Closing the Business

Correct answer: A. No one

After dissolution, the firm’s ordinary business comes to an end, so no one operates it. Former partners may carry out winding-up activities, such as realising assets and paying liabilities, but this is not the operation of the ordinary business. Exam tip: Dissolution ends the firm’s business and begins the winding-up process.

Correct answer: A. Capital Accounts

After liabilities and dissolution expenses are paid, the remaining cash is distributed to the partners according to the balances in their capital accounts. Therefore, the final settlement of cash is related to the Capital Accounts. Sales, Purchases and Stock Accounts relate to regular business operations, not the final distribution on dissolution. Exam tip: The surplus cash remaining at the end of dissolution is used to settle the partners’ capital accounts.

Correct answer: A. They are closed

On dissolution, the firm’s business is wound up by realising assets, paying liabilities and settling the partners’ accounts. After these adjustments, the firm’s books of account are closed. They are neither sold nor ignored. Exam tip: Dissolution means the complete closure of the firm’s business, not merely a change in the partnership relationship.

Correct answer: A. ₹5,000

The proceeds from the sale of an asset are credited to the Realisation Account. Therefore, when stock is sold for ₹5,000, ₹5,000 is credited. The amount is based on the actual sale proceeds, not the book value of the stock. Exam tip: Record the sale proceeds of an asset on the credit side of the Realisation Account.

Correct answer: A. Profit-sharing ratio

The profit arising from the realisation of assets and settlement of liabilities on dissolution is distributed among the partners in their profit-sharing ratio. The capital ratio is not used because the amount of capital contributed does not determine the agreed distribution of profit. Exam tip: Realisation profit or loss is normally shared in the old profit-sharing ratio.

Correct answer: A. Partners’ loan accounts

On dissolution, the usual order of payment is external liabilities, followed by partners’ loans, and finally partners’ capital. Therefore, partners’ loan accounts are settled after the external liabilities. Partners’ capital accounts are paid only after the loans have been settled. Exam tip: Remember the sequence—external liabilities → partners’ loans → partners’ capital.

Correct answer: A. Realisation Account

At dissolution, all non-cash assets are transferred to the Realisation Account, and entries relating to the settlement of liabilities and sale of assets are recorded in it. Its balance shows the profit or loss on realisation. Therefore, Realisation Account is correct. Sales, Purchase and Salary Accounts relate to routine business transactions, not specifically to dissolution. Exam tip: In dissolution questions, associate the calculation of realisation profit or loss with the Realisation Account.

Correct answer: A. Realisation proceeds

The amount received by selling assets at the time of dissolution is called realisation proceeds and is recorded in the Realisation Account. It is not a capital gain, because a gain is determined by comparing the realisation amount with the asset’s book value. Exam tip: identify cash received from the sale of assets as realisation proceeds.

Correct answer: A. Realise assets, pay liabilities and distribute the surplus

When a firm is dissolved, its business is wound up. Its assets are realised, liabilities and partners’ claims are settled, and any remaining surplus is distributed among the partners. Therefore, option A is correct. Increasing sales, purchasing machinery, or admitting a new partner relates to continuing or expanding the business, not closing it. Exam tip: remember that dissolution ultimately involves the final settlement of the firm’s accounts.

Correct answer: A. Credit side

Cash received from the sale of assets is credited to the Realisation Account because it represents the amount realised from those assets. In contrast, assets transferred to the account are recorded on its debit side. Exam tip: Asset-sale receipts are credited, while realisation expenses are debited to the Realisation Account.

Correct answer: A. ₹7,000

In a cash sale, the entire amount received is added to the firm’s cash. Therefore, selling the furniture for ₹7,000 increases cash by ₹7,000. The book value and resulting profit or loss are not relevant to the cash increase here. Exam tip: For an asset sold for cash, cash increase equals the sale value.

Correct answer: A. Partners’ Capital Account

At dissolution, the final balance in each partner’s capital account is determined after recording the realization of assets, payment of liabilities, and adjustment of profit or loss. This balance forms the basis for the amount payable to the partner. Sales, purchases, and stock accounts relate to trading activities and do not determine the partners’ final settlement. Exam tip: The Realisation Account calculates profit or loss on dissolution, whereas the final balance of the Partners’ Capital Account shows the amount due to or from each partner.

