Q.To which account credit balance of Profit and Loss account is transferred at the time of the dissolution of a firm?
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Dissolution Journal Entries – A First Look
Think of a partnership firm like a shared taxi ride. You and your friends pool money for the fare, decide the route together, and split the cost. As long as everyone agrees, the ride continues. But if one friend wants to get off early, or the destination changes, or everyone decides the ride is over — you settle the fare, divide any leftover change, and go your separate ways. That’s dissolution: the partnership ends, the firm is wound up, and all accounts are closed.
What Exactly Is Dissolution?
In Accountancy, dissolution of a partnership firm means the firm ceases to exist as a going concern. All assets are sold, all liabilities are paid off, and the remaining cash (if any) is distributed among the partners in their profit-sharing ratio. This is different from dissolution of partnership (where the firm continues but partners change). Here, the entire firm shuts down.
Dissolution is the final closure of the firm. Every asset is realised (converted to cash), every liability is settled, and partners’ capital accounts are closed.
Why Does It Matter?
You need dissolution entries because the accounting records must show:
- What happened to each asset (sold, taken over by a partner, or written off)
- How each liability was paid
- How the final cash was split among partners
Without these entries, the books would never balance — and the partners wouldn’t know their final share.
The Core Idea: Realisation Account
The NCERT textbook introduces a special temporary account called the Realisation Account. Think of it as a “profit/loss on sale” account for the entire firm. All assets (except cash/bank) are transferred to its debit side at book value. All liabilities (except partner’s loan or capital) are transferred to its credit side. Then, as assets are sold and liabilities paid, the Realisation Account records the actual cash flows. The difference — profit or loss on realisation — is transferred to the partners’ capital accounts in their profit-sharing ratio.
Realisation Profit/Loss = (Total assets realised + liabilities taken over by partners) – (Total assets book value + liabilities paid + realisation expenses)
Step-by-Step Accounting Treatment
Here’s the sequence of journal entries, exactly as per NCERT Class 12:
1. Transfer of Assets (except cash/bank) to Realisation Account
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Realisation A/c Dr. | (Book value of all assets) | |||
| To Sundry Assets A/c (individually) | (Book value) | |||
| (Being assets transferred to Realisation Account) |
Why? We remove assets from the books and bring them into the Realisation Account to track their sale.
2. Transfer of Liabilities (except partner’s loan/capital) to Realisation Account
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Sundry Liabilities A/c (individually) Dr. | (Book value) | |||
| To Realisation A/c | (Book value) | |||
| (Being liabilities transferred to Realisation Account) |
Why? Liabilities are now the responsibility of the Realisation Account — they will be paid from it.
3. Sale of Assets (for cash)
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | (Amount received) | |||
| To Realisation A/c | (Amount received) | |||
| (Being asset sold for cash) |
Why? Cash comes in; the Realisation Account records the sale proceeds.
4. Payment of Liabilities
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Realisation A/c Dr. | (Amount paid) | |||
| To Bank A/c | (Amount paid) | |||
| (Being liability paid) |
Why? Cash goes out; the Realisation Account records the payment.
5. Realisation Expenses Paid
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Realisation A/c Dr. | (Expenses) | |||
| To Bank A/c | (Expenses) | |||
| (Being realisation expenses paid) |
Why? These are costs of winding up — they reduce the net realisation.
6. Asset Taken Over by a Partner
If a partner takes an asset at an agreed value (not necessarily book value):
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Partner’s Capital A/c Dr. | (Agreed value) | |||
| To Realisation A/c | (Agreed value) | |||
| (Being asset taken over by partner) |
Why? The partner’s capital is reduced by the value of the asset they keep.
7. Liability Taken Over by a Partner
If a partner agrees to pay a liability personally:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Realisation A/c Dr. | (Amount of liability) | |||
| To Partner’s Capital A/c | (Amount of liability) | |||
| (Being liability taken over by partner) |
Why? The firm is relieved of the liability; the partner’s capital increases (they will pay it from their own pocket).
8. Transfer of Realisation Profit/Loss to Partners’ Capital Accounts
If profit:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Realisation A/c Dr. | (Profit amount) | |||
| To Partners’ Capital A/c (individually) | (In profit-sharing ratio) | |||
| (Being profit on realisation transferred) |
If loss, reverse the entry.
Why? The net gain or loss from winding up belongs to the partners in their profit-sharing ratio.
