- Chanda, Tara and Nisha were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. They decided to dissolve the firm on 31st March, 2021. Pass necessary Journal Entries for the following transactions after all assets (other than cash and bank) and third party liabilities have been transferred to Realisation Account. (i) A typewriter completely written off from the books was sold for ₹ 9,000. (ii) Chanda took over stock worth ₹ 96,000 at ₹ 84,000. (iii) Nisha was to get remuneration of ₹ 42,000 for completing the dissolution process. (iv) Creditors of ₹ 23,500 took over all the investments at ₹ 10,000. Remaining amount was paid to them in Cash. (v) Sundry Creditors amounting to ₹ 40,000 were settled at a discount of 10%. OR
- Heena, Meena and Tina are partners in a firm sharing profits and losses equally. Their Balance Sheet on April 1st, 2020 was as follows : Balance Sheet of Heena, Meena & Tina as on 1st April, 2020
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Bills Payable | 12,000 | Building | 40,000 |
| Sundry Creditors | 18,000 | Machinery | 30,000 |
| General Reserve | 12,000 | Furniture | 12,000 |
| Capitals : Heena | 30,000 | Stock | 22,000 |
| Meena | 30,000 | Debtors 20,000 | |
| Tina | 28,000 | Less : Provision for doubtful debts 1,000 | 19,000 |
| Bank | 7,000 | ||
| 1,30,000 | 1,30,000 |
Tina retired from the firm on the above date and the following was agreed upon : (a) Building was to be appreciated by 20%. (b) Machinery was to be depreciated by ₹ 1,500. (c) Provision for doubtful debts was to be increased to ₹ 1,500. (d) Goodwill was valued at ₹ 21,000 on Tina's retirement and the same was to be treated without opening goodwill account. (e) The balance in Tina's Capital account will be transferred to her Loan account. Prepare Revaluation Account and Partners' Capital Accounts.
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)Concept understanding — Realisation Account
The Realisation Account: Winding Up the Business Books
Think of a business as a box of ingredients you bought to make and sell biryani. Normally, you use the rice, spices, and chicken, sell the biryani, and keep buying fresh stock. But what if you decide to close the shop for good? You don't just throw away the leftover ingredients — you sell them off. The stove, the pots, the delivery scooter — everything goes. You collect whatever cash you can from selling these items, pay off any outstanding bills (like the vegetable vendor you still owe), and then see what's left. That leftover amount is what you, the owner, finally take home.
That entire process of selling off everything and settling all dues is what the Realisation Account captures in accounting. It's the final scorecard of a partnership firm that is being dissolved.
What the Realisation Account Actually Is
The Realisation Account is a nominal account (like a Profit & Loss account) that is opened only when a partnership firm is dissolved. Its single purpose is to calculate the profit or loss on realisation — that is, the net gain or loss from converting all non-cash assets into cash and paying off all liabilities.
The Realisation Account is not the same as the Revaluation Account. Revaluation is done when a firm is continuing (e.g., on admission of a partner). Realisation is done when the firm is closing down.
Why It Matters (The "Why")
Without the Realisation Account, you cannot fairly divide the final cash among the partners. Here's why:
- Assets are sold at market price, not book value. A machine bought for ₹1,00,000 might sell for only ₹60,000. That ₹40,000 loss must be recorded.
- Liabilities are settled for actual amounts. A creditor of ₹50,000 might agree to accept ₹48,000 in full settlement. That ₹2,000 gain must be recorded.
- There are dissolution expenses. Legal fees, brokerage, auctioneer's commission — these costs eat into the cash available.
The Realisation Account collects all these gains and losses in one place. The net result (profit or loss) is then transferred to the Partners' Capital Accounts in their profit-sharing ratio. Only after that can you determine exactly how much cash each partner is entitled to.
Accounting Treatment: The Debit and Credit Rules
The logic is straightforward. Think of the Realisation Account as a temporary "melting pot" where:
- Debit side: Everything that reduces the cash available to partners (assets being taken out, expenses being paid).
