Q.Pass the necessary journal entry for treatment of Partner's loan appearing on the asset side of the Balance Sheet in case of dissolution of a partnership firm.

Showing the 12 most recent of 43 on this concept.

1. CBSE 2026Set MARCH1 markMCQ
   Q.To which account credit balance of general reserve is transferred at the time of the dissolution of a firm?

   (a) Realisation A/c

   (b) Cash A/c

   (c) Profit and loss A/c

   (d) Partners' capital A/c

   ›Reveal solutionSolution

   The credit balance of general reserve is transferred to the partners' capital accounts on dissolution, so the answer is (d).

   General reserve represents profits set aside in the past that were never distributed. It is not a liability to an outsider and is not connected with the sale of any asset, so it is not passed through the Realisation Account. On dissolution it is credited directly to the partners' capital accounts in their profit-sharing ratio.

   ✓Final answer

   (d) Partners' capital A/c.

2. CBSE 2026Set MARCH1 mark
   Q.Describe the methods of dissolution of a partnership firm.

   ›Reveal solutionSolution

   A firm may be dissolved either without the court's intervention or through a court order.

   1. Dissolution without the intervention of the court:

   • By mutual agreement of all partners.

   • Compulsory dissolution (for example when all but one partner become insolvent, or the business becomes unlawful).

   • On the happening of certain contingencies (expiry of the term, completion of the venture, death or insolvency of a partner), subject to the agreement.

   • By notice, where the partnership is at will, any partner may dissolve it by giving notice to the others.

   2. Dissolution by the order of the court: When a partner becomes of unsound mind, is permanently incapable of performing duties, is guilty of misconduct, persistently breaches the agreement, transfers his interest, the business runs at a continuous loss, or on any other just and equitable ground, the court may order dissolution.

   ✓Final answer

   The methods are: (1) dissolution without the court's intervention - by agreement, compulsory dissolution, on happening of contingencies, or by notice in a partnership at will; and (2) dissolution by order of the court.

3. CBSE 2026Set MARCH1 mark
   Q.How would you deal with the provident fund balance shown in the balance sheet at the time of dissolution?

   ›Reveal solutionSolution

   Provident fund is an external liability; transfer it to the credit of the Realisation A/c and pay it in cash.

   The provident fund represents amounts belonging to the employees that the firm must pay out. It is therefore a genuine liability to outsiders, not a partners' reserve.

   On dissolution:

   • Transfer entry: Provident Fund A/c Dr, To Realisation A/c (credit side of Realisation A/c).
   • Payment entry: Realisation A/c Dr, To Cash/Bank A/c when the amount is actually paid.

   Because it is an external liability, it is not distributed among the partners' capital accounts.

   ✓Final answer

   Treat it as an external liability - transfer it to the credit side of the Realisation A/c and discharge it by paying through Cash/Bank.

4. CBSE 2026Set MARCH1 mark
   Q.On dissolution of a firm, Partner's Loan Account is transferred to __________ Account.

   ›Reveal solutionSolution

   On dissolution, the Partner's Loan Account is transferred to the Bank (Cash) Account when it is paid off.

   A loan given by a partner to the firm is kept separate from the Realisation Account. In the order of payment on dissolution, outside liabilities are paid first, then the partner's loan, and finally the partners' capitals. The partner's loan is discharged by the entry: Partner's Loan A/c Dr, To Bank A/c - so its balance is transferred to (settled through) the Bank/Cash Account.

   ✓Final answer

   On dissolution of a firm, Partner's Loan Account is transferred to the BANK (CASH) ACCOUNT.

   It is not routed through the Realisation Account, unlike outside liabilities.

5. CBSE 2026Set ANNUAL1 markMCQ
   Q.On dissolution of the firm, General Reserve is transferred to

   (a) Realization A/c

   (b) Partners' Capital A/cs in their profit-sharing ratio

   (c) Partners' Capital A/cs in capital ratio

   (d) Cash A/c

   ›Reveal solutionSolution

   General Reserve is an accumulated profit, so on dissolution it goes straight to the Partners' Capital Accounts in the profit-sharing ratio — never through the Realisation Account.

   When a firm is dissolved, the Realisation Account is opened only to record the sale/realisation of external assets and the payment/settlement of external liabilities, and to work out the resulting profit or loss on realisation. Items such as General Reserve, Reserve Fund, and credit balance of Profit & Loss Account are not assets or liabilities to be "realised" — they represent profits already earned by the firm in earlier years but kept back (undistributed) for contingencies. Since this money genuinely belongs to the partners, it is transferred directly to the Partners' Capital Accounts in their existing profit-sharing ratio (not the capital ratio, and not via the Realisation Account).