Correct answer: A. Record amounts received from realization and payments made

During dissolution, the cash and bank accounts record cash received from the realization of assets and payments made for liabilities, dissolution expenses, and other settlements. The Realization Account calculates the profit or loss on realization, while the partners’ capital accounts record the final adjustments. Exam tip: the cash and bank accounts show actual cash movement, not realization profit or loss.

Correct answer: A. Cash payment

When a liability is paid, cash flows out of the firm; therefore, it is an example of a cash payment. It is not a cash receipt because a receipt brings cash into the firm. Exam tip: settlement of a liability results in a cash outflow.

Correct answer: A. Partnership relationship

Dissolution of a firm ends the contractual partnership relationship among all the partners. After this, the firm’s assets are realised and its liabilities are settled. Relationships with customers, banks or the government may continue as needed during the winding-up process. Exam tip: dissolution of the firm means the end of the partnership relationship among all partners.

Correct answer: A. ₹10,000

Remaining cash balance = Total receipts − Total payments = ₹30,000 − ₹20,000 = ₹10,000. Therefore, option A is correct. Payments are subtracted from receipts while calculating the balance during dissolution; hence ₹12,000 is not correct. Exam tip: Remember the formula—Balance = Receipts − Payments.

Correct answer: A. Realisation Account

The Realisation Account is prepared to determine the profit or loss arising from the realisation of assets and settlement of liabilities. The Cash and Bank Accounts record receipts and payments, while the Stock Account deals only with stock. Exam tip: The profit or loss on realisation is ultimately transferred to the partners’ capital accounts.

Correct answer: A. Cash

At dissolution, the firm sells its assets and receives cash from them. Therefore, assets are generally converted into cash. A liability is an obligation, while an expense or loss may arise during the process but is not the form into which assets are converted. Exam tip: The amount realised from selling assets is recorded in the Realisation Account.

Correct answer: A. Closing all accounts and books

During dissolution, the books of account are closed after assets have been realised, liabilities have been paid and the partners’ accounts have been settled. Therefore, option A is correct. Preparing a new partnership agreement is not appropriate because the firm’s business is being terminated. Exam tip: Remember that the final stage of dissolution is the closing of the books of account.

Correct answer: A. Realisation receipt

During dissolution, the amount received from selling the firm’s assets is called a realisation receipt and is recorded in the Realisation Account. It is not capital introduced, a loan receipt, or salary income. Exam tip: proceeds from the sale of assets are treated as realisation receipts.

Correct answer: A. The firm’s external liabilities

On dissolution, the payment order is: external liabilities first, partners’ loans next, and partners’ capital last. Therefore, the firm’s external liabilities are paid first. Paying only tax is not sufficient because all other external claims must also be settled. Exam tip: remember the sequence—external liabilities, partners’ loans, and then capital.

Correct answer: A. To the partners

On dissolution, after settling external liabilities and partners’ loans, any remaining cash is paid to the partners according to the final amounts due to them. Customers, the bank, or the government are paid only if an obligation toward them is still outstanding. Exam tip: The surplus left after settling all liabilities is distributed among the partners.

Correct answer: A. Profit or loss

The Realisation Account records the realisation of assets and settlement of liabilities. If its total credits exceed total debits, it shows a profit; if total debits exceed total credits, it shows a loss. This profit or loss is transferred to the partners’ capital accounts. Exam tip: the balance of the Realisation Account represents profit or loss, not the cash balance itself.

Correct answer: A. Cease its regular business operations

On dissolution, the firm stops carrying on its regular business. It then realizes its assets, pays its liabilities, and settles the partners’ accounts as part of the winding-up process. Therefore, option A is correct; the other options describe continuation or expansion of business. Exam tip: after dissolution, the firm undertakes winding-up activities instead of normal trading.

Correct answer: A. In proportion to the balances due in the partners’ capital accounts

At dissolution, external liabilities are paid first, followed by partners’ loans. Any surplus remaining is then used to settle the amounts due to partners according to the balances in their capital accounts. Sales, purchases and salaries are not the basis for this distribution. Exam tip: remember the order of settlement—external liabilities, partners’ loans and finally partners’ capital.