Surjit and Rahi were sharing profits (losses) in the ratio of 3:2. Their Balance Sheet as on March 31, 2017 is as follows: **Balance Sheet of Surjit and Rahi as on March 31, 2017** | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Creditors | 38,000 | Bank | 11,500 | | Mrs. Surjit's loan | 10,000 | Stock | 6,000 | | Reserve | 15,000 | Debtors | 19,000 | | Rahi's loan | 5,000 | Furniture | 4,000 | | Capitals: | | Plant | 28,000 | | Surjit | 10,000 | Investment | 10,000 | | Rahi | 8,000 | Profit and Loss | 7,500 | | **Total** | **86,000** | **Total** | **86,000** | The firm was dissolved on March 31, 2017 on the following terms: 1. Surjit agreed to take the investments at ₹8,000 and to pay Mrs. Surjit's loan. 2. Other assets were realised as follows: Stock ₹5,000; Debtors ₹18,500; Furniture ₹4,500; Plant ₹25,000. 3. Expenses on realisation amounted to ₹1,600. 4. Creditors agreed to accept ₹37,000 as a final settlement. You are required to prepare Realisation account, Partners' Capital account and Bank account.

> [!TLDR] > Realisation Account closes with a **Loss on Realisation of ₹6,600** (Surjit ₹3,960, Rahi ₹2,640 in 3:2). Final settlement: **Surjit is paid ₹12,540** and **Rahi ₹8,360**; the Bank Account totals **₹64,500**. ## Concept and treatment On dissolution the **Realisation Account** records the closing of all assets (except Bank) and all external liabilities. Key treatments for this problem: - The **Profit & Loss (Dr.) balance ₹7,500** is a fictitious asset — it is **not** taken to Realisation; it is written off directly to the partners' capital accounts in 3:2 (Surjit ₹4,500, Rahi ₹3,000). - The **Reserve ₹15,000** is an undistributed profit — credited directly to capital accounts in 3:2 (Surjit ₹9,000, Rahi ₹6,000). - **Investment** is taken over by Surjit at ₹8,000 → credit Realisation, debit Surjit's capital. - **Mrs. Surjit's loan ₹10,000** (an external liability) is taken over by Surjit → transferred to the credit of Realisation and, because Surjit assumes it, credited to Surjit's capital. - **Rahi's loan ₹5,000** is a partner's loan — paid separately through the Bank (not routed through capital or Realisation). - **Creditors ₹38,000** settled for **₹37,000** (discount ₹1,000, a gain). ## Realisation Account | Particulars | Amount (₹) | Particulars | Amount (₹) | |:---|---:|:---|---:| | To Sundry Assets (transferred): | | By Creditors | 38,000 | | Stock | 6,000 | By Mrs. Surjit's Loan | 10,000 | | Debtors | 19,000 | By Surjit's Capital A/c (Investment taken over) | 8,000 | | Furniture | 4,000 | By Bank A/c (assets realised): | | | Plant | 28,000 | Stock 5,000; Debtors 18,500; | | | Investment | 10,000 | Furniture 4,500; Plant 25,000 | 53,000 | | To Surjit's Capital A/c (Mrs. Surjit's loan taken over) | 10,000 | By Loss on Realisation transferred: | | | To Bank A/c (Creditors paid) | 37,000 | Surjit's Capital A/c (3/5) | 3,960 | | To Bank A/c (Realisation ex

Surjit and Rahi were sharing profits (losses) in the ratio of 3:2. Their Balance Sheet as on March 31, 2017 is

Numerical Questions · Q13

Surjit and Rahi were sharing profits (losses) in the ratio of 3:2. Their Balance Sheet as on March 31, 2017 is as follows:

Balance Sheet of Surjit and Rahi as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	38,000	Bank	11,500
Mrs. Surjit's loan	10,000	Stock	6,000
Reserve	15,000	Debtors	19,000
Rahi's loan	5,000	Furniture	4,000
Capitals:		Plant	28,000
Surjit	10,000	Investment	10,000
Rahi	8,000	Profit and Loss	7,500
Total	86,000	Total	86,000

The firm was dissolved on March 31, 2017 on the following terms:

Surjit agreed to take the investments at ₹8,000 and to pay Mrs. Surjit's loan.
Other assets were realised as follows: Stock ₹5,000; Debtors ₹18,500; Furniture ₹4,500; Plant ₹25,000.
Expenses on realisation amounted to ₹1,600.
Creditors agreed to accept ₹37,000 as a final settlement.

