Closing the Business

On dissolution, all real assets other than cash and bank balances are transferred to the Realisation Account at their book values. This account records the sale of assets and the resulting profit or loss on realisation. Assets are not transferred directly to the Capital Account; that account is used for the partners’ final settlement. Exam tip: Cash and bank balances are excluded from the Realisation Account and remain in their respective accounts.

On dissolution, external liabilities are transferred to the Realisation Account through the entry: External Liability Account Dr. To Realisation Account. Cash or Bank Account is used when the liability is actually paid, but the transfer itself is recorded in the Realisation Account. Exam tip: In dissolution questions, remember that assets and external liabilities are generally transferred to the Realisation Account, while partners’ loans are treated separately.

The firm owed ₹10,000 but settled the liability by paying only ₹9,600. Therefore, the gain is ₹10,000 − ₹9,600 = ₹400. This gain is credited to the Realisation Account. Exam tip: settling a creditor’s claim for less than the amount due results in a gain, while paying more results in a loss.

An unrecorded asset has no existing book balance. When it is sold, the cash or bank account is debited with the amount received and the Realisation Account is credited. Therefore, Realisation Account is correct. Cash Account is debited rather than credited. Exam tip: For an unrecorded asset sold during dissolution, credit Realisation Account with the sale proceeds.

When the firm itself pays the realisation expenses, the Realisation Account is debited and the Cash/Bank Account is credited. Such expenses relate to the process of realising assets and settling liabilities, so they are recorded as a loss in the Realisation Account. The partners’ Capital Accounts are not debited directly. Exam tip: For expenses paid by the firm, remember the entry: ‘Realisation Account Dr. To Cash/Bank Account.’

When a partner pays realisation expenses on behalf of the firm and the firm agrees to reimburse the partner, the Realisation Account is debited and the partner’s Capital Account is credited. Hence, the reimbursement is recorded through the partner’s Capital Account. Cash or Bank Account would be used when the firm itself makes the payment directly. Exam tip: For reimbursable realisation expenses paid by a partner, remember: Realisation Account Dr. To Partner’s Capital Account.

Profit arising from the Realisation Account is transferred to the partners’ capital accounts in their old profit-sharing ratio. The capital ratio is not used because the amount of capital does not determine the distribution of realisation profit unless the partnership agreement specifically provides otherwise. Exam tip: Both realisation profit and realisation loss are distributed in the old profit-sharing ratio.

The debit side of the Realisation Account records the transfer of assets and realisation expenses, while the credit side records the transfer of liabilities and proceeds from assets realised. If the debit side exceeds the credit side, the difference is a Realisation Loss, which is transferred to the partners’ capital accounts in their profit-sharing ratio. A Realisation Profit arises only when the credit side is higher. Exam tip: Debit balance means Realisation Loss; credit balance means Realisation Profit.

An unrecorded liability paid during dissolution is treated as a realisation expense. Therefore, the Realisation Account is debited, while Cash or Bank is credited for the amount paid. Hence, option A is correct. Exam tip: Payments made to settle liabilities during dissolution generally appear on the debit side of the Realisation Account.

Complete closure of the business, along with the end of the firm’s existence, is called dissolution of the firm. In reconstitution, the partnership arrangement changes but the firm’s business continues. Exam tip: when the relationship among all partners ends and the business is closed, the correct term is dissolution of the firm.

The Realisation Account records the assets realised and the transferable external liabilities of the firm. Liabilities are transferred to this account so that their settlement can be recorded and the resulting profit or loss on realisation can be calculated. Therefore, without this transfer, the Realisation Account remains incomplete. The Cash Account records receipts and payments, while partners’ capital accounts record the final settlement with partners. Exam tip: On dissolution, transfer the transferable external liabilities to the Realisation Account; partners’ loans and capital are treated separately.

The machine’s book value is ₹50,000, but it is sold for ₹47,000. Since the sale proceeds are ₹3,000 less than the book value, the transaction results in a loss of ₹3,000. On dissolution, this loss is debited to the Realisation Account and ultimately transferred to the partners’ capital accounts in their profit-sharing ratio. Exam tip: compare sale proceeds with book value; a lower sale price indicates a loss.

