Dinkar, Navita and Vani were partners sharing profits and losses in the ratio of 3 : 2 : 1. Navita died on 30t

Question

Q. Dinkar, Navita and Vani were partners sharing profits and losses in the ratio of 3 : 2 : 1. Navita died on 30th June, 2017. Her share of profit for the intervening period was based on the sales during that period, which were ₹ 6,00,000. The rate of profit during the past four years had been 10% on sales. The firm closes its books on 31st March every year. Calculate Navita's share of profit.

CBSECBSE Class XII Board 2019Subjective· 1mImportance★★★★★

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Concept understanding — Partnership Accounting

Partnership Accounting — Your First Look

Think of a partnership as a group of friends starting a food stall together. One brings the money, another brings the cooking skills, a third brings the location. They agree to share the profits — but not necessarily equally. They also agree that if the stall loses money, they'll share the loss too.

That's the everyday intuition. Now let's make it precise.

What is a Partnership?

According to the Indian Partnership Act, 1932, a partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The NCERT Class-12 textbook defines it as a business owned and run by two or more persons (maximum 50, as per Companies Act, 2013) who contribute capital and share profits/losses in an agreed ratio.

The key features are:

Two or more persons — minimum 2, maximum 50
Agreement — written (partnership deed) or oral
Profit-sharing — the core purpose
Unlimited liability — each partner is personally liable for the firm's debts
Mutual agency — each partner can bind the firm and other partners

Why Does Partnership Accounting Matter?

A sole proprietor has one owner — simple. A company has many shareholders — complex but structured. A partnership sits in between. The accounting challenge is: how do we track each partner's claim on the business?

The business is separate from the partners for accounting purposes, but the partners are personally involved. We need to record:

What each partner brings in (capital)
What each partner takes out (drawings)
What each partner earns (interest, salary, commission, share of profit)
What happens when a partner joins or leaves

The Two Key Accounts

1. Capital Account

This records the permanent investment of each partner. There are two methods:

Fixed Capital Method — Capital remains constant unless partners decide to change it. All other transactions go to a separate Current Account.

Fluctuating Capital Method — Capital changes with every transaction (drawings, interest, salary, share of profit/loss). Only one account per partner.

NCERT recommends the Fixed Capital Method for clarity. Here's the format:

Partner's Capital Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Balance c/d | 50,000 | 30,000 | | By Balance b/d | 50,000 | 30,000 | | | | | | By Bank (additional capital) | — | — | | Total | 50,000 | 30,000 | | Total | 50,000 | 30,000 |

The opening balance is the capital brought in. The closing balance is the same unless additional capital is introduced or capital is withdrawn permanently.

2. Current Account

This records everything else — drawings, interest on capital, interest on drawings, salary, commission, and share of profit/loss.

Partner's Current Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Drawings | 5,000 | 4,000 | | By Balance b/d | 2,000 | 1,000 | | To Interest on Drawings | 250 | 200 | | By Interest on Capital | 3,000 | 1,800 | | To Balance c/d | 5,750 | 3,600 | | By Salary | 6,000 | — | | | | | | By Commission | — | 4,000 | | | | | | By Share of Profit | — | 1,000 | | Total | 11,000 | 7,800 | | Total | 11,000 | 7,800 |

The balance in the Current Account can be debit (overdrawn) or credit (undrawn profit).

The Profit and Loss Appropriation Account

This is the heart of partnership accounting. It shows how the net profit is distributed among partners — not how it is earned.

Important

The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. It starts with Net Profit (from the P&L Account) and then shows appropriations.

Format:

Profit and Loss Appropriation Account | Particulars | Amount (₹) | | Particulars | Amount (₹) | |---|---|---|---| | To Interest on Capital: | | | By Net Profit (transferred from P&L A/c) | 1,00,000 | | — A | 6,000 | | By Interest on Drawings: | | | — B | 4,000 | | — A | 500 | | To Partner's Salary: | | | — B | 300 | | — A | 12,000 | | | | | To Partner's Commission: | | | | | | — B | 8,000 | | | | | To Profit transferred to: | | | | | | — A's Current A/c (3/5) | 42,120 | | | | | — B's Current A/c (2/5) | 28,080 | | | | | Total | 1,00,800 | | Total | 1,00,800 |

Notice: The total on the debit side equals the total on the credit side. The net profit plus interest on drawings is the distributable profit. …

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Navita's share of profit for the period 1st April 2017 to 30th June 2017 is ₹20,000.