9. Closing of Partners’ Capital Accounts …
The credit (accumulated profit) balance of the Profit and Loss Account belongs to the partners, so on dissolution it is distributed to them. …
The credit balance of the Profit and Loss Account is transferred to Partners' Capital Accounts, so option (d) is correct.
In this GSEB Class-12 Commerce dissolution topic, accumulated profits/reserves (such as a credit balance of Profit and Loss A/c) belong to the partners. On dissolution they are distributed directly to the partners' capital accounts in their profit-loss sharing ratio. Only assets and liabilities being realise …
Showing the 12 most recent of 14 on this concept.
- CBSE 2025Set ANNUAL1 markMCQQ.When a partner takes responsibility to make payment of any outside liability of the firm, the account credited will be (A) Realisation A/c (B) Cash A/c (C) Partner's Capital A/c (D) None of these
›Reveal solutionSolution
If a partner personally undertakes to pay an outside liability of the firm, the Realisation Account is debited and the paying partner's Capital Account is credited. Hence the answer is (C) Partner's Capital A/c.
For Bihar Class-12 (BSEB Inter) commerce candidates, when a partner agrees to discharge a firm's liability out of his own pocket, the firm owes him that amount, so the entry is:
- Realisation A/c Dr. (amount of liability taken over)
- To Partner's Capital A/c …
- CBSE 2025Set ANNUAL1 markMCQQ.If a partner took asset on the dissolution of a firm, partner's capital account will be - (A) Debit (B) Credit (C) (A) and (B) both (D) None of these
›Reveal solutionSolution
If a partner takes over an asset on dissolution, his capital account is debited with the agreed value of that asset.
On dissolution, assets are transferred to the Realisation Account. When a partner personally takes over an asset, he is effectively buying it from the firm, so the agreed amount is charged against him. The entry is Partner's Capital A/c Dr. To Realisation A/c, which means the partner's capital account is debited ( …
- CBSE 2025Set ANNUAL1 markQ.Give journal entry for sale of not recorded asset on dissolution of a firm.
›Reveal solutionSolution
Sale of an unrecorded asset on dissolution: Bank/Cash A/c Dr. To Realisation A/c.
An unrecorded (not recorded) asset does not appear in the books, so it has no book value to transfer to the Realisation Account. When such an asset is sold for cash on dissolution, the whole sale proceeds are a gain to the firm and are credited to the Realisation Account:
Bank (Cash) A/c Dr. [amount realised]
** To Realisation A/c**
…
- CBSE 2025Set ANNUAL1 markMCQQ.On dissolution of a firm, the final balance of Capital Account is transferred to(a) Realisation A/c(b) Profit and Loss A/c(c) Cash A/c(d) Loan A/c of partners
›Reveal solutionSolution
The final balance of the Capital Account is settled through the Cash A/c - option (c).
On dissolution, the Realisation Account (profit/loss), reserves and the loan accounts are first transferred to the partners' capital accounts. Once all these adjustments are made, the balance remaining in each partner's Capital Account represents the amount finally due to or from him, which is paid or received in cash; thus t …
- CBSE 2025Set ANNUAL1 markMCQQ.At the time of dissolution undistributed profit and reserve are transferreed to -(a) Capital A/c(b) Bank A/c(c) Partners' Capital A/c(d) Profit / Loss A/c
›Reveal solutionSolution
Correct option: (c) Partners' Capital A/c.
Undistributed profits and reserves (e.g. General Reserve, credit balance of P&L A/c) are not transferred to the Realisation Account; they are distributed among the partners by crediting their Capital Account …
- CBSE 2024Set MARCH1 markMCQQ.To which account credit balance of Profit and Loss account 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) Partner's Capital A/c
›Reveal solutionSolution
The credit balance of the Profit and Loss Account is transferred to Partners' Capital Accounts, so option (d) is correct.
In this GSEB Class-12 Commerce dissolution topic, accumulated profits/reserves (such as a credit balance of Profit and Loss A/c) belong to the partners. On dissolution they are distributed directly to the partners' capital accounts in their profit-loss sharing ratio. Only assets and liabilities being realise …
- CBSE 2023Set ANNUAL1 markMCQQ.On dissolution of a firm, Bank overdraft is transferred to (A) Cash account (B) Bank account (C) Realisation account (D) Partners' Capital account
›Reveal solutionSolution
A bank overdraft is an external liability, so on dissolution it is transferred to the Realisation Account (Bank Overdraft A/c Dr., To Realisation A/c).
