Closing the Business

On dissolution, the firm’s business is discontinued, its assets are realised, liabilities are paid, and the remaining amount is settled among the partners. Therefore, complete winding up and settlement of the firm’s affairs is correct. Admission of a new partner is a form of reconstitution, not dissolution. Exam tip: dissolution of partnership and dissolution of the firm are not always the same; dissolution of the firm ends the firm’s existence.

At the dissolution of a firm, the process of selling assets and receiving cash from them is called realisation. A Realisation Account is prepared to record the sale of assets, realisation expenses and settlement of liabilities. Depreciation means a fall in the value of an asset over time, not its conversion into cash. Exam tip: Asset sales and dissolution-related settlement entries are recorded in the Realisation Account.

At dissolution, the Realisation Account records the sale or transfer of assets and the settlement of external liabilities. Its balance shows the profit or loss on realisation, so it is the correct answer. Purchase, Sales and Salary Accounts relate to routine business transactions and are not the special account prepared for dissolution. Exam tip: A profit on realisation is credited to the partners’ capital accounts, while a loss is debited to them.

On dissolution, the proceeds realised from the firm’s assets are first used to settle liabilities due to outside creditors. Partners’ loans are paid next, followed by the return of partners’ capital; any remaining surplus is then distributed among the partners. Exam tip: remember the order—outside liabilities, partners’ loans, partners’ capital, and finally surplus.

The profit on realisation is transferred to the partners’ Capital Accounts in their profit-sharing ratio. The Realisation Account is prepared to determine the profit or loss; therefore, the profit is not retained in that account. Exam tip: Realisation profit is credited to the partners’ Capital Accounts, while realisation loss is debited to them.

At dissolution, any loss arising from the realisation of assets and settlement of liabilities is transferred to the partners’ capital accounts in their profit-sharing ratio. It is not deposited in the bank or paid to the government. Exam tip: The final profit or loss of the Realisation Account is transferred to the partners’ capital accounts.

At dissolution, ordinary assets are transferred to the Realisation Account, but cash and bank balances are already recorded in the Cash Account or Bank Account. Therefore, they are generally not transferred to the Realisation Account. Creditors’ liabilities may be settled or adjusted through the realisation process, so option D is not the correct answer. Exam tip: remember that cash and bank balances remain in their respective accounts rather than being transferred to the Realisation Account.

The machine is sold for ₹15,000 and the sale is explicitly stated to be for cash, so the firm receives ₹15,000. No brokerage, selling expense, or outstanding amount is given; therefore, no deduction is made. Exam tip: when an asset is sold for cash, the cash received is generally equal to its sale price unless additional expenses are specified.

On dissolution of a firm, the relationship among the partners ends and the firm discontinues its business. Its assets are then realised and its liabilities are paid. Therefore, option A is correct; the other options are not consequences of dissolution. Exam tip: associate dissolution with closing the firm's business and settling its assets and liabilities.

Dissolution expenses, such as legal charges or expenses related to the sale of assets, are debited to the Realisation Account because this account determines the profit or loss on dissolution. The Bank Account records the payment, but it is not the account to which the expense is charged. Exam tip: Debit all expenses arising from dissolution to the Realisation Account.

The proceeds received from selling the asset are credited to the Realisation Account, while the Cash or Bank Account is debited by ₹9,000. A debit of ₹9,000 in the Realisation Account is incorrect because the sale proceeds are recorded on its credit side. Exam tip: transfer of an asset is recorded on the debit side of Realisation Account, but its sale proceeds are recorded on the credit side.

On dissolution, external liabilities are paid first, followed by settlement of partners’ loans and capital accounts. Any cash remaining after these payments is distributed among the partners according to their final amounts due. Exam tip: remember the order of settlement—external liabilities, partners’ loans, and partners’ capital.

The Realisation Account records the profit or loss arising from the realisation of assets and settlement of liabilities. A favourable difference results in profit, while an unfavourable difference results in loss. This result is transferred to the partners’ capital accounts. Exam tip: the final balance of the Realisation Account is profit or loss, not cash.

Cash is not transferred to the Realisation Account because it already exists in the Cash Account and is used directly to pay liabilities or distribute the remaining amount to partners. In contrast, non-cash assets such as furniture, stock and machinery are transferred to the Realisation Account so that the profit or loss on their realisation can be determined. Exam tip: Cash and bank balances are generally excluded from the assets transferred to the Realisation Account.

Paying the liability causes a cash outflow of ₹7,000, so the cash balance decreases by ₹7,000. It cannot decrease by ₹14,000 because the actual payment is only ₹7,000. Exam tip: Treat every cash payment as a reduction in cash.

In dissolution, the firm’s business is permanently closed. Its assets are realised, liabilities are paid, and the partners’ capital and current accounts are finally settled. Option B relates to reconstitution, while option C means that the business continues. Exam tip: dissolution involves winding up the firm’s business, not merely changing its partners.

On dissolution, the profit or loss from realisation is transferred to the partners’ capital accounts. After outside liabilities and partners’ loans are settled, the remaining capital balances are paid or adjusted, so the capital accounts are closed. Therefore, ignoring them is incorrect. Exam tip: After final settlement on dissolution, the balance of each capital account becomes nil.

The amount realised from an asset is its actual selling price. Since the stock is sold for ₹12,000, the amount realised is ₹12,000. The other amounts would be possible only if a discount, expense, or different selling price were specified. Exam tip: During dissolution, the sale proceeds of an asset are credited to the Realisation Account.

On dissolution of the firm, the partnership relationship among all the partners also comes to an end, as the business is closed and its assets and liabilities are settled. Option D is incorrect because the relationship does not continue unchanged. Exam tip: Dissolution of a firm generally involves the complete dissolution of the partnership among all partners.

Cash received from the sale of assets is credited to the Realisation Account because it represents the amount realised from those assets. The transfer of assets to the Realisation Account is recorded on the debit side, so option B is incorrect. Exam tip: remember—assets transferred are debited, while sale proceeds from assets are credited.

Remaining cash balance = Total receipts − Total payments = ₹25000 − ₹15000 = ₹10000. Therefore, option A is correct. ₹15000 represents the total payments, not the balance left. In such questions, subtract total payments from total receipts to find the closing cash balance.

During dissolution, the Bank Account records amounts received from the sale of assets and payments made for liabilities, dissolution expenses, and settlements with partners. Therefore, recording receipts and payments is its main purpose. Determining stock quantity is a separate activity, while fixing salaries and calculating tax are not functions of the Bank Account. Exam tip: In dissolution questions, distinguish the Bank Account, which records actual receipts and payments, from the Realisation Account, which records the realisation of assets and settlement of liabilities.

On dissolution, the realisation profit arising after realising assets and paying liabilities is distributed among the partners in their profit-sharing ratio. It is transferred to the partners’ capital accounts in that ratio. The capital ratio is not used merely because the partners have unequal capitals, unless the partnership agreement specifically provides otherwise. Exam tip: Remember that realisation profit or loss is normally shared in the profit-sharing ratio.

On dissolution, the firm's business is permanently discontinued. Its assets are realised, liabilities are paid, and partners’ claims are settled so that the books can be closed. The other options relate to continuing or expanding a business, not dissolving it. Exam tip: focus on the final settlement through the Realisation Account and Partners’ Capital Accounts.

The profit or loss arising from the Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio. The capital accounts are credited for a profit and debited for a loss. Therefore, option A is correct. Exam tip: cash received from the sale of assets is recorded in the Bank or Cash Account, but the final realisation profit or loss is transferred to the partners’ capital accounts.