Concept

When a partner dies during the year, her estate is entitled to her share of profit from the last balance-sheet date to the date of death. Here that profit is estimated from sales: if profit is a fixed percentage of sales, the profit for the period equals that percentage of the period's sales.

Step 1 - Firm's profit for the period

Sales (1 Apr 2017 to 30 Jun 2017) = ₹6,00,000; rate of profit = 10% on sales.

Profit for the period = 10% × 6,00,000 = ₹60,000.

Step 2 - Navita's share

Profit-sharing ratio Dinkar : Navita : Vani = 3 : 2 : 1, so Navita's share = 2/6 = 1/3.

Navita's share of profit = 1/3 × 60,000 = ₹20,000.

Journal entry …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 31 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. Ravi, Sunil and Amit were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 5. On 1st April, 2025, Ravi retired. Sunil and Amit decided to share future profits in the ratio of 2 : 3. After all adjustments with respect to general reserve, goodwill and revaluation, etc., the balances in the capital accounts of Ravi, Sunil and Amit stood at ₹ 3,00,000; ₹ 2,40,000 and ₹ 3,60,000 respectively. It was decided that the amount payable to Ravi will be brought by Sunil and Amit in such a way so as to make their capitals proportionate to their new profit sharing ratio. The amount brought in by Sunil and Amit will be : (A) Sunil ₹ 1,00,000, Amit ₹ 2,00,000 (B) Sunil ₹ 1,20,000, Amit ₹ 1,80,000 (C) Sunil ₹ 1,50,000, Amit ₹ 1,50,000 (D) Sunil ₹ 80,000, Amit ₹ 2,20,000$
›Reveal solutionSolution
After Ravi’s retirement, Sunil and Amit adjust their capitals to be proportionate to their new profit-sharing ratio (2:3). The required additional contributions are Sunil ₹1,20,000 and Amit ₹1,80,000 — option (B).

Concept First — Why This Treatment?

When a partner retires, the continuing partners often decide to adjust their capital accounts so that the capitals are in the new profit-sharing ratio. This ensures that capital contributions align with the risk and reward sharing going forward. The amount payable to the retiring partner is brought in by the continuing partners in the same proportion as their new ratio, unless otherwise agreed.

The key rule: Total capital of the new firm is determined first (usually based on the retiring partner’s capital or a mutually agreed figure), then each continuing partner’s capital is calculated as their share of that total. The difference between this required capital and their existing balance is the amount they must bring in (or withdraw).

Watch out

Common Pitfall

Students often mistakenly use the old ratio to divide the amount payable to the retiring partner. Remember: after retirement, the continuing partners share future profits in the new ratio, so the capital adjustment must also follow the new ratio.

Step-by-Step Solution

Step 1: Determine the Total Capital of the New Firm

After all adjustments (general reserve, goodwill, revaluation), the balances are:

Ravi: ₹3,00,000 (this is the amount payable to him)

Sunil: ₹2,40,000

Amit: ₹3,60,000

The continuing partners (Sunil and Amit) decide to bring in cash so that their capitals become proportionate to their new ratio of 2:3.

The total capital of the new firm is not simply the sum of Sunil and Amit’s existing capitals. Instead, we use the retiring partner’s capital as a base. Since Ravi’s capital is ₹3,00,000 and his old share was 4/12, the total capital of the firm before retirement was:

Total old capital = Ravi’s capital ÷ his old share = ₹3,00,000 ÷ (4/12) = ₹3,00,000 × 12/4 = ₹9,00,000

But after retirement, the firm’s capital belongs only to Sunil and Amit. Their combined existing capital is ₹2,40,000 + ₹3,60,000 = ₹6,00,000. The difference of ₹3,00,000 (Ravi’s capital) is what needs to be brought in by Sunil and Amit.

Tip

Shortcut

The amount payable to the retiring partner (₹3,00,000) is exactly the amount that the continuing partners must bring in total. This amount is then divided in the new profit-sharing ratio (2:3) to find each partner’s contribution.