When a partner takes over a firm’s asset, the Realisation Account is credited with the agreed value of the asset, while the concerned partner’s Capital Account is debited. Therefore, Realisation Account is correct. Cash Account is not credited because no cash is received from an outside buyer. Exam tip: For an asset taken over by a partner, remember the entry: Partner’s Capital Account Dr. To Realisation Account.

The profit or loss on the Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio. Therefore, its final balance is transferred to the partners’ capital accounts. The Cash Account records cash receipts and payments; it does not receive the realisation profit or loss. Exam tip: A credit balance in the Realisation Account indicates profit, while a debit balance indicates loss.

On dissolution, assets are first realized, and the cash generated is used to pay realization expenses, external liabilities and partners’ loans. Only the remaining cash is then distributed towards settlement of the partners’ capital accounts. Hence, A is correct. C is incorrect because partners’ loans must also be settled before returning capital. Exam tip: remember the order—external liabilities, partners’ loans, and then partners’ capital.

A reserve fund represents accumulated profits of the firm. Therefore, on dissolution, it is transferred to the partners’ capital accounts in their old profit-sharing ratio. The new ratio applies after a reconstitution, and the capital ratio is not the basis for distributing accumulated profits. Exam tip: On dissolution, distribute accumulated profits and losses in the old profit-sharing ratio.

A bank loan is an outside liability of the firm. Therefore, realisation proceeds are first used to discharge outside liabilities, including bank loans and other external creditors. Partners’ loans are paid after outside liabilities, followed by the repayment of partners’ capitals. Hence, partners’ loans in option B do not receive priority over the bank loan. Exam tip: remember the order as outside liabilities, partners’ loans, and finally partners’ capitals.

Profit on the sale of an asset in the Realisation Account = Sale value − Book value = ₹90,000 − ₹80,000 = ₹10,000. Therefore, option A is correct. The amount ₹9,000 results from an incorrect subtraction; the exact difference must be taken. Exam tip: a sale value above book value gives a profit, while a lower sale value gives a loss.

On dissolution, the usual order of settlement is: first, outside liabilities are paid; second, the partner’s loan is repaid; and finally, the partners’ capital is returned. Therefore, option A is correct. A partner’s loan is a separate claim from the partner’s capital and is not treated as an outside liability. Exam tip: remember the sequence—outside liabilities, partner’s loan, partners’ capital.

The Realisation Account records assets that are sold or otherwise realised during dissolution. Cash is already a liquid and available asset, so it is not transferred to this account; it is used directly to pay liabilities and dissolution expenses and to distribute the remaining amount. Cash is neither a liability, a reserve fund, nor an expense. Exam tip: Bank balance is also generally not transferred to the Realisation Account.

The firm owed ₹12,000 but settled the liability by paying only ₹11,800. Therefore, the gain is ₹12,000 − ₹11,800 = ₹200. ₹11,800 is the amount paid, not the gain. Exam tip: When a liability is settled for less than its book value, gain = amount payable − amount paid.

The Realisation Account is prepared at the time of dissolution to record the profit or loss arising from the realisation of assets and settlement of liabilities. Its balance is transferred to the partners’ capital accounts as profit or loss, thereby closing the account. Sales, Purchases and Salary Accounts relate to routine business transactions and are not created specifically for dissolution. Exam tip: Whenever the question refers to realising assets and settling liabilities, identify the Realisation Account.

An unrecorded asset is not transferred to the Realisation Account because it does not appear in the books. On its sale, the entry is: Cash Account Dr. ₹6,000 and Realisation Account Cr. ₹6,000. Therefore, the Realisation Account is credited. Exam tip: For the sale of an unrecorded asset, debit Cash or Bank and credit the Realisation Account.

When partners take over the assets, there is no sale to an external party and therefore no cash is realised from those assets. The agreed takeover value is adjusted through the concerned partner’s Capital Account, not through the Cash Account. Exam tip: distinguish ‘taken over by partners’ from a ‘cash sale’.

A loss on realisation is transferred to the partners’ capital accounts in their profit-sharing ratio on the debit side because it reduces their capital balances. A realisation profit, in contrast, is credited to the capital accounts. Exam tip: realisation profit is credited, whereas realisation loss is debited.