Closing the Business

When the sale proceeds of investments equal their book value, there is no difference to be recorded in the Realisation Account. Therefore, the transaction results in neither profit nor loss. For dissolution accounting, compare the sale proceeds with the book value, not with the original cost. Exam tip: proceeds above book value indicate a profit, while proceeds below book value indicate a loss.

When external liabilities are transferred to the Realisation Account, the liability accounts are debited and the Realisation Account is credited. Therefore, the transfer appears on the credit side of the Realisation Account. Partners’ loans are generally not transferred as external liabilities. Exam tip: transferred assets are recorded on the debit side, while external liabilities are recorded on the credit side of the Realisation Account.

On dissolution, the firm stops its business, realizes its assets, pays its liabilities, and settles the partners’ accounts with the remaining amount. Therefore, A is correct. B relates to continuing business, while C concerns reconstitution and D concerns expansion, not closure. Exam tip: Remember the sequence ‘realize assets, pay liabilities, and settle the final balances.’

When an unrecorded liability is paid, the Realisation Account is debited and the Bank Account is credited. Therefore, the Realisation Account receives a debit of ₹7,000. A credit of ₹7,000 is incorrect because the credit is made to the Bank Account. Exam tip: receipt from an unrecorded asset credits Realisation, whereas payment of an unrecorded liability debits it.

During dissolution, the partner’s capital account is adjusted for the realisation of assets, payment of liabilities, revaluation, accumulated profits or losses, drawings and other relevant items. The balance remaining after all these adjustments represents the final settlement with the partner. A credit balance is payable to the partner, while a debit balance is recoverable from the partner. Revaluation profit is only one adjustment made in the account, not the final settlement amount. Exam tip: final credit balance means payment to the partner; final debit balance means recovery from the partner.

The amount received from selling assets is credited to the Realisation Account because it represents the realisation proceeds. In contrast, the book value of assets transferred and realisation expenses are recorded on the debit side. Exam tip: Remember that asset sale proceeds are credited, while assets transferred and realisation expenses are debited.

When a partner takes over a firm’s liability, the Liability Account is debited and the Realisation Account is credited: Liability Account Dr. To Realisation Account. Hence, option B is correct. The Realisation Account is debited when a partner takes over an asset, not a liability. Exam tip: A liability taken over by a partner always creates a credit effect in the Realisation Account.

The actual payment of liabilities is made from the cash or bank account, so Cash or Bank Account is correct. The usual entry is: Realisation Account Dr. To Cash/Bank Account. The Realisation Account records the settlement of the liability, whereas the cash or bank account is the source through which payment is made. Exam tip: If the question asks ‘from which account was payment made,’ choose Cash/Bank; if it asks where the settlement is recorded, choose Realisation Account.

Goodwill is an intangible asset. If it is not disposed of separately at dissolution, it is realised along with the other assets, and the amount received is recorded in the Realisation Account. Liabilities and partners’ capital are not assets, so they are incorrect choices. Exam tip: On dissolution, assets are realised through the Realisation Account, whereas liabilities are settled through it.

The liability stood at ₹15,000 in the books, but only ₹14,500 was paid to settle it. Therefore, the saving or gain is ₹15,000 − ₹14,500 = ₹500. This gain is credited to the Realisation Account. Exam tip: when the book value of a liability exceeds the settlement amount, the difference is a gain.

The Realisation Account is prepared at the time of dissolution to record the realisation of assets and settlement of liabilities. Therefore, it is a special-purpose nominal account. Any profit or loss on realisation is transferred to the partners’ capital accounts. For the exam, remember that it is not a regular Trading Account; it is prepared specifically to determine profit or loss arising from dissolution.

A profit in the Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio. Therefore, each capital account is credited with the partner’s share of the profit, increasing the capital balance. In contrast, a realisation loss is debited to the capital accounts. Exam tip: Realisation profit is credited to partners’ capital accounts, whereas realisation loss is debited.