Step 2: Calculate the Amount to be Brought in by Each Partner

Total amount to be brought in = ₹3,00,000 (Ravi’s capital)

New ratio of Sunil : Amit = 2 : 3

Sunil’s share = 2/5 × ₹3,00,000 = ₹1,20,000

Amit’s share = 3/5 × ₹3,00,000 = ₹1,80,000

Step 3: Verify the New Capital Balances

After bringing in the cash:

Sunil’s new capital = ₹2,40,000 + ₹1,20,000 = ₹3,60,000

Amit’s new capital = ₹3,60,000 + ₹1,80,000 = ₹5,40,000

Check proportionality: Sunil : Amit = ₹3,60,000 : ₹5,40,000 = 2 : 3 ✓ …
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CBSE 2026Set 67/4/11 markMCQ
$Q. Dinesh, Siddharth and Naina were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 31st March, 2025, they decided to dissolve the firm. On this date, the firm had debtors amounting to ₹ 2,10,000 and provision for doubtful debts of ₹ 20,000. On dissolution, debtors of ₹ 10,000 proved bad and the remaining debtors realised 90%. Amount realised from debtors will be : (A) ₹ 1,71,000 (B) ₹ 2,00,000 (C) ₹ 1,80,000 (D) ₹ 1,89,000$
›Reveal solutionSolution
Amount realised from debtors on dissolution = ₹1,80,000 (Option C).

Concept: Realisation of Debtors on Dissolution

When a partnership firm dissolves, all assets are converted into cash through a Realisation Account. Debtors represent amounts owed to the firm, and their realisation involves two steps:

Identify the book value of debtors (gross debtors minus any provision for doubtful debts already created).

Determine actual cash realised based on what is collected and what proves irrecoverable.

The provision for doubtful debts is an accounting estimate created before dissolution. On dissolution, we ignore this provision and work with the actual outcome: which debtors pay and which don't. The Realisation Account is debited with the book value of debtors (net of provision) and credited with the actual cash received.

Watch out

A common mistake is to deduct the provision for doubtful debts from the amount realised. The provision is merely an accounting adjustment already made in the books; on dissolution, we focus on actual realisations. The ₹20,000 provision is irrelevant to the cash calculation.

Treatment on Dissolution

Step 1: Transfer debtors to Realisation Account at their net book value:

Gross Debtors = ₹2,10,000

Less: Provision for Doubtful Debts = ₹20,000

Net Book Value = ₹1,90,000

The Realisation Account is debited with ₹1,90,000 (the asset taken over for realisation).

Step 2: Determine actual cash realised:

Debtors proving bad = ₹10,000 (these yield zero cash)

Remaining debtors = ₹2,10,000 − ₹10,000 = ₹2,00,000

These remaining debtors realise 90% of their face value

Cash realised = 90% of ₹2,00,000 = ₹1,80,000

The Realisation Account is credited with ₹1,80,000 (cash received), and Bank/Cash Account is debited.

Solution

Working Note 1: Calculation of Amount Realised from Debtors

Particulars Amount (₹)
Total (Gross) Debtors 2,10,000
Less: Debtors proving bad 10,000
Good Debtors 2,00,000
Realisation percentage 90%
Cash Realised (90% of ₹2,00,000) 1,80,000

The provision for doubtful debts (₹20,000) does not enter this calculation. It was an accounting estimate; the actual bad debts are ₹10,000, and the actual collection rate on the remaining ₹2,00,000 is 90%.

Journal Entry (Dissolution)

| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …
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CBSE 2026Set 67/5/11 markMCQ
$Q. (a) John, Honey and Racob were partners in a firm sharing profits and losses equally. On 31st July, 2025 John died. His share in the profits of the firm from the date of last balance sheet till the date of his death will be : (A) Debited to Profit and Loss Account (B) Credited to Profit and Loss Account (C) Debited to Profit and Loss Suspense Account (D) Credited to Profit and Loss Suspense Account$
(OR)
$(b) Shashi, Maya and Komal were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 31st March, 2025 Komal retired. The new profit sharing ratio between Shashi and Maya was decided as 3 : 5. The gain or sacrifice of Shashi and Maya on Komal’s retirement was : (A) Shashi’s sacrifice 1/8; Maya’s gain 13/40 (B) Shashi’s gain 1/8; Maya’s sacrifice 13/40 (C) Shashi’s sacrifice 1/8; Maya’s sacrifice 13/40 (D) Shashi’s gain 1/8; Maya’s gain 13/40$
›Reveal solutionSolution

Part (a): a deceased partner's share of profit up to the date of death is debited to the Profit and Loss Suspense Account → option (C).

Part (b): Shashi sacrifices 1/8 and Maya gains 13/40 → option (A).

