Closing the Business

Realisation expenses are debited to the Realisation Account. An increase in these expenses raises the debit side of the account, thereby increasing the realisation loss or reducing the realisation profit. Hence, option B is correct. Exam tip: Realisation expenses are always recorded on the debit side of the Realisation Account.

The debtors had a book value of ₹60,000, but only ₹45,000 was realised. Therefore, the loss is ₹60,000 − ₹45,000 = ₹15,000. This loss is debited to the Realisation Account and ultimately transferred to the partners’ capital accounts in their profit-sharing ratio. A profit would arise only if the amount realised exceeded the book value. Exam tip: Realisation below book value means a realisation loss.

A ratio of 1:1:1 means that all three partners receive equal shares. The total ratio is 1 + 1 + 1 = 3; therefore, each partner’s share is ₹21,000 ÷ 3 = ₹7,000. Amounts such as ₹6,000 or ₹8,000 would not make the three shares total ₹21,000. Exam tip: For equal sharing, divide the total profit by the number of partners.

Goodwill is a non-current asset. On dissolution, goodwill appearing in the books is transferred at its book value to the debit side of the Realisation Account along with other assets. Therefore, option A is correct; liabilities are generally transferred to the credit side. Exam tip: If goodwill is not recorded in the books, no transfer entry is normally passed for it.

When a liability is settled for less than its book value, the amount saved is a gain for the firm. Therefore, ₹12,000 is credited as profit to the Realisation Account and is later transferred to the partners’ Capital Accounts in their profit-sharing ratio. A loss would arise only if the liability were settled for more than its book value. Exam tip: settlement of a liability below book value creates a realisation gain.

The final balance of the Realisation Account represents the profit or loss arising from the disposal of assets and settlement of liabilities. A profit is credited to the partners’ capital accounts in their profit-sharing ratio, while a loss is debited to them. Option B represents only the cash realised, not the final balance of the account. Exam tip: Realisation profit or loss is transferred to the partners’ capital accounts in the profit-sharing ratio.

Loss on sale of the asset = Book value − Sale proceeds = ₹35,000 − ₹30,000 = ₹5,000. Therefore, a loss of ₹5,000 is debited to the Realisation Account and ultimately transferred to the partners’ Capital Accounts in their profit-sharing ratio. Exam tip: if the sale proceeds are lower than the book value, the difference is a loss.

At dissolution, realisation expenses are debited to the Realisation Account because they are incurred for closing the firm and disposing of its assets. Since the payment is made through the bank, the Bank Account is credited by ₹1,000. The entry is: Realisation Account Dr. ₹1,000 To Bank Account ₹1,000. Exam tip: Dissolution-related realisation expenses are generally debited to the Realisation Account.

The existing bank balance is not transferred to the Realisation Account because it is a cash-like asset, and its realisation is recorded directly in the Bank Account. Other assets are generally transferred to the debit side of the Realisation Account, but cash and bank balances are exceptions. Exam tip: Remember that cash and bank balances are not transferred to the Realisation Account.

The total ratio is 1 + 2 + 3 = 6. The third partner’s share is 3/6, so the amount is ₹33000 × 3/6 = ₹16500. ₹11000 represents two ratio parts, not the third partner’s three parts. In such questions, first find the total ratio and then multiply the profit by the required partner’s ratio fraction.

Realisation of the unrecorded asset gives a ₹9,000 credit to the Realisation Account, while payment of the unrecorded liability creates a ₹3,000 debit. Therefore, the net gain is ₹9,000 − ₹3,000 = ₹6,000. The ₹9,000 option ignores the payment of the liability. Exam tip: Add the proceeds from an unrecorded asset and deduct any payment made for an unrecorded liability.

Payment of ₹5,000 above the book amount payable to creditors is an additional expense for the firm; hence, it is a loss of ₹5,000. Creditors are transferred to the Realisation Account at their amount due, while the actual amount paid is recorded. The excess payment produces a net debit difference of ₹5,000 in the Realisation Account, representing loss. Exam tip: On dissolution, settlement of a liability for more than its book value results in a Realisation Loss equal to the excess.

The Realisation Account is a nominal account because it records the incomes and expenses arising from the transfer and sale of assets, settlement of liabilities, and dissolution expenses. Its balance represents the profit or loss on realisation, which is transferred to the partners’ capital accounts. It is not a real account merely because the sale of assets is recorded in it. Exam tip: The profit or loss shown by the Realisation Account is transferred to the partners’ capital accounts.

