NCERT Solutions Class 12 Accountancy Chapter 5 Dissolution of Partnership Firm

Test Your Understanding

 

Question 1. Dissolution of a partnership is different from dissolution of a firm.
Answer: True. Under partnership dissolution, the business entity carries on its operations, but dissolving a firm means winding up all business activities entirely.
In simple words: True. When a partnership dissolves, the business can keep going under a new agreement, but when a firm dissolves, the business closes for good.
Exam Tip: Clearly contrast the continuity of business in partnership dissolution with the complete closure of operations in firm dissolution.

 

Question 2. A partnership is dissolved when there is a death of a partner.
Answer: True. If a partner passes away, the old agreement ends and a fresh partnership deed must be drafted.
In simple words: True. The death of a partner breaks the current agreement, so a new one must be written to keep going.
Exam Tip: Remember that the death of a partner dissolves the partnership, but the remaining partners can choose to continue the firm under a new deed.

 

Question 3. A firm is dissolved when all partners give consent to it.
Answer: True. When every single partner agrees to wind up, the firm undergoes voluntary dissolution.
In simple words: True. If every partner agrees to close the business, it will be shut down.
Exam Tip: This is known as dissolution by mutual agreement under Section 40 of the Indian Partnership Act, 1932.

 

Question 4. A firm is compulsorily dissolved when a partner decide to retire.
Answer: False. If a partner retires, the remaining members can decide to keep running the business, so closing the entire firm is not mandatory.
In simple words: False. When one partner retires, the others can keep the business running, so the firm does not have to close.
Exam Tip: Retirement of a partner leads to the dissolution of the partnership, not the compulsory dissolution of the firm itself.

 

Question 5. Dissolution of a firm necessarily involves dissolution of partnership.
Answer: True. Winding up a firm automatically ends the partnership relation, since no business remains for the partners to conduct.
In simple words: True. If the business is closed, the partnership agreement between the owners automatically comes to an end as well.
Exam Tip: Keep in mind that dissolution of a firm always includes partnership dissolution, but dissolution of partnership does not always mean the firm is dissolved.

 

Question 6. A firm is compulsorily dissolved when all partners or when all except one partner become involvent.
Answer: True. Since insolvent partners lose their legal capacity to enter into binding agreements, the firm must be dissolved.
In simple words: True. When partners run out of money and go bankrupt, they cannot sign business agreements, so the firm has to close.
Exam Tip: Compulsory dissolution occurs under Section 41 when all partners or all except one become insolvent, as a partnership requires at least two competent persons.

 

Question 7. Court can order a firm to be dissolved when a partner becomes insane.
Answer: True. If a partner loses their mental soundness, any other partner can approach the court to seek a dissolution order.
In simple words: True. If a partner becomes mentally unwell, the other partners can ask a judge to close the business.
Exam Tip: Dissolution by court order falls under Section 44 of the Indian Partnership Act. Insanity of a partner is a valid ground for a lawsuit to dissolve the firm.

 

Question 8. Dissolution of partnership cannot take place without intervention of the court.
Answer: False. Partners can mutually agree to dissolve their partnership without needing any legal action or court order.
In simple words: False. Partners can decide to end their agreement on their own without going to court.
Exam Tip: Most dissolutions happen voluntarily through agreement, notice, or specific events, without any court involvement.

 

Test Your Understanding - II

 

Question 1. On dissolution of a firm, bank overdraft is transferred to
(a) cash account
(b) bank account
(c) realisation account
(d) partner's capital account
Answer: (c) realisation account
In simple words: A bank overdraft is money the firm owes to the bank, so it is transferred to the realization account like other outside debts.
Exam Tip: Do not confuse bank overdraft with standard cash/bank balances; overdraft is a liability and must be transferred to the credit side of the Realisation Account.

 

Question 2. On dissolution of a firm, partner's loan account is transferred to
(a) realisation account
(b) partner's capital account
(c) partner's current account
(d) None of the options
Answer: (d) None of the options
In simple words: A partner's loan is settled separately by paying them cash, so we do not transfer it to any of these accounts.
Exam Tip: Remember that partner's loan is an internal liability that is paid off directly through the cash/bank account, not via the Realisation Account.

 

Question 3. After transferring liabilities like creditors and bills payables in the realisation account, in the absence of any information regarding then payment, such liabilities are treated as
(a) never paid
(b) fully paid
(c) partly paid
(d) None of the options
Answer: (b) fully paid
In simple words: Even if the problem does not tell you to pay the creditors, you must assume they were paid their full amount.
Exam Tip: Always debit the Realisation Account and credit the Bank Account for the full book value of external liabilities if no settlement details are provided.