Part (a)

When a partner dies during the year, his share of profit from the date of the last Balance Sheet to the date of death is estimated (on time or sales basis) and credited to the deceased partner's capital account. Since the year-end Profit and Loss Account is not yet prepared, the corresponding debit is parked in the Profit and Loss Suspense Account, which is later adjusted. Therefore his share is debited to the Profit and Loss Suspense Account. …
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CBSE 2026Set 67/5/11 markMCQ
$Q. Sushil and Sapna were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 31st March, 2025, the firm was dissolved. On the date of dissolution there existed a balance of ₹ 1,20,000 in sundry creditors account. The sundry creditors were payable after three months. They were paid immediately at a discount of 12% p.a. The amount paid to sundry creditors was : (A) ₹ 1,20,000 (B) ₹ 1,23,600 (C) ₹ 1,16,400 (D) ₹ 1,34,400$
›Reveal solutionSolution
The sundry creditors, originally ₹1,20,000, were paid immediately at a 12% p.a. discount for three months, resulting in a payment of ₹1,16,400.

When a partnership firm undergoes dissolution, the primary objective is to close down its operations by realising all assets and settling all liabilities. To achieve this, a special account called the Realisation Account is prepared. This account serves as a temporary ledger to record all transactions related to the sale of assets and payment of liabilities, ultimately determining the profit or loss arising from the dissolution process.

External liabilities, such as Sundry Creditors, are first transferred to the credit side of the Realisation Account. This closes their individual ledger accounts and brings them into the dissolution process. When these liabilities are subsequently paid, the Realisation Account is debited, and the Bank/Cash Account is credited. Debiting the Realisation Account signifies an expense or loss incurred during the dissolution, as funds are being used to settle the firm's obligations.

In this specific scenario, the Sundry Creditors were due after three months but were paid immediately. Paying a liability before its due date often results in a discount, as the creditor receives their money earlier than anticipated. This discount reduces the actual cash outflow from the firm. The discount is calculated on the original amount of the liability for the period by which the payment is advanced, at the agreed annual rate. The amount actually paid is the original liability less this discount.

The accounting treatment for the payment of creditors at a discount involves:

Transfer of Creditors: (Though not explicitly asked for, conceptually, Sundry Creditors Account is debited to close it, and Realisation Account is credited).

Payment of Creditors: Realisation Account is debited with the actual amount paid (original amount minus discount), and the Bank/Cash Account is credited with the same amount, reflecting the reduction in cash.

Working Notes

Calculation of Discount on Sundry Creditors

Original amount of Sundry Creditors = ₹1,20,000

Discount rate = 12% p.a.

Period for which discount is received = 3 months (since payment was made 3 months before the due date)

Discount = Original Amount $\times$ Rate $\times$ Period

Discount = ₹1,20,000 $\times$ $\frac{12}{100}$ $\times$ $\frac{3}{12}$

Discount = ₹1,20,000 $\times$ 0.12 $\times$ 0.25

Discount = ₹3,600

Calculation of Amount Paid to Sundry Creditors …
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CBSE 2025Set 67/5/11 markMCQ
$Q. On 1st April, 2024, the Balance Sheet of Radha and Mohan showed a loan of ₹ 10,000 given by Mohan to the firm. The firm was dissolved on this date. Mohan’s loan will be discharged by crediting which of the following account ? (A) Realisation Account (B) Mohan’s Capital Account (C) Mohan’s Current Account (D) Bank Account$
(OR)
$Which of the following events does not result in reconstitution of a firm ? (A) Dissolution of partnership (B) Dissolution of partnership firm (C) Death of a partner (D) Change in profit sharing ratio of existing partners$
›Reveal solutionSolution
Part (a): A partner's loan is paid in cash on dissolution — Bank Account is credited (D).

Part (b): Dissolution of partnership firm (B) ends the firm, so it is not a reconstitution.

Part (a)

A loan given by a partner to the firm is not part of that partner's capital. For this amount the partner stands as an ordinary creditor. On dissolution, after outside liabilities, partner's loans are settled — and settlement means paying cash.

