Closing the Business

On dissolution Realisation Account is opened to settle assets and liabilities. Remember its purpose for exams.

Value realized from an unrecorded asset is shown on the credit side of Realisation Account. It may increase profit.

The firm’s realization expenses are debited to the Realisation Account because they are costs of winding up the business. Cash or Bank is credited for the payment.

On dissolution, the firm’s external liabilities, such as creditors and bank loans, are settled before the claims of partners relating to their loans and capital. Generally, partners’ loans are paid next, followed by the return of partners’ capital. Exam tip: remember the order as external liabilities → partners’ loans → partners’ capital.

Machinery, stock and furniture are assets transferred to the Realisation Account. Partners’ Capital accounts are settled separately, so they are not transferred to it.

The firm’s liability was ₹10,000, but it was settled by paying only ₹9,600. Therefore, gain = ₹10,000 − ₹9,600 = ₹400. This gain is recorded in the Realisation Account. Exam tip: when a liability is settled for less than its book value, the difference is a gain for the firm.

A bank loan is a liability. When it is paid, the liability is reduced and the Bank Loan Account is debited, while the Cash or Bank Account is credited with the amount paid. Therefore, the Bank Loan Account is correct. Exam tip: on settlement of a liability, debit the liability account and credit the account from which payment is made.

When an unrecorded liability is paid, the payment is debited to the Realisation Account and Cash or Bank is credited. The payment is a loss arising on dissolution, so the Realisation Account is debited.

The correct answer is option B: the partners’ Capital Accounts. Realisation means closing the firm by selling assets, paying liabilities, and settling the business. The Realisation Account records the profit or loss from this closing process. If the realisation account has a credit balance, it represents profit. That profit belongs to the partners, so it is transferred to their Capital Accounts in their agreed profit-sharing ratio. Option A, Cash Account, is wrong because cash records receipts and payments; it does not receive the final profit as an owner’s share. Option B is correct because the partners’ capital increases by their shares of profit. Option C, Stock Account, is wrong because stock is an asset and its realisation is already dealt with during closure. Option D, Sales Account, is wrong because Sales Account is used for sales transactions, not for distributing partnership profit. A useful exam chain is: Realisation profit → partners’ profit-sharing ratio → Partners’ Capital Accounts. If the firm maintains fluctuating capital accounts, the credit may be posted there; the principle remains the same.

Loss or profit on realisation = Sale value − Book value = ₹47,000 − ₹50,000 = a loss of ₹3,000. Therefore, a ₹3,000 loss is recorded in the Realisation Account. ₹47,000 is the sale value, not the amount of loss. Exam tip: a sale value below book value indicates a loss, while a higher sale value indicates a profit.

The direct answer is B: the partner’s capital account is credited. Realisation expenses are expenses connected with closing the firm. If the firm pays them, Cash or Bank is credited. But here a partner personally bears the expense, so the firm has not paid cash. The firm must record that the partner has paid an amount on its behalf and is entitled to reimbursement. The entry is Realisation Account Dr. to Partner’s Capital Account, so the partner’s capital account is credited. Option A is wrong because no cash is paid by the firm in this situation. Option B is correct because crediting the capital account records the amount payable to or adjustable with that partner. Option C, Sales Account, is unrelated to dissolution expenses. Option D, Purchase Account, is also unrelated and is not used to record this payment. Do not confuse “expense paid by partner” with “expense paid to partner”: the former credits the partner’s capital account as reimbursement.

Accumulated profits such as general reserve, undistributed profit or credit balance of the profit and loss account represent profits earned for the partners before dissolution. They are not an asset to be realised and are not a liability payable to outsiders. Therefore, at dissolution, the balance is distributed among the partners in their profit-sharing ratio and transferred to their capital accounts, or to current accounts when the fixed-capital method is being used. The Realisation Account records the disposal of assets and settlement of liabilities, so option B is not appropriate. Cash records receipts and payments, while the Creditors’ Account records external claims. Hence option A, Capital Accounts, is correct. The essential concept is that accumulated profits belong to the partners and increase their claims on the firm.

On dissolution, the cash realised is first used to settle the firm’s external liabilities, such as creditors and bank loans. After that, partners’ loans are repaid and their capitals are returned. Revaluation may be part of the accounting process, but settling external liabilities is the essential priority before distributing cash to partners. Exam tip: remember the payment order as external liabilities → partners’ loans → partners’ capitals.

A debit balance in the Realisation Account indicates that the loss arising from realising assets and settling liabilities exceeds the corresponding gains. This realisation loss is transferred to the partners’ capital or current accounts in their profit-sharing ratio. Exam tip: a credit balance means realisation profit, while a debit balance means realisation loss.