- Credit side: Everything that increases the cash available to partners (liabilities being settled cheaply, assets being sold for more than book value).
Here is the precise treatment as per NCERT:
| Transaction | Debit | Credit |
|---|---|---|
| Transfer of all assets (except cash/bank) | Realisation A/c | Respective Asset A/c |
| Transfer of all external liabilities | Respective Liability A/c | Realisation A/c |
| Sale of an asset | Bank A/c (cash received) | Realisation A/c |
| Payment of a liability | Realisation A/c | Bank A/c (cash paid) |
| Payment of dissolution expenses | Realisation A/c | Bank A/c |
| When a partner takes over an asset | Partner's Capital A/c | Realisation A/c |
| When a partner takes over a liability | Realisation A/c | Partner's Capital A/c |
| Profit on realisation (transferred) | Realisation A/c | Partners' Capital A/c (in PSR) |
| Loss on realisation (transferred) | Partners' Capital A/c (in PSR) | Realisation A/c |
Cash and bank balances are not transferred to the Realisation Account. They remain as they are and are finally distributed to the partners.
The Proforma (Format) of the Realisation Account
This is the standard format you will use in your exam. Notice that the total of both sides must match before you can find the profit or loss.
| Dr. | Realisation Account | Cr. | |
|---|---|---|---|
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Sundry Assets (all transferred) | xxx | By Sundry Liabilities (all transferred) | xxx |
| To Bank (liabilities paid) | xxx | By Bank (assets sold) | xxx |
| To Bank (dissolution expenses) | xxx | By Partner's Capital A/c (asset taken over) | xxx |
Part (b)Concept understanding — Goodwill Adjustment on Retirement
Goodwill Adjustment on Retirement – A First Look
Think of a cricket team. Four friends start a team together. Over time, they build a reputation – people come to watch them, sponsors pay them, and their brand becomes valuable. Now one player retires. Should he walk away with nothing for the reputation the team built while he was part of it? Of course not. That reputation – the team's ability to earn more than just its raw assets – is goodwill.
In a partnership, goodwill is that same intangible value: the firm's name, its customer loyalty, its location advantage, its reputation for quality. When a partner retires, the remaining partners continue the business. They will enjoy the benefits of that goodwill going forward. The retiring partner, who helped build it, deserves a share of its value at the time of retirement.
The Precise Meaning
Goodwill on retirement is the compensation paid by the continuing partners to the retiring partner for his/her share of the firm's reputation and earning power. It is not a cash payment for a physical asset – it is an adjustment of the partners' capital accounts to reflect that the retiring partner's share of goodwill is being transferred to the remaining partners.
Goodwill is not brought into the books as a new asset. It is adjusted through the partners' capital accounts. The retiring partner's capital account is credited with his/her share of goodwill, and the continuing partners' capital accounts are debited in their gaining ratio.
Why Does This Matter?
If goodwill were ignored, the retiring partner would be underpaid. The continuing partners would get a free benefit – the firm's reputation – without compensating the person who helped create it. The adjustment ensures fairness: the retiring partner gets his/her rightful share, and the continuing partners pay for the advantage they now exclusively enjoy.
The Accounting Treatment – Step by Step
The NCERT textbook gives a clear procedure. Here is the logic:
-
Calculate the firm's total goodwill at the time of retirement. This is usually given in the problem or valued using an agreed method (e.g., average profit method, super profit method).
-
Find the retiring partner's share of that goodwill.
Retiring partner's share = Total goodwill × Retiring partner's profit-sharing ratio.
-
Determine the gaining ratio of the continuing partners.
Gaining ratio = New ratio – Old ratio (for each continuing partner).
If the new ratio is not given, the continuing partners share the retiring partner's share in their old profit-sharing ratio.
-
Pass the journal entry:
Continuing Partners' Capital A/cs (individually) Dr. (in gaining ratio) To Retiring Partner's Capital A/cThis entry reduces the continuing partners' capital (they pay) and increases the retiring partner's capital (he receives).