You are required to prepare Realisation account, Partners' Capital account and Bank account.

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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. …

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We begin by transferring all assets (except cash/bank) and all external liabilities to the Realisation account. The Profit & Loss (Dr.) balance of ₹7,500 is a fictitious asset — it is also transferred to the debit of Realisation. Partners’ loans (Mrs. Surjit’s loan and Rahi’s loan) are paid directly and do not pass through Realisation; they are shown in the Bank account.

Step 1 – Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock	6,000	By Creditors	38,000
To Debtors	19,000	By Mrs. Surjit’s Loan (taken over by Surjit)	10,000
To Furniture	4,000	By Surjit’s Capital (Investments taken over)	8,000
To Plant	28,000	By Stock (realised)	5,000
To Investment	10,000	By Debtors (realised)	18,500
To Profit & Loss A/c	7,500	By Furniture (realised)	4,500
To Bank (Expenses)	1,600	By Plant (realised)	25,000
To Bank (Creditors paid)	37,000	By Loss transferred to:
		Surjit’s Capital (3/5)	3,960
		Rahi’s Capital (2/5)	2,640
Total	1,13,100	Total	1,13,100

Note

The loss on realisation = Total Debit (1,13,100) – Total Credit (1,06,500) = ₹6,600. This matches the official answer.

Step 2 – Partners’ Capital Accounts

Particulars	Surjit (₹)	Rahi (₹)	Particulars	Surjit (₹)	Rahi (₹)
To Realisation (Loss)	3,960	2,640	By Balance b/d	10,000	8,000
To Realisation (Investments taken)	8,000	—	By Reserve (3:2)	9,000	6,000
To Bank (Final payment)	12,540	8,360	By Mrs. Surjit’s Loan (paid by Surjit)	10,000	—
			By Rahi’s Loan (transferred to Bank)	—	5,000
Total	24,500	11,000	Total	29,000	19,000

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Realisation Account closes with a Loss on Realisation of ₹6,600 (Surjit ₹3,960, Rahi ₹2,640 in 3:2). Final settlement: Surjit is paid ₹12,540 and Rahi ₹8,360; the Bank Account totals ₹64,500.

Concept and treatment

On dissolution the Realisation Account records the closing of all assets (except Bank) and all external liabilities. Key treatments for this problem:

The Profit & Loss (Dr.) balance ₹7,500 is a fictitious asset — it is not taken to Realisation; it is written off directly to the partners' capital accounts in 3:2 (Surjit ₹4,500, Rahi ₹3,000).
The Reserve ₹15,000 is an undistributed profit — credited directly to capital accounts in 3:2 (Surjit ₹9,000, Rahi ₹6,000).
Investment is taken over by Surjit at ₹8,000 → credit Realisation, debit Surjit's capital.
Mrs. Surjit's loan ₹10,000 (an external liability) is taken over by Surjit → transferred to the credit of Realisation and, because Surjit assumes it, credited to Surjit's capital.
Rahi's loan ₹5,000 is a partner's loan — paid separately through the Bank (not routed through capital or Realisation).
Creditors ₹38,000 settled for ₹37,000 (discount ₹1,000, a gain).

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Assets (transferred):		By Creditors	38,000
Stock	6,000	By Mrs. Surjit's Loan	10,000
Debtors	19,000	By Surjit's Capital A/c (Investment taken over)	8,000
Furniture	4,000	By Bank A/c (assets realised):
Plant	28,000	Stock 5,000; Debtors 18,500;
Investment	10,000	Furniture 4,500; Plant 25,000	53,000
To Surjit's Capital A/c (Mrs. Surjit's loan taken over)	10,000	By Loss on Realisation transferred:
To Bank A/c (Creditors paid)	37,000	Surjit's Capital A/c (3/5)	3,960
To Bank A/c (Realisation expenses)	1,600	Rahi's Capital A/c (2/5)	2,640
Total	1,15,600	Total	1,15,600

Loss on Realisation = Debit total (₹1,15,600) − Credits before loss (₹1,09,000) = ₹6,600.

Partners' Capital Accounts

Particulars	Surjit (₹)	Rahi (₹)	Particulars	Surjit (₹)	Rahi (₹)
To Profit & Loss A/c (written off)	4,500	3,000	By Balance b/d	10,000	8,000
To Realisation A/c (Investment)	8,000	—	By Reserve	9,000	6,000

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Concept and treatment

Realisation Account

Partners' Capital Accounts

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