Ashok, Babu and Chetan are in partnership sharing profit in the proportion of 1/2, 1/3, 1/6 respectively. They dissolve the partnership on December 31, 2017, when the balance sheet of the firm was as under: **Balance Sheet of Ashok, Babu and Chetan as on December 31, 2017** | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Sundry Creditors | 20,000 | Bank | 7,500 | | Bills payable | 25,500 | Sundry Debtors | 58,000 | | Chetan's loan | 30,000 | Stock | 39,500 | | Capitals: | | Machinery | 48,000 | | Ashok | 70,000 | Investment | 42,000 | | Babu | 55,000 | Freehold property | 50,500 | | Chetan | 27,000 | | | | Current accounts: | | | | | Ashok | 10,000 | | | | Babu | 5,000 | | | | Chetan | 3,000 | | | | **Total** | **2,45,500** | **Total** | **2,45,500** | The machinery was taken over by Babu for ₹45,000, Ashok took over the Investment for ₹40,000 and Freehold property was taken over by Chetan at ₹55,000. The remaining Assets realised as follows: Sundry Debtors ₹56,500 and Stock ₹36,500. Sundry Creditors were settled at a discount of 7%. An Office computer, not shown in the books of accounts, realised ₹9,000. Realisation expenses amounted to ₹3,000. Prepare Realisation Account, Partners' Capital Account, Bank Account.

> [!TLDR] > The firm is dissolved on 31 Dec 2017. The Realisation Account shows a **Profit of ₹2,400** (Ashok ₹1,200, Babu ₹800, Chetan ₹400 in 3 : 2 : 1). Ashok is paid **₹41,200**, Babu **₹15,800**; Chetan's capital shows a deficiency of ₹24,600 which is set off against his ₹30,000 loan, so **₹5,400 is paid towards Chetan's loan**. The Cash Account totals **₹1,09,500**. ## Concept and Accounting Treatment On dissolution, all assets (except cash/bank) are debited to the Realisation Account at book value and all outside liabilities are credited to it. Amounts actually realised are credited; amounts actually paid are debited; assets taken over by a partner are credited to Realisation and debited to that partner's capital. The balancing figure is the profit or loss, shared in the profit-sharing ratio. **Key points in this question:** - **Chetan's loan ₹30,000** is a partner's loan — it is **not** transferred to the Realisation Account. It is settled separately, after the outside liabilities. - **Current account balances** (credit) are carried to each partner's capital account. - The **office computer** is an unrecorded asset; its ₹9,000 proceeds are credited to Realisation. ## Solution ### Realisation Account | Particulars | Amount (₹) | Particulars | Amount (₹) | |:---|---:|:---|---:| | To Sundry Debtors | 58,000 | By Sundry Creditors | 20,000 | | To Stock | 39,500 | By Bills Payable | 25,500 | | To Machinery | 48,000 | By Bank A/c (Debtors realised) | 56,500 | | To Investment | 42,000 | By Bank A/c (Stock realised) | 36,500 | | To Freehold Property | 50,500 | By Bank A/c (Office computer) | 9,000 | | To Bank A/c (Creditors paid, less 7%) | 18,600 | By Babu's Capital A/c (Machinery taken over) | 45,000 | | To Bank A/c (Bills Payable paid) | 25,500 | By Ashok's Capital A/c (Investment taken over) | 40,000 | | To Bank A/c (Realisation expenses) | 3,000 | By Chetan's Capital A/c (Freehold property taken over) | 55,000 | | To Profit transferred to Capital A/cs: | |

Ashok, Babu and Chetan are in partnership sharing profit in the proportion of 1/2, 1/3, 1/6 respectively. They

Numerical Questions · Q19

Ashok, Babu and Chetan are in partnership sharing profit in the proportion of 1/2, 1/3, 1/6 respectively. They dissolve the partnership on December 31, 2017, when the balance sheet of the firm was as under:

Balance Sheet of Ashok, Babu and Chetan as on December 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	20,000	Bank	7,500
Bills payable	25,500	Sundry Debtors	58,000
Chetan's loan	30,000	Stock	39,500
Capitals:		Machinery	48,000
Ashok	70,000	Investment	42,000
Babu	55,000	Freehold property	50,500
Chetan	27,000
Current accounts:
Ashok	10,000
Babu	5,000
Chetan	3,000
Total	2,45,500	Total	2,45,500

The machinery was taken over by Babu for ₹45,000, Ashok took over the Investment for ₹40,000 and Freehold property was taken over by Chetan at ₹55,000. The remaining Assets realised as follows: Sundry Debtors ₹56,500 and Stock ₹36,500. Sundry Creditors were settled at a discount of 7%. An Office computer, not shown in the books of accounts, realised ₹9,000. Realisation expenses amounted to ₹3,000. Prepare Realisation Account, Partners' Capital Account, 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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On dissolution, all assets (except bank) and outside liabilities are transferred to the Realisation Account; assets taken over by partners are credited to it and debited to their capital accounts. Chetan's loan is a partner's loan, so it is not transferred to Realisation — it is settled separately. The office computer is an unrecorded asset realising ₹9,000.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Debtors	58,000	By Sundry Creditors	20,000
To Stock	39,500	By Bills Payable	25,500
To Machinery	48,000	By Bank A/c (Debtors 56,500 + Stock 36,500 + Computer 9,000)	1,02,000
To Investment	42,000	By Babu's Capital A/c (Machinery taken over)	45,000
To Freehold Property	50,500	By Ashok's Capital A/c (Investment taken over)	40,000
To Bank A/c (Creditors paid, less 7%)	18,600	By Chetan's Capital A/c (Freehold taken over)	55,000
To Bank A/c (Bills Payable paid)	25,500
To Bank A/c (Realisation expenses)	3,000
To Profit — Ashok 1,200, Babu 800, Chetan 400	2,400
Total	2,87,500	Total	2,87,500