Do not debit the Goodwill account. The goodwill is not being recorded as an asset – it is an adjustment among partners. Only if the firm decides to raise goodwill as an asset and then write it off would you touch the Goodwill account, but that is a different treatment (usually for admission, not retirement).
Format: Partners' Capital Accounts (after adjustment)
Here is how the capital accounts look after the goodwill adjustment. Assume three partners: A, B, and C. C retires. A and B continue in the ratio 3:2. Total goodwill is ₹1,00,000. Old ratio was 2:2:1 (A:B:C). C's share = 1/5 × ₹1,00,000 = ₹20,000. Gaining ratio of A and B = New ratio – Old ratio = (3/5 – 2/5) : (2/5 – 2/5) = 1/5 : 0. So A gains fully. A's capital is debited ₹20,000; C's capital is credited ₹20,000.
| Particulars | A (₹) | B (₹) | C (₹) |
|---|---|---|---|
| To C's Capital A/c (Goodwill) | 20,000 | – | – |
Part (a)
Dissolution journal entries (assets other than cash/bank and third-party liabilities already transferred to Realisation A/c):
| Particulars | Dr (Rs.) | Cr (Rs.) |
|---|---|---|
| (i) Bank A/c Dr | 9,000 | |
| To Realisation A/c (typewriter sold) | 9,000 | |
| (ii) Chanda's Capital A/c Dr | 84,000 | |
| To Realisation A/c (stock taken over) | 84,000 | |
| (iii) Realisation A/c Dr | 42,000 | |
| To Nisha's Capital A/c (remuneration) | 42,000 | |
| (iv) Realisation A/c Dr | 13,500 | |
| To Bank A/c (creditors 23,500 took investments 10,000; bal. paid) | 13,500 | |
| (v) Realisation A/c Dr | 36,000 |
Part (a): Dissolution entries - typewriter sold 9,000; Chanda takes stock 84,000; Nisha remuneration 42,000; creditors 23,500 took investments 10,000 + paid 13,500; creditors 40,000 settled at 36,000.
Part (b): Revaluation profit Rs.6,000; Heena & Meena capitals Rs.32,500 each; Tina's Rs.41,000 to her Loan A/c.
Part (a)
When a creditor takes over an asset, only the net cash paid is recorded (no separate entry for the asset already in Realisation). See the journal in the short answer.
| Particulars | Dr (Rs.) | Cr (Rs.) |
|---|---|---|
| Bank A/c Dr | 9,000 | |
| To Realisation A/c | 9,000 | |
| Chanda's Capital A/c Dr | 84,000 | |
| To Realisation A/c | 84,000 | |
| Realisation A/c Dr | 42,000 | |
| To Nisha's Capital A/c | 42,000 | |
| Realisation A/c Dr | 13,500 | |
| To Bank A/c | 13,500 | |
| Realisation A/c Dr | 36,000 |
Showing the 12 most recent of 64 on this concept.
- CBSE 2026Set 67/5/11 markMCQQ.Raha, Naveen and Vandana were partners in a firm sharing profits and losses equally. Naveen retired on 31st March, 2025. The balance in his capital account after making the necessary adjustments on account of reserves and revaluation of assets and reassessment of liabilities was ₹ 1,27,000. Naveen was paid ₹ 1,50,000 in full settlement of his claim. The value of goodwill of the firm on the date of Naveen’s retirement was : (A) ₹ 1,50,000 (B) ₹ 23,000 (C) ₹ 69,000 (D) ₹ 4,50,000
›Reveal solutionSolution
The value of goodwill of the firm on the date of Naveen's retirement is ₹69,000.
When a partner retires from a firm, the continuing partners acquire the retiring partner's share of future profits. Since goodwill represents the firm's reputation and earning capacity, the retiring partner is entitled to be compensated for their share in the firm's goodwill, as they contributed to building it during their tenure. This compensation ensures fairness, as the continuing partners will benefit from the firm's established goodwill in the future.