   This is distinct from how such a reserve is treated at admission or retirement of a partner (where it may first be adjusted through the old partners' capital accounts in the old ratio before the new ratio takes effect) — at dissolution, since the firm is winding up entirely, the full reserve is simply distributed to all partners in their profit-sharing ratio as a final step alongside the Realisation Account's profit/loss.

   ✓Final answer

   Option (b) "Partners' Capital A/cs in their profit-sharing ratio" — General Reserve, being an accumulated profit, is distributed to partners in their profit-sharing ratio on dissolution, not through the Realisation Account.

6. CBSE 2026Set ANNUAL1 markMCQ
   Q.On dissolution of the firm, the liability paid by the partner is to be credited to ............................... .

   (a) Bank Account

   (b) Realisation Account

   (c) Partner's Capital Account

   (d) Realisation Expenses Account

   ›Reveal solutionSolution

   A liability paid by a partner personally (not out of the firm's bank) on dissolution is credited to that Partner's Capital Account.

   On dissolution of a firm, all assets are realised and all liabilities are paid off through the Realisation Account. Normally, when the FIRM pays a liability out of its own bank/cash, the entry is:

   Realisation A/c Dr.

      To Bank A/c

   But sometimes a partner personally pays a firm liability (e.g., a partner settles a creditor out of his own pocket because the firm's cash was tight, or he undertakes to discharge a specific liability as part of the settlement). In that case, the firm has not paid anything out of its own funds — instead, it now owes that amount to the partner who paid on its behalf. The correct entry is:

   Realisation A/c Dr.

      To Partner's Capital A/c

   This credits the partner's capital account (increasing what the firm owes him / reducing what he owes the firm), rather than touching the Bank Account at all, because no firm cash moved.

   ✓Final answer

   A liability paid by a partner (out of his own funds) at the time of dissolution is credited to that Partner's Capital Account.

7. CBSE 2026Set ANNUAL1 mark
   Q.Which account is to be debited to write off Preliminary expenses appearing in the Balance Sheet at the time of dissolution of Partnership firm ?

   ›Reveal solutionSolution

   Preliminary expenses (and other fictitious assets like a debit balance of P&L A/c) are written off directly to the Partners' Capital Accounts, NOT through the Realisation Account.

   When a partnership firm is dissolved, every REAL asset (machinery, stock, debtors, premises, etc.) is transferred to the Realisation Account so that its realisation (sale) can be accounted for. However, some items appearing on the asset side of the Balance Sheet are not real, saleable assets at all — they are fictitious assets, representing expenses/losses not yet written off. Common examples: Preliminary Expenses, Discount on Issue of Debentures, debit balance of Profit & Loss Account, Deferred Advertisement Expenditure.

   Since these items have no realisable value and cannot be "sold" on dissolution, they are NOT transferred to the Realisation Account. Instead, they are written off directly against the partners' own capital, in their old profit-sharing ratio, through the entry:

   Partners' Capital A/cs Dr. (in old ratio)

      To Preliminary Expenses A/c

   This correctly reflects that these were always notional/non-recoverable amounts that ultimately reduce what the partners are entitled to receive on final settlement.

   ✓Final answer

   The Partners' Capital Accounts (in their old profit-sharing ratio) are debited to write off Preliminary Expenses at the time of dissolution.

8. CBSE 2025Set 67/4/11 markMCQ
   Q.White, Shaun and Todd were partners in a firm sharing profits and losses equally. Shaun's wife had advanced a loan of ₹ 1,00,000 to the firm. The firm was dissolved. Shaun's wife's loan had already been transferred to Realisation account. The account credited to discharge Shaun's wife's loan will be : (A) Shaun's capital account (B) Bank account (C) Realisation account (D) Shaun's loan account

   ›Reveal solutionSolution

   Bank Account is credited to discharge Shaun's wife's loan. A loan from a partner's wife is an outside (third-party) liability, so it is correctly transferred to the Realisation Account; when it is actually paid off, cash goes out and Bank is credited. The answer is (B) Bank account.

   Concept: whose loan gets transferred to Realisation Account?