Particulars L.F. Debit (₹) Credit (₹)
Mohan's Loan A/c Dr. 10,000
To Bank A/c 10,000
(Being Mohan's loan discharged on dissolution)

(A) Realisation A/c records assets sold and external liabilities paid, not a partner's loan. …
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Particulars	Amount (₹)
Total (Gross) Debtors	2,10,000
Less: Debtors proving bad	10,000
Good Debtors	2,00,000
Realisation percentage	90%
Cash Realised (90% of ₹2,00,000)	1,80,000

CBSE 2025Set 67/6/11 markMCQ

Q. Sharma, Verma and Khan were partners in a firm sharing profits and losses in the ratio of 2 : 2 : 1. The firm closes its books on 31st March every year. On 31st December, 2024 Khan died. Khan's share in the profits of the firm till the date of his death was to be calculated on the basis of the profit of the previous year. During the year ended 31st March, 2024 the firm earned a profit of ₹ 6,00,000. The treatment for Khan's share in the profits of the firm till the date of his death will be : (A) Khan's Capital Account will be debited by ₹ 90,000 and Profit and Loss Suspense Account will be credited by ₹ 90,000. (B) Profit and Loss Suspense Account will be debited by ₹ 90,000 and Khan's Capital Account will be credited by ₹ 90,000. (C) Khan's Capital Account will be debited by ₹ 1,20,000 and Profit and Loss Suspense Account will be credited by ₹ 1,20,000. (D) Profit and Loss Suspense Account will be debited by ₹ 1,20,000 and Khan's Capital Account will be credited by ₹ 1,20,000.

›Reveal solution

Khan's share of profit from 1st April 2024 to 31st December 2024 (9 months) is ₹90,000, credited to his Capital Account by debiting Profit and Loss Suspense Account.

Concept: Deceased Partner's Share of Profit till Death

When a partner dies during the accounting year, the firm has not yet closed its books and the current year's profit is unknown. The deceased partner is entitled to his share of profit from the beginning of the accounting year up to the date of death. Since the actual profit cannot be determined immediately, it is calculated on an agreed basis—commonly on the basis of the previous year's profit, adjusted proportionately for the period.

The accounting treatment follows the golden rule for personal accounts: Debit what goes out, Credit what comes in. Khan's Capital Account (a personal account representing his claim) must be credited because the firm owes him his profit share. The corresponding debit goes to Profit and Loss Suspense Account, a temporary account that holds this liability until the final accounts are prepared and the actual profit is ascertained.

The entry is:

Profit and Loss Suspense Account Dr.

To Deceased Partner's Capital Account

This recognizes the firm's obligation to pay the deceased partner's share without waiting for year-end finalization.

Solution

Step 1: Determine the time period

Khan died on 31st December 2024. The firm's accounting year runs from 1st April to 31st March. Therefore, Khan was alive for the period:

1st April 2024 to 31st December 2024 = 9 months (out of 12 months)

Step 2: Calculate Khan's share of profit

Khan's profit-sharing ratio = $\frac{1}{5}$ (in the ratio 2 : 2 : 1, total = 5 parts)

Previous year's profit (year ended 31st March 2024) = ₹6,00,000

Khan's share for the full year = $\frac{1}{5} \times 6,00,000 = ₹1,20,000$

Khan's share for 9 months = $1,20,000 \times \frac{9}{12} = ₹90,000$

Working Note 1: Khan's Profit Share Calculation

Particulars	Calculation	Amount (₹)
Previous year's profit (2023–24)	Given	6,00,000
Khan's share (1/5) for full year	$\frac{1}{5} \times 6,00,000$	1,20,000
Period from 1 April to 31 Dec 2024	9 months out of 12	—
Khan's share for 9 months	$1,20,000 \times \frac{9}{12}$	90,000

Journal Entry

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CBSE 2025Set ANNUAL1 markMCQ
$Q. On death of a partner, the firm gets for joint life policy taken for all partners is (A) Policy amount (B) Surrender value (C) Policy amount of deceased partner (D) Surrender value of all partners$
›Reveal solutionSolution
A Joint Life Policy (JLP) on all partners is payable in full on the first partner's death, so the firm receives the entire policy (sum assured) amount. Hence the answer is (A) Policy amount.

A Joint Life Policy is a single insurance policy taken by the firm on the joint lives of all partners, with premiums paid by the firm. Its purpose is to provide ready funds to pay the deceased partner's dues. For Bihar Class-12 (BSEB Inter) commerce:

On the death of any partner, the policy matures and the insurer pays the firm the full policy amount (the sum assured). …
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CBSE 2025Set ANNUAL1 markMCQ
$Q. According to the Partnership Act, the interest payable to the deceased partner on the amount left by him will be (A) 6% p.a. (B) 10% p.a. (C) 12% p.a. (D) as per Bank rate.$
›Reveal solutionSolution

Interest on the amount left by a deceased partner is 6% per annum under the Act — option (A).