The accounting treatment for goodwill on a partner's retirement involves adjusting the capital accounts of the partners. The retiring partner's capital account is credited with their share of goodwill, increasing their claim against the firm. This increase is borne by the continuing partners, whose capital accounts are debited in their gaining ratio. The gaining ratio is the ratio in which the continuing partners acquire the retiring partner's share of profits.
The general journal entry for goodwill adjustment on retirement is:
Gaining Partners' Capital A/c Dr. (in their gaining ratio)
To Retiring Partner's Capital A/c Cr. (with their share of goodwill)
In this specific problem, we are given the amount paid to the retiring partner and their capital balance after all other adjustments (reserves, revaluation). The difference between the amount paid and this adjusted capital balance represents the retiring partner's share of goodwill. This is because the payment in full settlement includes not only their capital balance but also their share of any unrecorded or unadjusted goodwill. We can then use the retiring partner's profit-sharing ratio to calculate the total goodwill of the firm.
Solution: Calculation of Firm's Goodwill
The problem provides Naveen's capital balance after all adjustments (excluding goodwill) and the final amount paid to him. The excess amount paid to Naveen over his adjusted capital balance represents his share of the firm's goodwill.
-
Calculate Naveen's Share of Goodwill:
The amount paid to Naveen in full settlement is ₹1,50,000.
His capital account balance after all other adjustments was ₹1,27,000.
The difference is the compensation for his share of goodwill.
-
Calculate the Firm's Total Goodwill: …
-
- CBSE 2026Set MARCH1 markMCQQ.Which of the following amounts will be written at the credit side of realisation account, when there is balance of debtors ₹ 24,500 and bad debt reserve ₹ 2,500 in the balance sheet at the time of the dissolution of a firm?(a) ₹ 24,500(b) ₹ 2,500(c) ₹ 22,000(d) ₹ 27,000
›Reveal solutionSolution
The bad debt reserve of 2,500 is credited to the Realisation A/c, so the answer is (b).
When assets and their related provisions are transferred to the Realisation Account:
Item Amount Side of Realisation A/c Debtors (gross) 24,500 Debit Bad debt reserve (provision) 2,500 Credit … - CBSE 2026Set MARCH1 markQ.Realisation account is ______ account.
›Reveal solutionSolution
The Realisation Account is a Nominal Account.
On the dissolution of a firm, a Realisation Account is prepared to record the sale of all assets and the settlement of all liabilities so that the profit or loss on realisation can be ascertained and shared among the partners in their profit-sharing ratio. Because its purpose is to determine a gain or loss (an income/expense result) rather than to track a person (personal account) or a property (real account), i …
- CBSE 2026Set MARCH1 markMCQQ.Unrecorded liabilities, when paid are shown in(a) a) Debit side of Realisation A/c(b) b) Debit side of Bank A/c(c) c) Credit side of Realisation A/c(d) d) Debit side of Cash A/c
›Reveal solutionSolution
Payment of an unrecorded liability on dissolution is shown on the debit side of the Realisation Account - option (a).
In Karnataka 2nd PUC Accountancy, at dissolution the Realisation Account is prepared to close all assets and liabilities. When a liability that was never recorded in the books is discovered and paid, the payment represents a cash outflow of realisation; the entry is Realisation A/c Dr, To Bank A/c. Hence it appears on the debit side of the R …
- CBSE 2026Set ANNUAL1 markMCQQ.In the case of death of a partner, which of the following item, will not be adjusted on the basis of time? A) Share in goodwill B) Interest on capital C) Interest on drawings D) Share in profits
›Reveal solutionSolution
Share in goodwill is NOT adjusted on a time basis, so option (A) is correct.
When a partner dies part-way through the year, the amount due to the deceased is built up from several items. The following are measured on a time basis (for the part of the year up to the date of death):
- Interest on capital (option B) - proportionate to the period.
- Interest on drawings (option C) - proportionate to the period.