Partners' Capital Accounts (summary)

	Ashok (₹)	Babu (₹)	Chetan (₹)
Balance b/d + Current A/c	80,000	60,000	30,000
Add: Realisation profit	1,200	800	400
Less: Asset taken over	(40,000)	(45,000)	(55,000)
Balance	41,200 (Cr)	15,800 (Cr)	24,600 (Dr)

Ashok (₹41,200) and Babu (₹15,800) are paid in cash. Chetan's deficiency of ₹24,600 is set off against the ₹30,000 loan the firm owes him, leaving ₹5,400 paid towards his loan. …

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The firm is dissolved on 31 Dec 2017. The Realisation Account shows a Profit of ₹2,400 (Ashok ₹1,200, Babu ₹800, Chetan ₹400 in 3 : 2 : 1). Ashok is paid ₹41,200, Babu ₹15,800; Chetan's capital shows a deficiency of ₹24,600 which is set off against his ₹30,000 loan, so ₹5,400 is paid towards Chetan's loan. The Cash Account totals ₹1,09,500.

Concept and Accounting Treatment

On dissolution, all assets (except cash/bank) are debited to the Realisation Account at book value and all outside liabilities are credited to it. Amounts actually realised are credited; amounts actually paid are debited; assets taken over by a partner are credited to Realisation and debited to that partner's capital. The balancing figure is the profit or loss, shared in the profit-sharing ratio.

Key points in this question:

Chetan's loan ₹30,000 is a partner's loan — it is not transferred to the Realisation Account. It is settled separately, after the outside liabilities.
Current account balances (credit) are carried to each partner's capital account.
The office computer is an unrecorded asset; its ₹9,000 proceeds are credited to Realisation.

Solution

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Debtors	58,000	By Sundry Creditors	20,000
To Stock	39,500	By Bills Payable	25,500
To Machinery	48,000	By Bank A/c (Debtors realised)	56,500
To Investment	42,000	By Bank A/c (Stock realised)	36,500
To Freehold Property	50,500	By Bank A/c (Office computer)	9,000
To Bank A/c (Creditors paid, less 7%)	18,600	By Babu's Capital A/c (Machinery taken over)	45,000
To Bank A/c (Bills Payable paid)	25,500	By Ashok's Capital A/c (Investment taken over)	40,000
To Bank A/c (Realisation expenses)	3,000	By Chetan's Capital A/c (Freehold property taken over)	55,000
To Profit transferred to Capital A/cs:
Ashok (1/2)	1,200
Babu (1/3)	800
Chetan (1/6)	400
Total	2,87,500	Total	2,87,500

Partners' Capital Accounts

Particulars	Ashok (₹)	Babu (₹)	Chetan (₹)	Particulars	Ashok (₹)	Babu (₹)	Chetan (₹)
To Realisation A/c (Asset taken over)	40,000	45,000	55,000	By Balance b/d	70,000	55,000	27,000
To Bank A/c (Final payment)	41,200	15,800	—	By Current A/c	10,000	5,000	3,000
To Chetan's Loan A/c (Deficiency set off)	—	—	24,600	By Realisation A/c (Profit)	1,200	800	400
Total	81,200	60,800	79,600	Total	81,200	60,800	30,400

Chetan's debit side (₹55,000, the freehold property he took over) exceeds his credit side (₹30,400), leaving a deficiency of ₹24,600. This is not brought in as cash — it is set off against the loan the firm owes him.

Chetan's Loan Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Chetan's Capital A/c (deficiency set off)	24,600	By Balance b/d	30,000
To Bank A/c (paid)	5,400
Total	30,000	Total	30,000

Cash / Bank Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	7,500	By Realisation A/c (Creditors)	18,600
To Realisation A/c (Debtors)	56,500	By Realisation A/c (Bills Payable)	25,500
To Realisation A/c (Stock)	36,500	By Realisation A/c (Expenses)	3,000
To Realisation A/c (Office computer)	9,000	By Chetan's Loan A/c	5,400
		By Ashok's Capital A/c	41,200
		By Babu's Capital A/c	15,800
Total	1,09,500	Total	1,09,500

Working Notes

WN1: Discount on creditors

7% of ₹20,000 = ₹1,400, so creditors are paid ₹18,600.

WN2: Profit on realisation …

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Concept and Accounting Treatment

Solution

Realisation Account

Partners' Capital Accounts

Chetan's Loan Account

Cash / Bank Account

Working Notes

WN1: Discount on creditors

WN2: Profit on realisation …

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