Dissolution ends the partnership relationship among all the partners and is followed by the winding-up process. During winding up, the firm realizes its assets, pays its liabilities and settles the partners’ accounts. Once this process is complete, the firm no longer exists as a going business entity. Option B is incorrect because only activities related to realization and settlement may continue during winding up; the normal business does not continue. Exam tip: Associate dissolution with closing the business and settling all accounts.

An unrecorded asset is not transferred from the books to the Realisation Account because it has no existing book balance. When a partner takes it over, the partner’s Capital Account is debited and the Realisation Account is credited. Therefore, Realisation Account is correct. Exam tip: whether an unrecorded asset is sold for cash or taken over by a partner, Realisation Account is credited; only the account receiving the consideration changes.

On dissolution, the payment order is: external liabilities first, partners’ loans or advances next, and partners’ capital thereafter. A partner’s loan is treated as a liability separate from capital, so it is repaid before the return of capital. Exam tip: remember the sequence—external liabilities → partners’ loans → capital → distribution of any remaining surplus in the profit-sharing ratio.

The Realisation Account records the proceeds from realising assets and the settlement of liabilities, along with related realisation expenses. Its balance therefore represents the profit or loss on realisation, which is transferred to the partners’ capital accounts in their profit-sharing ratio. It does not represent the cash balance or the amount payable to creditors. Exam tip: The final balance of the Realisation Account is transferred to the partners’ capital accounts.

Profit = selling price − book value = ₹33,000 − ₹30,000 = ₹3,000. Profit percentage = (₹3,000 ÷ ₹30,000) × 100 = 10%, so option A is correct. The 5% distractor would apply if the profit were ₹1,500. Exam tip: Calculate profit percentage using the cost or book value as the denominator, not the selling price.

On dissolution, the amount realised from the firm’s assets is first used to pay external creditors because their claims rank before the partners’ capital or residual claims. Partners’ loans and capital are settled afterwards, and any remaining surplus is distributed in the profit-sharing ratio. Therefore, option A is correct; partners do not lose their claim, but it is settled only after external liabilities. Exam tip: Remember the order—external liabilities, partners’ loans, partners’ capital, and finally the surplus.

When a partner bears the realisation expenses personally and does not seek reimbursement, the firm neither incurs an expense nor makes a cash payment. Therefore, no entry is made in the Realisation Account. Option C would apply only if the firm itself paid the expenses. Exam tip: if reimbursement is payable, debit the Realisation Account and credit the partner's account; if there is no reimbursement, no entry is recorded.

At dissolution, entries relating to the realisation of assets and settlement of liabilities are recorded in the Realisation Account. Its balance represents the resulting profit or loss, which is transferred to the partners’ Capital Accounts in their profit-sharing ratio. The Capital Account shows each partner’s final capital balance, so it is not the account that accumulates these realisation results. Exam tip: associate asset realisation and liability settlement with the Realisation Account.

On dissolution, all recorded external liabilities are transferred to the Realisation Account and closed in the books. Therefore, the Liability Account is debited and the Realisation Account is credited: Liability A/c Dr. To Realisation A/c. Option B reverses the accounts, while C and D do not record the transfer of liabilities correctly. Exam tip: remember that assets transferred to Realisation are debited, whereas liabilities transferred to Realisation are credited.

On dissolution, after settling external liabilities, realization expenses and partners’ loans, the balance cash is paid to partners according to the final amounts due in their capital accounts. The profit-sharing ratio or the original capital ratio is not automatically used because realization results, profits or losses and other adjustments may change the final capital balances. Exam tip: remember the order of settlement—external liabilities, partners’ loans and then partners’ capital.

At dissolution, the Realisation Account is prepared to record the realisation of assets, settlement of liabilities, and the resulting profit or loss. In reconstitution, such as the admission of a new partner, the business continues and a Revaluation Account is generally used instead. Exam tip: reconstitution changes the partnership arrangement, whereas dissolution involves settling the firm’s assets and liabilities.

There is a sale loss of ₹6000 and expenses of ₹2000 making total loss ₹8000. Combine both effects in such questions.