of business, and incorporation means forming a company. Exam tip: dissolution of a firm ends the firm’s existence, whereas dissolution of partnership may allow the firm to continue with a changed agreement.

The Realisation Account is prepared to record the sale or realisation of assets and the settlement of external liabilities, thereby determining the resulting profit or loss. The Capital Account records each partner’s capital and final adjustment, so it is not the appropriate account for this purpose. Exam tip: Associate the settlement of assets and liabilities on dissolution with the Realisation Account.

At dissolution, the firm’s business is closed and its assets are generally sold to realise cash. The sale and related settlement are recorded through the Realisation Account. Purchasing assets or automatically doubling their value is not part of dissolution. Exam tip: Remember that dissolution involves realising assets and paying liabilities.

On dissolution, external liabilities are paid from the firm’s available cash and the cash realized from selling its assets. The usual order of settlement is external debts, partners’ loans, and then partners’ capital. Therefore, fresh borrowing, profit, or an increase in capital is not the normal source of payment. Exam tip: Cash received through realization is first used to settle external liabilities.

On dissolution, the realisation account determines the profit or loss arising from the realisation of assets and settlement of liabilities. Realisation profit is transferred to the partners’ capital accounts in their profit-sharing ratio. The Bank or Cash Account records the amount received, not the profit itself. Exam tip: both realisation profit and loss are transferred to partners’ capital accounts in the profit-sharing ratio.

On dissolution, the loss arising from the realisation of assets and settlement of liabilities is transferred from the Realisation Account to the partners’ capital accounts in their profit-sharing ratio. Purchase, Sales and Stock Accounts are not used for this transfer. Exam tip: The profit or loss on realisation is ultimately transferred to the partners’ capital accounts.

Dissolution of a firm ends the partnership among all the partners, and the firm’s business is closed while its assets are realised and liabilities are paid. Therefore, the firm ceases to exist. The option stating that it is only temporarily suspended is incorrect because dissolution is not a temporary pause in business. Exam tip: When the relationship among all partners ends, it is called dissolution of the firm.

When dissolution expenses are borne by the firm, they are debited to the Realisation Account, while the Cash or Bank Account is credited for the payment. Therefore, Realisation Account is correct. Cash or Bank is not debited because it decreases when the payment is made. Exam tip: Record dissolution expenses on the debit side of the Realisation Account.

The proceeds received from selling an asset are credited to the Realisation Account. Therefore, an asset sold for ₹10,000 results in a credit of ₹10,000 to that account. ‘Nothing’ is incorrect because the sale proceeds must be recorded in Realisation Account. Exam tip: transfer the asset’s book value to the debit side of Realisation Account and record sale proceeds on its credit side.

On dissolution, outside liabilities, realisation expenses and amounts due to partners are settled first. Any cash remaining after these payments is paid to the partners according to the balances due in their final capital accounts. Suppliers are paid while settling liabilities, so they do not receive the residual cash balance. Exam tip: Treat the cash left after all settlements as the partners’ final payment.

At dissolution, the Realisation Account records the realisation or sale of assets and the settlement of liabilities. The resulting net profit or loss is transferred to the partners’ capital accounts, so option A is correct. Tax calculation and salary determination are not purposes of this account. Exam tip: Its final balance generally represents realisation profit or realisation loss.

During dissolution, the amount realised from the firm’s assets is first used to pay external liabilities. Payments to partners’ loans and then to partners’ capital are made afterward. Therefore, formation, earning a profit, or the normal year-end is not the correct time. Exam tip: Remember the order—external liabilities, partners’ loans, and partners’ capital.

Cash is not transferred to the Realisation Account; it continues to appear in the Cash Account. Assets such as furniture, machinery and stock are transferred to the Realisation Account at their book values. Exam tip: cash and bank balances are generally excluded from the assets transferred to the Realisation Account.

At dissolution, the process of selling the firm’s assets and converting them into cash is called realisation. Depreciation is the gradual decrease in the value of an asset, whereas devaluation refers to a reduction in the value of a currency. Exam tip: Asset realisation and settlement of liabilities are recorded through the Realisation Account.

On dissolution, profit shown by the Realisation Account is transferred to the partners’ capital or current accounts in their profit-sharing ratio. The bank and creditors receive only the amounts due to them, not the realisation profit. Exam tip: Realisation profit is credited to partners, while realisation loss is debited to them in the profit-sharing ratio.

On dissolution, the firm stops carrying on its business, and its assets and liabilities are settled. After transferring the realisation profit or loss to the partners’ capital accounts and settling the final amounts due to them, the capital accounts are closed. Therefore, option A is correct; continuation of normal business is contrary to dissolution. Exam tip: In dissolution questions, remember that capital accounts are closed after adjusting realisation profit or loss and making the final settlement.

On dissolution, the firm’s assets are first used to settle external liabilities, such as trade creditors and other outside lenders. Partners’ loans are paid after external liabilities, followed by the return of partners’ capital; any remaining surplus is then distributed among the partners. Exam tip: Realisation expenses are paid first from the available cash, but among the liabilities, external liabilities have priority.

When a liability is settled in cash, the cash balance decreases by the exact amount paid. Therefore, paying ₹8,000 reduces cash by ₹8,000. The other amounts do not match the stated payment. Exam tip: In a cash settlement, credit the Cash Account with the full amount paid.

During dissolution, amounts received from the sale of assets, payments made to settle liabilities, and dissolution expenses are recorded through the bank account. Therefore, its primary use is to record receipts and payments. Stock valuation is a separate process, while tax liability and salary fixation are not the main purposes of this account. Exam tip: In dissolution questions, the bank account summarises cash and bank receipts and payments.

On dissolution, after assets are realised and liabilities are settled, the partners’ capital account balances are adjusted through cash or bank, leaving them nil. Sales, Purchases and Discount Accounts are normally transferred to the Profit and Loss Account and closed earlier; therefore, they are not the intended account here. Exam tip: Remember that partners’ capital accounts are finally settled and closed during dissolution.

The amount received from the sale of machinery is equal to its stated selling price. Therefore, the amount received is ₹12,000. If the book value or profit/loss is not given, the selling price itself is treated as the amount realised. Exam tip: In dissolution, the proceeds from the sale of an asset are credited to the Realisation Account.

On dissolution of a partnership firm, the partnership among all the partners comes to an end, and the firm's assets and liabilities are settled before the business is closed. Therefore, option A is correct. Expansion or admission of a new partner does not constitute dissolution. Exam tip: A Realisation Account is generally prepared to close the firm's books on dissolution.

At dissolution, assets are transferred to the debit side of the Realisation Account at their book value. The amount received from selling the assets is subsequently recorded on the credit side, so the credit-side option is incorrect. Exam tip: remember the basic rule—assets are debited and liabilities are credited in the Realisation Account.

External liabilities of the firm are transferred to the credit side of the Realisation Account at their book value because their settlement is recorded through this account. Therefore, option A is correct. A partner’s loan is not an external liability and is not transferred to the Realisation Account. Exam tip: assets are generally debited and external liabilities are credited in the Realisation Account.

A loss on realisation is borne by the partners when the firm is dissolved. Therefore, the loss of ₹4,000 is transferred to the partners’ capital accounts in their profit-sharing ratio. It is not paid to the bank or the government and is not left unadjusted in the Realisation Account. Exam tip: Realisation profit is credited to partners’ capital accounts, while realisation loss is debited to them.