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Subjects
Class 12AccountancyDissolution of a Partnership FirmClosing the BusinessMedium
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On dissolution of a partnership firm, payment of what should be ensured before distributing cash to the partners?

Answer and explanation

Correct answer: Payment of external liabilities

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.

Related tags

Partnership DissolutionExternal LiabilitiesCash DistributionRealisation AccountPartner CapitalClosing The BusinessDissolution Of A Partnership FirmAccountancy
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10 more MCQs
  1. 1What is the process of permanently closing a partnership firm and ending its existence called?
  2. 2Which account is prepared at the time of dissolution of a firm to determine the profit or loss arising from the settlement of its assets and external liabilities?
  3. 3What is generally done with the assets of a partnership firm at the time of its dissolution?
  4. 4On dissolution of a partnership firm, from what are the external liabilities generally paid?
  5. 5To which account is the realisation profit transferred?
  6. 6To which account is the realisation loss transferred?
  7. 7What happens to the existence of the firm after dissolution?
  8. 8Dissolution expenses are generally debited to which account?
  9. 9At the time of dissolution, if an asset is sold for ₹10,000, what amount will be credited to the Realisation Account?
  10. 10On dissolution of a firm, to whom is the final cash balance paid after settling outside liabilities and other amounts due?
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