Q.Which account is opened in the books of a firm to close its accounts on dissolution?

Dissolution expenses are credited to the Cash / Bank Account (and debited to the Realisation Account).

When a firm is dissolved, the expenses incurred to realise assets and settle liabilities (legal fees, brokerage, etc.) are called dissolution or realisation expenses. The accounting entry is:

Realisation A/c ..... Dr

   To Cash / Bank A/c

Because the firm actually pays out cash, the Cash/Bank Account (a real asset account) is credited (it decreases), and the Realisation Account is debited as these are a cost of winding up. Hence the account that is credited is the Cash/Bank Account.

The answer is Cash/Bank account.

When a firm is dissolved, the costs of closing it (legal charges, commission, etc.) are called realisation / dissolution expenses. The journal entry is:

The Realisation Account is debited because the expense is a loss of the dissolution process, and the Cash/Bank Account is credited because cash actually goes out to pay it. Hence dissolution expenses are credited to the Cash/Bank account.

The answer is the Partner's Capital account.

When a firm is dissolved, all assets are transferred to the Realisation Account. If a partner takes over an asset (keeps it personally at an agreed value) instead of it being sold for cash, the agreed value becomes an amount owed by that partner. The entry is:

The Partner's Capital Account is debited because the value of the asset reduces the amount ultimately payable to him, and the Realisation Account is credited as the asset is disposed of. Hence the partner's capital account is debited.

On dissolution, assets and liabilities are closed off by transfer to the Realisation Account, which then measures the profit or loss on realising the assets and paying the liabilities.

The purpose of the Realisation Account is to record the sale of assets and settlement of liabilities and to compute the net gain or loss, which is shared by the partners in their profit-sharing ratio:

The balance of the Realisation Account is the profit (or loss) on dissolution, transferred to partners' capital accounts. The other options — Bank A/c (only cash), Partner's Capital A/c and Partner's Current A/c — are not where assets and liabilities are collected.

An asset taken over by a partner is a payment in kind to that partner, so his Capital account is debited and the Realisation Account is credited with the agreed value.

When the firm is dissolved (or reconstituted), any asset that a partner keeps for himself is treated exactly like cash paid to him. The firm is releasing an asset in his favour, so:

• The Realisation Account is credited (the asset leaves the firm at its agreed value, just as if it had been sold).
• The partner's Capital Account is debited (he owes the firm that value; it reduces the amount ultimately payable to him).

The journal entry is:

The other options are wrong: Revaluation A/c is used only for change in value of assets, not for taking them over; Asset and Balance Sheet accounts are not debited for a take-over; Profit and Loss Adjustment A/c records revaluation gains/losses, not take-overs.

Expenses incurred on dissolution of a firm are called Realisation Expenses.

Why: When a firm is dissolved, its assets are sold and liabilities are paid off through the Realisation Account. Any expenditure incurred in this process — brokerage, commission, legal charges, expenses of realising assets — is termed Realisation Expenses and is debited to the Realisation Account (it reduces the profit / increases the loss on realisation).

The correct option is Capital. If a partner takes over any asset of the firm (at an agreed value), the amount is charged to him — his Capital account is debited and the Realisation Account is credited with the agreed value of that asset.

Explanation

• Taking over an asset means the partner keeps the asset personally instead of it being sold in the market.

• The partner therefore becomes a debtor of the firm for the agreed value of that asset.

• The entry is: Partner's Capital A/c Dr ... To Realisation A/c — reducing the amount ultimately payable to that partner.

The term is Realisation Expenses (also called dissolution expenses).

When a firm is dissolved, its assets are sold and liabilities paid off through the Realisation Account. Any expenses incurred in this process — brokerage on sale of assets, legal charges, cost of winding up, etc. — are called Realisation Expenses. They are recorded on the debit side of the Realisation Account as they are a cost of closing the firm.

The expenses incurred to close down and realise the assets of a firm on dissolution are called Realisation Expenses.