Q.What journal entries would be recorded for the following transactions on the dissolution of a firm of Arti and Karim after various assets (other than cash) and the third party liabilities have been transferred to Realisation account.
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Start your 14-day free trial to unlock the full solution →The journal entries record the takeover of assets by partners, payment of realisation expenses, settlement of liabilities, and distribution of the realisation loss — all after assets and third-party liabilities have been transferred to the Realisation Account.
Concept First: Realisation Expenses Accounting
When a firm is dissolved, a Realisation Account is opened to record the sale or takeover of all assets and the payment of all liabilities. The key rule is:
- When a partner takes over an asset: Debit the Partner's Capital Account (they are paying the firm) and Credit the Realisation Account (the asset is leaving the firm). The amount is the agreed value, not the book value.
- When the firm pays an expense of dissolution: Debit the Realisation Account (it's a cost of winding up) and Credit Cash/Bank.
- When a liability is settled: Debit the Liability Account (or directly the Realisation Account if already transferred) and Credit Cash/Bank. Any discount received is credited to the Realisation Account (it's a gain).
- Loss on Realisation: This is the net debit balance of the Realisation Account after all entries. It is transferred to the Partners' Capital Accounts in their profit-sharing ratio.
Common Mistake
Do NOT record the takeover of an asset as a sale to an outsider. When a partner takes over an asset, the entry is directly between the Partner's Capital Account and the Realisation Account — no cash changes hands unless the partner pays extra.
Solution: Journal Entries
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| 1. Arti takes over Stock | ||||
| Arti's Capital A/c Dr. | 68,000 | |||
| To Realisation A/c | 68,000 | |||
| (Being stock taken over by Arti at agreed value of ₹68,000) | ||||
| 2. Karim takes over unrecorded Bike | ||||
| Karim's Capital A/c Dr. | 40,000 | |||
| To Realisation A/c | 40,000 | |||
| (Being unrecorded bike taken over by Karim at ₹40,000) | ||||
| 3. Payment of compensation to employees | ||||
| Realisation A/c Dr. | 40,000 | |||
| To Cash/Bank A/c | 40,000 | |||
| (Being compensation paid to employees on dissolution) | ||||
| 4. Settlement of Sundry Creditors at discount | ||||
| Sundry Creditors A/c Dr. | 36,000 | |||
| To Cash/Bank A/c | 30,600 | |||
| To Realisation A/c | 5,400 | |||
| (Being creditors settled at 15% discount; discount credited to Realisation) | ||||
| 5. Transfer of Loss on Realisation | ||||
| Arti's Capital A/c Dr. | 18,000 | |||
| Karim's Capital A/c Dr. | 24,000 | |||
| To Realisation A/c | 42,000 | |||
| (Being loss on realisation distributed in ratio 3:4) |
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