- Share in profits (option D) - profit of the firm up to the date of death, shared time-wise. …
- CBSE 2026Set ANNUAL1 markMCQQ.At the time of dissolution of a firm, where is the amount of provision for bad debts on debtor is transferred? A) In Realisation A/c B) In Partners' Capital A/c C) In Partners' Loan A/c D) In Bank A/c
›Reveal solutionSolution
The provision for bad debts is transferred to the Realisation Account on dissolution — option (A).
When a firm is dissolved, a Realisation Account is opened to close all assets (at book value, debit side) and all outside liabilities and provisions against assets (credit side). The provision for bad debts is a provision created against debtors, so it is transferred to the credit side of the Realisation Account. Debtors themselves are shown on the debit side at gross book value, and the amount actually rea …
- CBSE 2026Set ANNUAL1 markMCQQ.On retirement of a partner, goodwill will be credited to Capital Account of(a) Retiring partner(b) Remaining partners(c) All partners(d) None of them
›Reveal solutionSolution
On retirement, goodwill is credited to the retiring partner's capital account - option (a).
When a partner retires, he gives up his share of future profits to the continuing partners, so he is compensated for his share of the firm's goodwill. The standard treatment is to credit the retiring partner's capital account with his share of goodwill a …
- CBSE 2026Set ANNUAL1 markMCQQ.On dissolution of a partnership firm, profit or loss on realisation is distributed among the partners:(a) In Capital ratio(b) In profit sharing ratio(c) In sacrificing ratio(d) Equally
›Reveal solutionSolution
Realisation profit/loss is shared in the profit-sharing ratio - option (b).
On dissolution, the Realisation Account is prepared to record the sale of assets and payment of liabilities; its balance is the profit or loss on realisation. Being a profit or loss of the firm, it is transferred to the partners' capital accounts in their profit …
- CBSE 2026Set ANNUAL1 markMCQQ.Which account is prepared for the sale of Assets?(a) Realization account(b) Revaluation account(c) Profit and Loss appropriation account(d) Partner's capital account
›Reveal solutionSolution
Correct option: (a) Realisation account.
On dissolution of a firm, a Realisation Account is opened to record the sale/realisation of all assets and the payment of all liabilities. (A Revaluation Account is prepared only on reconstitution - admission/retirement/death - when the firm continues, not when …
- CBSE 2026Set ANNUAL1 markQ.Answer in one word/sentence: On retirement of a partner, the existing partners will pay his share of goodwill to him in which ratio?
›Reveal solutionSolution
Answer: Gaining ratio.
On a partner's retirement, the remaining (continuing) partners acquire his share of profit and therefore compensate him for his share of goodwill. They bear this in …
- CBSE 2026Set ANNUAL1 markQ.Answer in one word/sentence: On dissolution, Bank overdraft is transferred to which account?
›Reveal solutionSolution
Answer: Realisation Account.
A bank overdraft is an external liability of the firm. On dissolution all outside liabilities are transferred to the Realisation Account, so a bank overdraft is also transfe …
- CBSE 2025Set 67/4/11 markMCQQ.(a) Tavish, Umesh and Varun were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 2. Tavish retired. Umesh and Varun decided to share profits and losses in future in the ratio of 5 : 3. The gaining share of Umesh will be : (A) 21/72 (B) 11/72 (C) 45/72 (D) 32/72(OR)(b) Asit, Sonu and Hina were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. Asit retired and the balance in his capital account after making necessary adjustments on account of reserves and revaluation of assets and liabilities was ₹ 40,00,000. Sonu and Hina agreed to pay him ₹ 45,00,000 in full settlement of his claim. The value of goodwill of the firm was : (A) ₹ 5,00,000 (B) ₹ 20,00,000 (C) ₹ 15,00,000 (D) ₹ 10,00,000
›Reveal solutionSolution
Part (a): Umesh's gaining share = 21/72 — option (A).
Part (b): Firm's goodwill = ₹10,00,000 — option (D).
Part (a)
Gaining share = New share − Old share. Umesh's old share = 3/9, new share = 5/8. …
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