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
🔒You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
🔒 Start your 14-day free trial to unlock the full solution →Part (a)Concept understanding — Dissolution Accounting Treatment
Dissolution of a Partnership Firm – The Accounting Treatment
Let’s start with something you already know. Imagine you and a friend run a small tiffin service together. You both put in money, buy utensils, rent a space, and share the profits. One day, you decide to stop. You sell the utensils, pay the rent you owe, and split whatever cash is left. That’s dissolution — the end of the partnership.
Now, in Accountancy, dissolution means the firm ceases to exist. All assets are sold, all liabilities are paid off, and the remaining money (or loss) is divided among the partners. The accounting treatment is simply the set of rules we follow to record this winding-up process in the books.
Why does dissolution need a separate treatment?
During the life of a firm, we use a Profit and Loss Appropriation Account to share profits, and a Capital Account to track each partner’s stake. But when the firm dissolves, we stop using those accounts. Instead, we open a Realisation Account — the star of dissolution accounting.
The Realisation Account is like a temporary “sale and settlement” account. It collects:
- All assets (except cash/bank) at their book value.
- All liabilities (except partner’s loan or capital) at their book value.
- The actual sale proceeds of assets.
- The actual payment made to settle liabilities.
- Any expenses of dissolution.
At the end, the balance of the Realisation Account — profit or loss on realisation — is transferred to the partners’ capital accounts in their profit-sharing ratio.
The accounting treatment step-by-step
Step 1: Transfer assets (except cash/bank) to the debit of Realisation Account
Journal entry:
Realisation A/c Dr. [Book value of all assets except cash/bank]
To Sundry Assets A/c [Individually or collectively]
Why? Because we are removing the assets from the books. The Realisation Account now “holds” them.
Step 2: Transfer liabilities (except partner’s loan or capital) to the credit of Realisation Account
Journal entry:
Sundry Liabilities A/c Dr. [Book value of all liabilities]
To Realisation A/c [Total liabilities]
Why? Liabilities are obligations. By transferring them to the credit side, we show that the Realisation Account will now handle their payment.
Step 3: Record sale of assets
When assets are sold:
Bank A/c Dr. [Actual sale amount]
To Realisation A/c [Sale proceeds]
If an asset is taken over by a partner (instead of sold outside):
Partner’s Capital A/c Dr. [Agreed value]
To Realisation A/c [Agreed value]
Step 4: Record payment of liabilities
When liabilities are paid:
Realisation A/c Dr. [Amount paid]
To Bank A/c [Amount paid]
If a liability is taken over by a partner:
Realisation A/c Dr. [Amount of liability]
To Partner’s Capital A/c [Amount of liability]
Step 5: Record dissolution expenses
If paid by the firm:
Realisation A/c Dr. [Expense amount]
To Bank A/c [Expense amount]
If paid by a partner personally (and not reimbursed), no entry is needed — it’s treated as the partner’s contribution.
Step 6: Close the Realisation Account
After all assets are sold and liabilities paid, the Realisation Account will have a balance.
- If the credit side is larger → Profit on Realisation → transfer to partners’ capital accounts in profit-sharing ratio.
- If the debit side is larger → Loss on Realisation → transfer to partners’ capital accounts in profit-sharing ratio.
Journal entry for profit:
Realisation A/c Dr. [Profit amount]
To Partner’s Capital A/c [Each partner’s share]
For loss:
Partner’s Capital A/c Dr. [Each partner’s share]
To Realisation A/c [Loss amount]
Step 7: Close partners’ capital accounts
After all adjustments, the capital accounts show the final amount due to each partner. This is paid in cash:
Partner’s Capital A/c Dr. [Final balance]
To Bank A/c [Amount paid]
If a partner’s capital account shows a debit balance (they owe the firm), they bring in cash:
Bank A/c Dr. [Amount brought in]
To Partner’s Capital A/c [Amount brought in]
The format of the Realisation Account
Here’s how it looks in the NCERT textbook style:
| Dr. | Realisation Account | Cr. |
|---------|--------------------------|---------| …
Part (b)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.
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. …
Part (a)
Mohan's loan of ₹10,000 to the firm; firm dissolved.
A partner's loan is a liability of the firm to the partner as a creditor — separate from capital. It is not transferred to the Realisation Account; it is paid off directly in cash.
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Mohan's Loan A/c Dr. | 10,000 | ||
| To Bank A/c | 10,000 |
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. …
Showing the 12 most recent of 74 on this concept.
- CBSE 2026Set 67/4/11 markMCQQ.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 outCommon 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.
TipShortcut
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 ✓ …
- CBSE 2026Set 67/4/11 markMCQQ.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 outA 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 (₹) | …
- CBSE 2026Set 67/5/11 markMCQQ.(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. …
- CBSE 2026Set 67/5/11 markMCQQ.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 × Rate × Period
Discount = ₹1,20,000 × 10012 × 123
Discount = ₹1,20,000 × 0.12 × 0.25
Discount = ₹3,600
-
Calculation of Amount Paid to Sundry Creditors …
- CBSE 2026Set MARCH1 markMCQQ.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 Ac …
- CBSE 2026Set MARCH1 markQ.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.
- 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. …
- CBSE 2026Set MARCH1 markQ.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. …
- CBSE 2026Set MARCH1 markQ.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 B …
- CBSE 2026Set ANNUAL1 markMCQQ.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).
…
- CBSE 2026Set ANNUAL1 markMCQQ.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. …
- CBSE 2026Set ANNUAL1 markQ.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.
…
- CBSE 2025Set 67/4/11 markMCQQ.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. …
🎓Unlock everything free for 14 days
- ✓Full step-by-step solutions
- ✓Concept-first explanations
- ✓Methods, shortcuts & mistakes
- ✓PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.