   On dissolution, all external (third-party) liabilities are transferred to the credit side of the Realisation Account, and all assets (except cash/bank and fictitious assets) to its debit side. A crucial distinction decides where a "loan" goes:

   • A partner's own loan to the firm (e.g. Shaun's Loan) is not routed through Realisation Account. It is settled through a separate Partner's Loan Account after outside liabilities are paid.
   • A loan from a partner's wife or other relative is treated as an outside liability, because the wife is not a partner. It is transferred to the Realisation Account, exactly like creditors or bills payable.

   So in this question, transferring Shaun's wife's loan to the Realisation Account is the correct treatment, not an error.

   Discharging the loan

   Once the loan sits on the credit side of the Realisation Account, paying it off is simply a payment of a liability during dissolution. The entry is:

   Particulars	L.F.	Debit (₹)	Credit (₹)
   Realisation A/c ....Dr.		1,00,000
   To Bank A/c			1,00,000
   (Being Shaun's wife's loan paid on dissolution)

   The account credited is Bank A/c, because cash flows out of the firm to settle the external liability.

   Watch out

   Do not confuse this with a partner's own loan. A partner's own loan would be paid by debiting that Partner's Loan A/c and crediting Bank, and it is never transferred to Realisation. A relative's loan, by contrast, is an outside liability transferred to Realisation and then paid off through Bank.

   Why the other options are wrong

   • (A) Shaun's capital account — the loan is a liability owed to Shaun's wife, an outsider; it is not adjusted against Shaun's capital.
   • (C) Realisation account — Realisation A/c is debited (not credited) when the liability is paid; the amount is already sitting on its credit side from the transfer entry.
   • (D) Shaun's loan account — this is the wife's loan, not Shaun's own loan, so no partner's loan account is involved.

   ✓Final answer

   The correct answer is (B) Bank account. Shaun's wife's loan is an external liability that was rightly transferred to the Realisation Account; discharging it is a payment of a liability, so the Realisation Account is debited and Bank Account is credited.

9. CBSE 2025Set 67/6/11 markMCQ
   Q.In the event of dissolution of a partnership firm, the order of payment of losses including deficiencies of capital shall be : (A)

   (i) First out of profits,

   (ii) Next by the partners individually in their profit sharing ratio,

   (iii) Lastly, if necessary, out of capital of partners. (B)

   (i) First out of capital of partners,

   (ii) Next out of profits,

   (iii) Lastly, if necessary, by the partners individually in their profit sharing ratio. (C)

   (i) First by the partners individually in their profit sharing ratio,

   (ii) Next out of profits,

   (iii) Lastly, if necessary, out of capital of partners. (D)

   (i) First out of profits,

   (ii) Next out of capital of partners,

   (iii) Lastly, if necessary, by the partners individually in their profit sharing ratio.

   ›Reveal solutionSolution

   The correct order of payment of losses (including capital deficiencies) on dissolution is: first out of profits, next out of capital, and lastly by partners individually in their profit-sharing ratio — Option (D).

   Concept: Order of Application of Losses on Dissolution

   When a partnership firm dissolves, assets are realised and liabilities are settled. The difference between what is realised and what is owed often results in a loss (or gain). The Indian Partnership Act, 1932, and accounting principles establish a clear hierarchy for absorbing these losses.

   The fundamental principle is that losses are business obligations first, to be met from business resources before calling upon partners' personal wealth. This mirrors the logic of appropriation: profits belong to the firm before distribution, so losses must be borne by the firm's accumulated resources before partners contribute individually.

   The Three-Stage Hierarchy

   Stage 1: Out of Profits

   Any accumulated profits (reserves, undistributed profits, profit and loss account credit balance) are applied first. These are the firm's retained earnings and represent the primary cushion against losses.

   Stage 2: Out of Capital

   If profits are insufficient, the loss is charged against the partners' capital accounts in their profit-sharing ratio. Capital represents the partners' investment in the firm — it is the second line of defence. Each partner's capital is reduced proportionately.

   Stage 3: By Partners Individually (Personal Contribution)

   If even after exhausting capital accounts a partner's capital account shows a debit balance (a deficiency), that partner must bring in cash from personal resources to make good the deficiency. This is the last resort. The partner with the deficiency has a personal liability to contribute, because losses are shared in the profit-sharing ratio and his share of losses exceeded his capital.

   Watch out

   A common confusion: students sometimes think capital is applied before profits, or that partners contribute individually before touching capital. Remember, the firm's own resources (profits, then capital) are exhausted first; only a residual deficiency triggers personal contribution.