On dissolution, all external/third-party liabilities (creditors, bills payable, bank loan, bank overdraft) are transferred to the credit side of the Realisation Account, because the firm must pay them off as part of realisation. The entry is: Bank Overdraft A/c Dr., To Realisation A/c. Transferring it to the Cash or …
- CBSE 2023Set ANNUAL1 markQ.At the time of dissolution of firm, the goodwill of the firm is taken over by a partner, what will be the journal entry?
›Reveal solutionSolution
Goodwill taken over by a partner on dissolution: Partner's Capital A/c Dr., To Realisation A/c.
During dissolution, all assets (including goodwill, if appearing or agreed) stand in the Realisation Account. When a partner takes over an asset such as goodwill, he becomes liable to the firm for its agreed value, so:
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---| …
- CBSE 2022Set ANNUAL1 markMCQQ.Which account is debited with interest payable on partner's loan account on dissolution of a partnership firm?(a) Realisation account(b) Partners' Capital account(c) Cash/Bank account(d) Partner's loan account
›Reveal solutionSolution
Interest accrued on a partner's loan at dissolution is routed through the Realisation Account, like any other winding-up cost.
A partner's loan to the firm is a liability distinct from their capital, and on dissolution it is settled directly (not transferred into the Realisation Account itself, unlike other assets/liabilities) by paying it off from the firm's Cash/Bank Account. However, if interest has accrued on that loan but has not yet been paid or recorded by the date of dissolution, this interest is an additional cost of winding up that the firm must now recognise. Since the Realisation Account is where every dissolution-related gain, loss and expense is finally g …
- CBSE 2022Set ANNUAL1 markMCQQ.Which account is prepared for final settlement of outside liabilities and Partners on dissolution of a firm?(a) Realisation account(b) Partner's Capital account(c) Cash/Bank account(d) Partners' loan account
›Reveal solutionSolution
Realisation Account calculates the profit/loss on winding up; the Cash/Bank Account is where the actual final payments happen.
On dissolution, several accounts work together, but each has a distinct role: the Realisation Account records the book values of assets/liabilities transferred and the amounts actually realised/paid, to arrive at an overall profit or loss on realisation. The Partners' Capital Accounts show what each partner is ultimately owed (or owes) after all adjustments. But the actual, physical settlement — receiving the sale proceeds of assets and then paying, strictly in order, the firm's outside creditor …
- CBSE 2022Set ANNUAL1 markMCQQ.At the time of dissolution of the firm, an unrecorded Bills Payable of Rs. 1,20,000 was taken over by a partner at Rs. 1,08,000. What will be the accounting treatment in partner's capital account?(a) Rs. 1,08,000 debited(b) Rs. 1,08,000 credited(c) Rs. 1,20,000 debited(d) Rs. 1,20,000 credited
›Reveal solutionSolution
An unrecorded liability taken over by a partner is credited to their Capital Account at the AGREED (takeover) value, not the original book figure.
Because this Bills Payable was 'unrecorded', it simply did not exist in the firm's books at all — there is no earlier entry to reverse. When a partner personally agrees to take over and settle this liability on the firm's behalf, it is treated as the partner doing the firm a service worth the AMOUNT THEY AGREE TO SETTLE IT FOR (here, Rs. 1,08,000 — not the original Rs. 1,20,000 face value, since that figure never appeared in the accounts in the first …
- CBSE 2022Set ANNUAL1 markMCQQ.On dissolution of a firm, creditors having book value of Rs. 2,50,000 were settled partly by giving unrecorded investment worth Rs. 80,000 and the remaining creditors were paid at 5% discount. What will be the amount paid to the creditors?(a) Rs. 1,61,500(b) Rs. 1,70,000(c) Rs. 2,37,500(d) Rs. 3,13,500
›Reveal solutionSolution
Settle the part paid via the investment first, then apply the discount only to what's actually paid in cash — answer: Rs. 1,61,500.
Total creditors (book value) = Rs. 2,50,000.
Step 1: Rs. 80,000 of this is settled by giving the creditors an unrecorded investment (worth exactly Rs. 80,000) — no cash changes hands for this part, and it is treated at its full Rs. 80,000 value since that is what it is worth.
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