Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2017 was as follows: **Bala

Numerical Questions · Q11

Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2017 was as follows:

Balance Sheet of Rose and Lily as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	40,000	Cash	16,000
Lily's loan	32,000	Debtors 80,000
Profit and Loss	50,000	Less: Provision for doubtful debts 3,600	76,400
Capitals:		Inventory	1,09,600
Lily	1,60,000	Bills receivable	40,000
Rose	2,40,000	Buildings	2,80,000
Total	5,22,000	Total	5,22,000

Rose and Lily decided to dissolve the firm on the above date. Assets (except bills receivable) realised ₹4,84,000. Creditors agreed to take ₹38,000. Cost of realisation was ₹2,400. There was a Motor Cycle in the firm which was bought out of the firm's money but was not shown in the books of the firm; it was now sold for ₹10,000. There was a contingent liability in respect of an outstanding electric bill of ₹5,000 which was paid. Bills Receivable was taken over by Rose at ₹33,000. Show Realisation Account, Partners' Capital Account, Loan Account and Cash Account.

Punjab PsebTextbookSubjective· 5mImportance★★★★★

86% · 59/69 Questions

🔒 Locked · start free trial →

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 →

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.

Important

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. …

Start your 14-day free trial to unlock the full solution →

We first open the Realisation Account by transferring all assets (except cash) and all external liabilities at book value. The unrecorded motorcycle is brought in as an asset. Bills Receivable taken over by Rose is treated as a realisation (credit side). All payments and receipts pass through this account; the resulting profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio (2:3).

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Assets (transfer):		By Creditors (transferred)	40,000
Debtors (net)	76,400	By Lily’s Loan (transferred)	32,000
Inventory	1,09,600	By Provision for Doubtful Debts	3,600
Bills Receivable	40,000	By Realisation (assets realised):
Buildings	2,80,000	Cash – Assets (except B/R)	4,84,000
To Bank (Creditors paid)	38,000	Cash – Motorcycle	10,000
To Bank (Realisation expenses)	2,400	By Rose – Bills Receivable taken over	33,000
To Bank (Contingent liability paid)	5,000
To Profit transferred to:
Rose’s Capital (2/5)	6,240
Lily’s Capital (3/5)	9,360
Total	5,66,000	Total	5,66,000

Note

The unrecorded motorcycle is not in the books, so it is not “transferred” from the Balance Sheet. It is simply brought into the Realisation Account on the debit side (as an asset) and then sold – the sale appears on the credit side. The contingent liability (electric bill) is paid and debited to Realisation.

Partners’ Capital Account

Particulars	Rose (₹)	Lily (₹)	Particulars	Rose (₹)	Lily (₹)
To Realisation (B/R taken over)	33,000	–	By Balance b/d	2,40,000	1,60,000
To Cash (final payment)	2,13,240	1,69,360	By Realisation – Profit	6,240	9,360
Total	2,46,240	1,69,360	Total	2,46,240	1,69,360

Lily’s Loan Account …

Start your 14-day free trial to unlock the full solution →

Realisation profit of ₹15,600 is shared between Rose and Lily in their profit-sharing ratio 2:3. Rose's capital account is settled at ₹2,33,240 and Lily's at ₹1,99,360. The Cash Account totals ₹5,10,000.

Concept and Accounting Treatment

When a partnership firm is dissolved, the Realisation Account is the central tool. It replaces the Profit and Loss Account and all asset/liability accounts. The logic is simple: all assets (except cash) are transferred to the debit side of Realisation Account at their book values, and all external liabilities (except partner loans and capital) are transferred to the credit side. Then, as assets are sold, we credit Realisation Account with the sale proceeds; as liabilities are paid, we debit Realisation Account. Any profit or loss on realisation is then transferred to the partners' capital accounts in their profit-sharing ratio.

The Motor Cycle not shown in the books is an unrecorded asset. When sold, it is a direct gain — we credit Realisation Account with the sale proceeds. The Bills Receivable taken over by Rose is treated as a sale to a partner: debit Rose's Capital Account and credit Realisation Account with the agreed value (₹33,000), not the book value.

The Contingent Liability (outstanding electric bill) was not recorded in the books. When paid, it becomes a realisation expense — debit Realisation Account and credit Cash.

Partner's Loan (Lily's loan) is a separate liability, not part of realisation. It is paid directly from Cash and shown in the Loan Account.

Cash Account records all receipts and payments during dissolution — from asset sales, liability payments, realisation expenses, and final settlement to partners.

Solution

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Assets (transferred):		By Creditors (transferred)	40,000
Debtors	80,000	By Lily's Loan (transferred)	32,000
Less: Provision for Doubtful Debts	(3,600)	By Bills Receivable (taken by Rose)	33,000
Net Debtors	76,400	By Assets Realised (except Bills Receivable):
Inventory	1,09,600	Cash from realisation	4,84,000
Bills Receivable	40,000	Motor Cycle sold	10,000
Buildings	2,80,000
To Cash (Creditors paid)	38,000
To Cash (Realisation expenses)	2,400
To Cash (Contingent liability paid)	5,000
To Profit transferred to Capital A/cs:
Rose (2/5)	6,240
Lily (3/5)	9,360
Total	5,99,000	Total	5,99,000

Partners' Capital Accounts

Particulars	Rose (₹)	Lily (₹)	Particulars	Rose (₹)	Lily (₹)
To Bills Receivable (taken over)	33,000	—	By Balance b/d	2,40,000	1,60,000
To Cash (final payment)	2,33,240	1,99,360	By Realisation Profit	6,240	9,360
			By Profit and Loss (credit balance)	20,000	30,000
Total	2,66,240	1,99,360	Total	2,66,240	1,99,360

Lily's Loan Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Cash (payment)	32,000	By Balance b/d	32,000
Total	32,000	Total	32,000

Cash Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	16,000	By Creditors (paid)	38,000
To Assets Realised (except Bills Receivable)	4,84,000	By Realisation Expenses	2,400
To Motor Cycle sold	10,000	By Contingent Liability (electric bill)	5,000
		By Lily's Loan (paid)	32,000
		By Rose's Capital (final payment)	2,33,240
		By Lily's Capital (final payment)	1,99,360
Total	5,10,000	Total	5,10,000

Working Notes

Working Note 1: Realisation Profit Calculation

Item	Amount (₹)
Credit side (gains):
Creditors transferred	40,000
Bills Receivable taken by Rose	33,000
Cash from asset realisation	4,84,000
Motor Cycle sold	10,000
Total credits	5,67,000
Debit side (losses/expenses):
Debtors (net)	76,400
Inventory	1,09,600

Start your 14-day free trial to unlock the full solution →

←Previous question · questions-for-practiceQ10 — What journal entries would be recorded for the following transactions …→Next question · questions-for-practiceQ12 — Shilpa, Meena and Nanda decided to dissolve their partnership on March…

Concept and Accounting Treatment

Solution

Realisation Account

Partners' Capital Accounts

Lily's Loan Account

Cash Account

Working Notes

Working Note 1: Realisation Profit Calculation

🎓Unlock everything free for 14 days

Unlock everything free for 14 days