Closing the Business

At dissolution, non-cash assets such as land, machinery and stock are transferred to the Realisation Account at their book values. This account is used to determine the profit or loss arising from the sale of assets and settlement of liabilities. Cash or bank balances are not transferred to the Realisation Account; this is an important examination point.

When ₹4,000 is collected from debtors, cash or bank balance increases by ₹4,000, while the debtors' balance decreases. It is a receipt, not a payment or an automatic loss. Exam tip: realisation of an asset is recorded on the receipts side.

On dissolution, the cash realised from selling the assets is generally used first to pay the firm’s external liabilities, such as creditors. The loans and capital accounts of the partners are settled afterwards. Purchasing new assets or declaring profit is not the purpose of dissolution. Exam tip: Remember the usual order of payment—external liabilities, partners’ loans, and then partners’ capitals.

On dissolution, outside liabilities are paid first, followed by partners’ loans. The remaining amount is then paid to partners according to the final balances of their capital accounts after adjusting realization profit or loss and other dissolution items. The profit-sharing ratio is not directly used for the final payment because the capital accounts have already been adjusted. Exam tip: Remember the order—outside liabilities, partners’ loans, and finally capital accounts.

A worthless asset generates no sale proceeds, but its book value is debited to the Realisation Account. This results in a realisation loss, so option A is correct. A realisation profit would arise only when the sale proceeds exceed the asset’s book value. Exam tip: an asset transferred to Realisation without any proceeds generally creates a loss equal to its book value.

During dissolution, the amounts realised from assets are used to pay outside liabilities, loans and dissolution expenses, followed by settlement of the partners’ capital accounts. Once all payments and settlements are complete, the bank account is normally closed, so its final balance is zero. Balances such as ₹1000, ₹500 or ₹2000 would indicate that some payment or settlement is still pending. Exam tip: After complete settlement on dissolution, treat the bank account as closed with a nil balance.

When external liabilities are transferred on dissolution, the Realisation Account is credited and the respective liability accounts are debited. Therefore, option A is correct; option B applies to the liability accounts, not to the Realisation Account. Exam tip: assets are transferred to the debit side of Realisation Account, while liabilities are transferred to its credit side.

At the time of dissolution, the firm’s assets are transferred at their book value to the debit side of the Realisation Account. This records the assets taken over for realisation. Crediting the assets is incorrect; the cash or bank proceeds received from selling the assets are credited to the Realisation Account. Exam tip: book value of assets transferred—debit; sale proceeds of assets—credit.

In dissolution, the firm first realizes its assets and pays the external liabilities and dissolution expenses. The remaining cash is then distributed according to the partners’ capital accounts, resulting in the final settlement of the partners. Therefore, option A is correct. Options B and C are earlier stages, while taking a new loan is not part of the final dissolution process. Exam tip: remember the sequence—realization, payment of liabilities, and finally settlement of partners’ accounts.

Closing cash balance = Total receipts − Total payments = ₹30,000 − ₹18,000 = ₹12,000. Therefore, option A is correct. The other options do not represent the correct difference between receipts and payments. In such questions, subtract total payments from total receipts to find the closing cash balance.

On dissolution, the firm's business is discontinued. Its assets are realised, and the proceeds are used to settle outside liabilities and the partners' claims. Increasing profit, making new investments, or expanding production is not the purpose of dissolution. Exam tip: associate dissolution with realisation of assets and final settlement of liabilities.

On dissolution, the payment order is: external liabilities first, partners’ loans second, partners’ capital third, and any remaining surplus is distributed last. Therefore, partners’ loans are paid first after external liabilities. Exam tip: a partner’s loan is treated separately from capital and is settled before the partner’s capital account.

The asset is sold for ₹2,000 more than its book value: ₹11,000 − ₹9,000 = ₹2,000. Therefore, a realisation profit of ₹2,000 arises and is transferred to the partners’ capital accounts in their profit-sharing ratio. A realisation loss would arise only if the sale proceeds were lower than the book value. Exam tip: Compare the sale proceeds with the book value—higher proceeds mean profit, while lower proceeds mean loss.

On dissolution, the profit or loss arising from the realisation of assets and settlement of liabilities is determined through the Realisation Account. This profit or loss is transferred to the partners’ Capital Accounts in their profit-sharing ratio, making Capital Account the correct answer. Purchase, Sales and Salary Accounts are not used for this adjustment. Exam tip: Remember that realisation profit or loss is distributed among partners in the profit-sharing ratio.

When a liability is settled, cash or bank balance flows out of the firm, so it is a payment transaction. It is not a receipt because a receipt brings money into the firm. Exam tip: settlement of liabilities during dissolution is generally recorded as a payment.

On dissolution, the firm’s assets are realised, liabilities are paid, and the partners’ accounts are settled. After these adjustments, all the accounts in the books are closed. Therefore, option A is correct; option B is incorrect because the accounts do not remain open after dissolution. Exam tip: The final objective of dissolution is the complete settlement and closure of the firm’s accounts.

The proceeds from selling assets are received by the firm in cash or through the bank, so they are deposited in the Bank or Cash Account. Salary, Purchases and Drawings Accounts do not record this receipt. Exam tip: cash or bank received from asset realisation is debited to the Bank/Cash Account.

On dissolution, the firm's normal business activities cease. The firm then completes the winding-up process by realising assets, paying liabilities and settling the partners' accounts. Therefore, option A is correct. Option D is incorrect because the firm's ordinary business does not continue as before. Exam tip: Dissolution of the firm involves ending the firm's business and winding it up, not merely changing the relationship among partners.

Closing balance = Total receipts − Total payments = ₹25,000 − ₹20,000 = ₹5,000. Therefore, option A is correct. ₹4,000 may result from an arithmetic error of ₹1,000. In the examination, calculate the balance by subtracting total payments from total receipts.

On dissolution, the firm’s business is discontinued, its assets are realised, and the claims of creditors and partners are settled. Therefore, the ultimate objective is the realisation of assets and complete settlement of liabilities. Expansion, fresh investment, and admission of a new partner relate to continuing the business, not dissolving it. Exam tip: Dissolution involves ending the firm’s business and making a final settlement of its accounts.

When a partner takes over an asset Realisation Account is credited. Remember the takeover entry for exams.

When an unrecorded liability is paid, the entry is: Realisation Account Dr. and Bank Account Cr. Therefore, the payment amount is debited to the Realisation Account. Bank is credited because cash or bank balance decreases; it is not debited. Exam tip: remember the entry as Realisation A/c Dr. To Bank A/c.

At dissolution, the firm’s business is being closed, so the claims of creditors and other outside parties must be paid or otherwise settled. This discharges the firm’s external obligations and allows its accounts to be closed finally. Increasing sales, bringing in capital, or admitting a new partner is not an objective of dissolution. Exam tip: In dissolution, the realisation proceeds are used to settle external liabilities before the partners’ capital accounts are settled.

When a partner pays dissolution expenses on behalf of the firm, the amount becomes payable by the firm, so the same partner is reimbursed. Generally, the Realisation Account is debited and the concerned partner’s Capital Account is credited. However, if the partner has agreed to bear the expenses personally, no reimbursement is made. In the examination, distinguish between ‘paid on behalf of the firm’ and ‘undertaken to bear personally’.

After external liabilities, partners’ loans and capital have been paid, the remaining surplus is distributed among the partners in their profit-sharing ratio. Capital account balances determine the repayment of capital, not the distribution of the surplus. For exams, remember the settlement order: external liabilities, partners’ loans, capital, and finally distribution of surplus.