Closing the Business

Dissolution of a firm ends the partnership among all the partners and brings the firm’s business to an end. Its assets are realised and liabilities are paid during the winding-up process, so option A is correct. Option B relates to admission of a partner, not dissolution. Exam tip: after dissolution, assets are realised, liabilities are settled, and any surplus is distributed among the partners.

The Realisation Account is prepared on dissolution to record the sale of assets, settlement of liabilities, and the resulting profit or loss. Purchase, Sales, and Salary Accounts relate to routine business transactions and are not the principal account for closing the firm. Exam tip: associate the disposal of assets and settlement of liabilities at dissolution with the Realisation Account.

When a firm is dissolved, the amount obtained by selling its assets is called realisation and is recorded in the Realisation Account. Devaluation and depreciation refer to a fall in value, while revaluation means reassessing the value of assets. Exam tip: In the dissolution chapter, associate the sale of assets with Realisation.

On dissolution, the available assets are first used to settle the firm’s external liabilities, meaning claims of outsiders. After that, partners’ loans are repaid, partners’ capital is returned, and any remaining surplus is distributed among the partners. Therefore, partners’ loans and capital do not receive priority over external liabilities. Exam tip: remember the order—external liabilities, partners’ loans, partners’ capital, and finally distribution of surplus.

The profit on the Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio. Therefore, the partners’ capital accounts are correct. Partners’ current accounts may be used only under a fixed-capital system when the question specifically requires it. Exam tip: Realisation profit or loss is ultimately distributed among partners in their profit-sharing ratio.

Loss on the Realisation Account arises from selling assets and settling liabilities during dissolution. It is transferred to the partners’ capital or current accounts in their profit-sharing ratio. It is not allocated to creditors, customers, or the government. Exam tip: remember that both realisation profit and realisation loss are normally shared in the profit-sharing ratio.

At dissolution, cash and bank balances are generally not transferred to the Realisation Account. They remain in the Cash or Bank Account and are used to pay liabilities and dissolution expenses. In contrast, all other assets are transferred to the Realisation Account. Exam tip: remember the rule—“All assets except cash and bank balances are transferred to the Realisation Account.”

The sale proceeds of the machinery represent the cash received. Therefore, a sale for ₹12,000 results in cash receipt of ₹12,000. No realisation expense or other deduction is mentioned in the question. Exam tip: If selling expenses are given, cash received = sale price − selling expenses.

Expenses incurred for selling assets and settling liabilities during dissolution are debited to the Realisation Account. This account is prepared to determine the profit or loss arising from the closure of the firm; such expenses are not directly debited to the partners’ Capital Accounts. Exam tip: Assets transferred and dissolution expenses appear on the debit side of the Realisation Account.

On dissolution of a firm, the partnership among all the partners comes to an end. After the firm’s assets are realised and liabilities are settled, the firm itself ceases to exist. Therefore, option A is correct. Option C is incorrect because the firm does not continue its business in the same form after closure. Exam tip: dissolution of a firm ends the entire firm, unlike the retirement of a single partner.

Stock is an asset transferred to the Realisation Account at its book value, while the cash or bank amount received from its sale is credited to the Realisation Account. Therefore, option A is correct. The debit side of the Realisation Account records the transfer of assets and dissolution expenses, not the sale proceeds. Exam tip: For an asset sold during dissolution, record Cash/Bank on the debit side and Realisation Account on the credit side.

During dissolution, external liabilities such as suppliers’ claims are settled first. Partners’ loans and capitals are then settled, and any surplus cash left after meeting all these claims is distributed among the partners. Exam tip: Remember the order—external liabilities first and the remaining surplus to partners at the end.

The Realisation Account records the realisation of assets, settlement of liabilities and realisation expenses. Its final balance shows the profit or loss on realisation, which is transferred to the partners’ capital accounts in their profit-sharing ratio. Therefore, it is not limited to profit, loss or cash received alone. Exam tip: Remember that the profit or loss on realisation is distributed among the partners.

Cash is generally not transferred to the Realisation Account because it is already recorded in the Cash Account and is used to receive and hold the amounts realised. In contrast, non-cash assets such as furniture, stock and machinery are transferred to the Realisation Account to determine the profit or loss on their sale or settlement. Exam tip: non-cash assets and external liabilities are usually transferred to the Realisation Account, but cash is not.

When the liability is paid, ₹5,000 cash leaves the firm, so the cash balance decreases by ₹5,000. The liability is also settled. It cannot decrease by ₹10,000 because the actual payment is only ₹5,000. Exam tip: A cash payment is recorded by crediting the Cash Account.

On dissolution, the firm’s business is closed, its assets are realised, liabilities are paid, and any remaining amount is settled among the partners. Therefore, the final settlement of all accounts is the main objective. Increasing profit, production, or sales relates to running a business, not dissolving it. Exam tip: Remember dissolution as the winding up of the business and settlement of its accounts.

On dissolution, the partners’ capital accounts are settled after the firm’s assets have been realised and its liabilities have been paid. The accounts are closed when the final amounts due to or from the partners are settled. Admission or the year-end does not close these accounts, while retirement generally involves settlement of only the retiring partner’s account. Exam tip: In dissolution questions, associate closure of capital accounts with final settlement after payment of liabilities.

The amount actually received from the sale of stock is treated as the receipt. Therefore, when the stock is sold for ₹15,000, the receipt is ₹15,000. The other amounts would be possible only if a discount, expense, or different sale value were stated. Exam tip: Proceeds from the sale of an asset during dissolution are credited to the Realisation Account.

Dissolution of a partnership firm means the dissolution of the partnership among all the partners. Therefore, their mutual partnership relationship ends after dissolution. Option C is incorrect because the relationship does not continue unchanged. Exam tip: Remember that dissolution of the firm ends the partnership among all partners.

Cash received from the sale of assets is credited to the Realisation Account because it represents an amount realised during dissolution. In contrast, the book value of assets transferred to the account is recorded on the debit side. Exam tip: Remember—assets transferred are debited, while sale proceeds received are credited to the Realisation Account.

Balance = Total receipts − Total payments = ₹20,000 − ₹12,000 = ₹8,000. Therefore, option A is correct. ₹12,000 is the total payment, not the balance. In such questions, subtract total payments from total receipts to find the surplus balance.

At dissolution, the Bank Account records money received and payments made through the bank, such as proceeds from the sale of assets and settlement of liabilities. Valuing assets and determining creditors' claims are separate processes and are not the main functions of the Bank Account. Exam tip: the Bank Account records transactions made through the bank; not every cash transaction is a bank transaction.

On dissolution, the firm’s assets are transferred to the Realisation Account, and the amount received from selling an asset is credited to this account. The ₹7,000 is debited to the Cash Account when received, but the corresponding sale proceeds are credited to the Realisation Account. Exam tip: Asset sale proceeds are recorded on the credit side of the Realisation Account.

When the sale proceeds of an asset exceed its book value, the difference is treated as a realisation profit and is credited to the Realisation Account. A realisation loss occurs only when the asset is sold below its book value, so option B is incorrect. Exam tip: Sale proceeds − book value = realisation profit when the difference is positive.

When the amount realised from an asset is less than its book value, the difference is a realisation loss, which is debited to the Realisation Account. A realisation profit arises only when the sale proceeds exceed the book value. Exam tip: calculate sale proceeds minus book value; a negative result indicates a realisation loss.