The direct answer is A: the amount is credited to the Realisation Account. An unrecorded asset is an asset that was not appearing in the books, so it has no existing asset-account balance to transfer. When it is sold for ₹7000, the firm receives cash and recognises the realisation proceeds. The entry is Cash or Bank Account Dr. ₹7000 to Realisation Account ₹7000. Therefore the credit side of Realisation Account records the amount realised from the unrecorded asset. Option A is correct. Option B is wrong because the receipt is not directly a partner’s capital contribution or withdrawal. Option C is wrong because Purchase Account records purchases, not proceeds from selling an asset during dissolution. Option D is wrong because Stock Account is not used for an unrecorded asset sale in the realisation entry. The special rule is worth remembering: an unrecorded asset brought into the books is usually not first debited; its sale proceeds are credited directly to Realisation Account.

During dissolution, the firm’s assets are realised and the proceeds are used in a prescribed order: outside liabilities are paid first, then partner loans, and finally the partners’ capital balances are settled, subject to the applicable accounting rules and available funds. Thus repayment of capital depends on the balance available after realisation and payment of prior claims, not automatically on the profit-sharing ratio. The profit-sharing ratio is used for distributing realised profit or loss, not for deciding an arbitrary cash repayment basis. Drawings are past withdrawals and do not determine the amount available for settlement. Sale value relates to an individual asset or total realisation, but it is not itself the basis of repayment. Therefore option B is the best answer. If available cash is insufficient, partners may receive only a proportionate amount or may need to contribute for a deficiency.

The agreed value is credited to the Realisation Account because the machinery is used to settle the creditor’s claim. The creditor’s account is debited to record that the liability has been discharged.

The direct answer is B: the investment account is transferred to the Realisation Account. On dissolution, the firm must close its asset accounts and realise or sell the assets. Investments are assets, just like machinery, furniture, or debtors, so their book value is transferred to Realisation Account. The usual entry is Realisation Account Dr. to Investment Account. Later, if the investment is sold, the cash received is recorded on the credit side of Realisation Account. Option B is correct because it follows the general dissolution rule for assets. Option A is wrong because an investment is not added directly to partners’ capital; any profit or loss on realisation is ultimately shared through the realisation result. Option C is wrong because leaving the investment account open would prevent proper closure of the books. Option D is wrong because Sales Account is used for ordinary sales of goods, not for transferring a non-trading investment during dissolution. The memory cue is: at dissolution, transfer every recorded asset except cash and bank to Realisation Account.

The realisation profit is shared in the partners’ profit-sharing ratio. The first partner receives 3 out of the total 4 parts, so the amount credited is ₹12,000 × 3/4 = ₹9,000.

At dissolution, goodwill recorded in the books is an intangible asset and is transferred to the Realisation Account like other assets. It is then disposed of through sale or takeover by a partner. It is not directly transferred to the Reserve Fund Account. Exam tip: On dissolution, assets are generally transferred to the Realisation Account, except items such as cash and bank balance.

The Realisation Account records the transfer of the firm’s assets and external liabilities. After recording the sale proceeds of assets, payment of liabilities and realisation expenses, its balance represents the profit or loss on realisation. The Capital Account records adjustments in the partners’ capital and therefore is not the correct answer. Exam tip: In dissolution questions, associate the profit or loss on assets and liabilities with the Realisation Account.

When a partner takes over a firm asset at dissolution, the amount recognised in the Realisation Account is the value agreed between the firm and that partner. This is called the agreed value or takeover value. The partner’s capital account is debited with that agreed amount, and the asset is removed from the firm’s books through the realisation process. Original cost is not compulsory because the asset may have appreciated, depreciated or become obsolete. Nominal value is used only in special contexts and does not represent the negotiated consideration here. Zero value would be appropriate only if the asset were surrendered without consideration, which is not stated. Therefore option B is correct. The governing principle is that the accounting entry should reflect the value at which the partner assumes the asset and the firm’s corresponding claim is settled.

Payment of an unrecorded liability is debited to the Realisation Account and credited to the Bank or Cash Account. This increases the realisation expense, thereby decreasing the realisation profit or increasing the loss. Exam tip: payment of an unrecorded liability is recorded on the debit side of the Realisation Account.

The General Reserve represents accumulated profits belonging to the partners. Therefore, on dissolution, its balance is transferred to the partners’ capital accounts in their profit-sharing ratio. It is not transferred to creditors or the Realisation Account. Exam tip: distribute a general reserve among partners in the profit-sharing ratio unless the partnership deed provides otherwise.

Realisation loss is transferred to the partners’ capital accounts in their profit-sharing ratio because it arises from the sale of assets and settlement of liabilities during dissolution. It is not normally shared in the capital ratio; that ratio would apply only if specifically agreed by the partners. Exam tip: distribute the profit or loss on the Realisation Account in the existing profit-sharing ratio.