The profit on the Realisation Account is transferred to the partners’ Capital Accounts in their profit-sharing ratio. Since the ratio is 1:1:1, each partner’s share is ₹27,000 ÷ 3 = ₹9,000. Amounts such as ₹8,000 or ₹10,000 do not result from an equal division. Exam tip: On dissolution, a realisation profit is credited to the partners’ Capital Accounts in the profit-sharing ratio.

Since the selling price is ₹8,000 higher than the asset’s book value, the firm earns a profit of ₹8,000. In dissolution accounting, this profit is credited to the Realisation Account and distributed among the partners’ capital accounts in their profit-sharing ratio. Exam tip: selling price greater than book value means profit; selling price lower than book value means loss.

Assets such as stock and machinery, along with external liabilities, are transferred to the Realisation Account because the profit or loss on their sale or settlement is determined in this account. Dividend is an appropriation of profit, not an asset or liability, so it is generally not transferred to the Realisation Account. Exam tip: cash or bank balances, partners’ capital accounts and profit-appropriation items are normally excluded from this account.

Loss on realisation is transferred to the partners’ capital accounts in their profit-sharing ratio. Since the ratio is equal, or 1:1, each partner’s share is ₹16,000 × 1/2 = ₹8,000. Amounts such as ₹6,000 and ₹4,000 do not represent equal shares. Exam tip: On dissolution, distribute the realisation loss through the Realisation Account in the partners’ profit-sharing ratio.

When an unrecorded liability is paid during dissolution, the Realisation Account is debited by ₹4,000 and the Cash Account is credited. Therefore, Realisation Account is correct. Cash Account is not debited because cash decreases on payment; it is credited. Exam tip: For payment of an unrecorded liability, record: Realisation A/c Dr. to Cash/Bank A/c.

The Realisation Account records items related to the realisation of assets and settlement of liabilities. The net result may be a realisation profit or a realisation loss, which is transferred to the partners’ capital or current accounts in their profit-sharing ratio. Therefore, cash balance or the total value of assets is not the final result of this account. Exam tip: The balance of the Realisation Account is always distributed among the partners as profit or loss.

When debtors realise an amount greater than their book value, the excess is a gain on realisation. Therefore, the Realisation Account will show a profit of ₹10,000, which will be transferred to the partners’ capital or current accounts in their profit-sharing ratio. A loss would arise only if the amount realised were less than the book value. Exam tip: Realisation above book value means profit; realisation below book value means loss.

Partners’ capital accounts are not transferred to the Realisation Account; they remain in the partners’ capital accounts and are used for the final settlement or adjustment. Assets are transferred to the debit side and external liabilities to the credit side of the Realisation Account. Therefore, both the debit-side and credit-side alternatives are incorrect. Exam tip: the Realisation Account records the realisation of assets and settlement of external liabilities, not the transfer of partners’ capital.

Since the profit-sharing ratio is equal, the Realisation Account profit of ₹15,000 is divided among three partners: ₹15,000 ÷ 3 = ₹5,000. Thus, ₹5,000 is credited to each partner’s Capital Account. An amount of ₹6,000 would distribute ₹18,000 in total, exceeding the available profit. Exam tip: A profit on realisation is credited to the partners’ Capital or Current Accounts in their profit-sharing ratio.

The Realisation Account determines the profit or loss arising from the sale of assets and settlement of liabilities. This profit or loss is transferred to the partners’ Capital Accounts in their profit-sharing ratio, thereby closing the Realisation Account. It is not transferred directly to the Cash, Bank or Stock Account. Exam tip: Remember that the final realisation profit or loss goes to the partners’ Capital Accounts.

A loss on realisation is transferred to the partners’ capital accounts in their profit-sharing ratio by debiting those accounts. Therefore, a total realisation loss of ₹12,000 reduces the partners’ combined capital by ₹12,000. It is not credited to capital or current accounts, so options B and D are incorrect. Exam tip: Credit the partners’ capital accounts for realisation profit and debit them for realisation loss.

In the Realisation Account, receipts of ₹50,000 are recorded on the credit side and payments of ₹52,000 on the debit side. Since the debit side exceeds the credit side by ₹2,000, the firm incurs a realisation loss of ₹2,000, which is transferred to the partners’ capital accounts in their profit-sharing ratio. Exam tip: Payments minus receipts indicate a loss; receipts minus payments indicate a profit.