Under Section 37 of the Indian Partnership Act, 1932, when a partner dies (or retires) and the amount due to him is not paid immediately but is retained in the business, the outgoing partner (or his legal representative) is entitled, at his option, to interest at 6% per annum on the amount left in the firm (or a share of profi …

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CBSE 2025Set ANNUAL1 mark
$Q. Fill in the blank: Life Insurance reserve fund is transferred to ________ A/c.$
›Reveal solutionSolution

Answer: Partners' Capital Account.

A life (joint life) insurance policy reserve is an accumulated fund set aside out of the partners' profits. When it is no longer required or the policy matures, the reserve belongs to the partners and is transferred to their …

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CBSE 2025Set ANNUAL1 markMCQ
$Q. In the case of death of partner, Which account was not made from the following?$
(a) Cash Account
(b) Partners' Capital Account
(c) Realisation Account
(d) Revaluation Account
(a) Cash Account
(b) Partners' Capital Account
(c) Realisation Account
(d) Revaluation Account
›Reveal solutionSolution
Realisation Account is the account that is NOT prepared on the death of a partner — it belongs to dissolution of the firm, a different event.

On the death of a partner, the firm continues its business with the remaining partners (reconstitution of the firm), it does not wind up. The accounting steps taken are:

Revaluation Account — to record any revaluation of assets and liabilities as on the date of death, and to adjust reserves.

Partners' Capital Account — to credit the deceased partner's capital with his share of revaluation profit, goodwill, reserves, and accrued profit up to the date of death, and to transfer the final balance to his Executor's/Representative's Account.

Cash/Bank Account — used when any amount is actually paid in cash to the executor, or when the firm pays the dues over time. …
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CBSE 2025Set ANNUAL1 markMCQ
$Q. On dissolution of the firm, Partners' Capital A/cs are closed through$
(a) Realization A/c
(b) Drawings A/c
(c) Bank A/c
(d) Loan A/c
›Reveal solutionSolution
Partners' Capital Accounts are the last accounts settled on dissolution, and they are closed through the Bank Account — the actual cash payment/receipt to/from each partner.

On dissolution of a firm, the normal sequence is:

Assets (other than cash/bank) are transferred to Realisation A/c and sold; liabilities are transferred and paid off through Realisation A/c.

Any reserves/accumulated profits are distributed to partners' Capital A/cs in the old profit-sharing ratio.

Profit or loss on realisation is transferred to partners' Capital A/cs.

Partners' Drawings, Loan accounts, etc. are settled. …
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CBSE 2024Set 67/2/11 markMCQ
$Q. At the time of dissolution of a firm, the total assets were ₹6,00,000 and outside liabilities were ₹2,40,000. If assets realised ₹7,20,000 and realisation expenses of ₹8,000 were paid, the profit or loss on realisation will be : (A) Loss ₹1,20,000 (B) Profit ₹1,20,000 (C) Loss ₹1,12,000 (D) Profit ₹1,12,000$
›Reveal solutionSolution

Profit on realisation = ₹1,12,000 (Option D) — the excess of the net amount realised from assets (after realisation expenses) over the book value of those assets. Liabilities settled at book value cause no gain or loss.

At dissolution, a Realisation Account is opened. All assets (except cash/bank) are transferred to its debit at book value and all outside liabilities to its credit at book value. The cash actually realised on assets is credited, and the amounts paid to settle liabilities and the realisation expenses are debited. The balancing figure is the profit or loss on realisation, shared by the partners in their profit-sharing ratio.

Key insight: because the outside liabilities (₹2,40,000) are both transferred in (credit) and paid off (debit) at the same ₹2,40,000, they cancel out and have no effect on the realisation profit. So the profit is simply the net cash realised from the assets minus the book value of those assets.

Working

Particulars Amount (₹)
Assets realised 7,20,000
Less: Realisation expenses (8,000)
Net amount realised from assets 7,12,000
Less: Book value of assets (6,00,000)
Profit on realisation 1,12,000

Cross-check via the Realisation Account

Particulars Amount (₹) Particulars Amount (₹)
To Sundry Assets (book value) 6,00,000 By Outside Liabilities 2,40,000
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Particulars	Debit (₹)	Credit (₹)
Mohan's Loan A/c Dr.	10,000
To Bank A/c		10,000
(Being Mohan's loan discharged on dissolution)

Particulars	Amount (₹)
Assets realised	7,20,000
Less: Realisation expenses	(8,000)
Net amount realised from assets	7,12,000
Less: Book value of assets	(6,00,000)
Profit on realisation	1,12,000

Concept

Step 1 - Firm's profit for the period

Step 2 - Navita's share

Journal entry …

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