   Why This Order?

   The logic is rooted in the nature of partnership:

   • Profits are collective earnings held by the firm. They exist precisely to absorb fluctuations, including losses.
   • Capital is the partners' stake in the firm. It is meant to fund operations and bear risk, so it is the natural second absorber.
   • Personal contribution is invoked only when a partner's share of the loss creates a deficit beyond what his capital can cover. This respects limited liability to the extent of capital, but enforces the profit-sharing agreement when capital is insufficient.

   This sequence ensures that the firm's internal resources are fully utilised before any partner is asked to dip into personal funds, and it treats all partners equitably according to their profit-sharing ratio.

   Application to the Question

   Let's examine each option:

   (A) suggests profits → partners individually → capital. This is incorrect because it asks partners to contribute personally before their capital is applied, which contradicts the principle that capital is a firm resource to be used before personal funds.

   (B) suggests capital → profits → partners individually. This reverses the first two stages. Profits, being the firm's retained earnings, should be the first buffer, not capital.

   (C) suggests partners individually → profits → capital. This is entirely backwards, asking for personal contribution before touching any firm resources.

   (D) states profits → capital → partners individually. This is the correct sequence: exhaust accumulated profits first, then reduce capital accounts proportionately, and finally require personal contribution if a capital deficiency arises.

   Tip

   A mnemonic: P-C-P (Profits, Capital, Personal). Think of it as the firm's "internal reserves" (profits) → "invested resources" (capital) → "external call" (personal funds).

   ---

   ✓Final answer

   The correct order of payment of losses, including deficiencies of capital, on dissolution is: (i) First out of profits, (ii) Next out of capital of partners, (iii) Lastly, if necessary, by the partners individually in their profit-sharing ratio. The answer is (D).

10. CBSE 2025Set MARCH1 markMCQ
    Q.Which is the last payment made from the realisation of assets, at the time of the dissolution of a firm :

    (a) Dissolution expense

    (b) Partner's capital

    (c) Liabilities towards third parties

    (d) Partner's loan

    ›Reveal solutionSolution

    Order of payment on dissolution: (1) realisation expenses & outside liabilities, (2) partners' loans, (3) partners' capital — capital is paid last. Correct option: (b).

    As per the rule of application of assets in dissolution (GSEB Class-12 Commerce Accountancy):

    1. Expenses of realisation and liabilities of the firm to third parties.
    2. Loans/advances given by partners to the firm.
    3. Partners' capital.
    4. Surplus (if any) shared in profit ratio.

    Hence the last payment from realised assets is partners' capital.

    ✓Final answer

    (b) Partner's capital.

11. CBSE 2025Set MARCH1 mark
    Q.What is voluntary dissolution?

    ›Reveal solutionSolution

    Voluntary dissolution = dissolution of a firm brought about by the mutual consent/agreement of all partners (or as per the partnership deed), not by compulsion of law or a court order.

    In GSEB Class-12 Commerce Accountancy (Dissolution of a Firm):

    • Voluntary dissolution takes place when all partners agree to dissolve the firm, or in accordance with a term/contingency provided in the partnership deed (e.g., expiry of the agreed period, completion of the venture).

    • It is contrasted with compulsory dissolution (by operation of law) and dissolution by the court.

    ✓Final answer

    Dissolution of the firm by the mutual agreement of all partners (or per the deed) is voluntary dissolution.

12. CBSE 2025Set MARCH1 markMCQ
    Q.In the event of dissolution of a firm, the amount realised from the sale of assets is first applied to :

    (a) Pay partners' capital

    (b) Pay off loans from partners

    (c) Settle external liabilities

    (d) Distribute among partners in their profit sharing ratio

    ›Reveal solutionSolution

    Realised amounts are applied first to settle external liabilities. Correct option: (c).

    ✓Final answer

    The order of application of the amount realised on dissolution (Section 48, Indian Partnership Act, 1932) is:

    Priority	Payment
    1	Realisation expenses
    2	External liabilities (outside creditors, bank loan, etc.)
    3	Partners' loans / advances to the firm
    4	Partners' capital balances
    5	Surplus (if any) shared in profit-sharing ratio

    Among the given options, paying partners' capital (a), partners' loans (b) and distributing among partners (d) all rank AFTER external liabilities. Third-party creditors must be settled before any partner is paid. Hence the first application is to settle external liabilities — option (c).