 

Question 5. Unrecorded assets when taken over by a partner are shown in
(a) debit of realisation account
(b) debit of bank account
(c) credit of realisation account
(d) credit of bank account
Answer: (c) credit of realisation account
In simple words: Since the asset brings value, we credit the realization account and deduct the amount from the partner's capital.
Exam Tip: The journal entry for this is: Partner's Capital A/c Dr. to Realisation A/c.

 

Question 6. Unrecorded liabilities when paid are shown in
(a) debit of realisation account
(b) debit of bank account
(c) credit of realisation account
(d) credit of bank account
Answer: (a) debit of realisation account
In simple words: Paying off any debt that was not in the books is an expense, so we record it on the debit side of the realization account.
Exam Tip: Unrecorded liabilities do not have a book value to transfer first, but their actual payment is always debited to the Realisation Account.

 

Question 7. The accumulated profits reserves are transferred to
(a) realisation account
(b) partners' capital account
(c) bank account
(d) None of the options
Answer: (b) partners' capital account
In simple words: Savings and profits from past years belong to the owners, so they go straight into the partners' capital accounts.
Exam Tip: Accumulated reserves must not be transferred to the Realisation Account; they are shared directly among partners in their old profit-sharing ratio.

 

Question 8. On dissolution of the firm, partner's capital accounts are closed through
(a) realisation account
(b) drawings account
(c) bank account
(d) loan account
Answer: (c) bank account
In simple words: To finish closing the business, the partners are paid their final balances (or they pay what they owe) using the bank account.
Exam Tip: The capital accounts must balance out exactly when the final cash or bank payments are made to or by the partners.

 

Test Your Understanding - III

 

Question 1. All assets (except cash/bank and fictitious assets) are transferred to the _____ (Debit/Credit) side of _____ Account (Realisation/Capital).
Answer: Debit, Realisation
In simple words: When a business closes, all physical and financial assets (except cash) are moved to the debit side of the realization account to be sold.
Exam Tip: Cash and bank balances are already liquid, and fictitious assets are losses, so neither goes to the Realisation Account.

 

Question 2. All _____ (internal/external) liabilities are transferred to the _____ (Debit/Credit) side of _____ account (Bank/Realisation).
Answer: External, Credit, Realisation
In simple words: Third-party debts are sent to the credit side of the realization account before we pay them off.
Exam Tip: Only outside liabilities (like creditors or bank loans) go to the Realisation Account; partner loans and capitals are settled separately.

 

Question 3. Accumulated losses are transferred to _____ (Current/Capital Accounts) in _____ (equal ratio/profit sharing ratio).
Answer: Capital account, Profit sharing ratio
In simple words: Any losses that haven't been cleared yet are split among the partners' capital accounts using their regular profit-sharing percentages.
Exam Tip: Accumulated losses (like a debit balance in Profit and Loss) are debited to the partners' capital accounts, reducing their final claims.

 

Question 4. If a liability is assumed by a partner, such Partner's Capital Account is _____ (debited/credited)..
Answer: Credited
In simple words: If a partner agrees to pay off a business debt using their personal funds, we increase (credit) their capital account balance.
Exam Tip: The journal entry is Realisation A/c Dr. to Partner's Capital A/c.

 

Question 5. If a partner takes over an asset, such (Partner's Capital Account) is _____ (debited/credited).
Answer: Debited
In simple words: When a partner keeps a business asset for themselves, we reduce (debit) their capital account balance by that asset's value.
Exam Tip: The journal entry is Partner's Capital A/c Dr. to Realisation A/c.

 

Question 6. No entry is required when a _____ (partner/creditor) accepts a fixed asset in payment of his dues.
Answer: Creditor
In simple words: If a creditor takes a business asset to settle their debt, we do not make any journal entry since both a liability and an asset are cleared together.
Exam Tip: Direct transfer of an asset to a creditor requires no entry unless there is a cash difference to be paid or received.

 

Question 7. When creditor accepts an asset whose value is more than the amount due to him, he will _____ (pay/not pay) the excess amount which will be credited _____ Account.
Answer: Pay, Realisation
In simple words: If a creditor takes an asset worth more than what they are owed, they must refund the extra cash, which goes to the realization account.
Exam Tip: The cash received from the creditor is debited to the Bank Account and credited to the Realisation Account.

 

Question 8. When the firm has agreed to pay the partner a fixed amount for realisation work irrespective of the actual amount spent, such fixed amount is debited to (Realisation/Capital) Account and Credited to (Capital/Bank) Account.
Answer: Realisation, Capital
In simple words: A fixed payment promised to a partner for winding up the firm is charged to the realization account and added to their capital account.
Exam Tip: The entry is Realisation A/c Dr. to Partner's Capital A/c, regardless of the actual expenses incurred by the partner.

 

Question 9. Partner's loan is _____ (recorded/not recorded) in the (Realisation Account).
Answer: not recorded
In simple words: A partner's loan is not put into the realization account because it is settled separately after external debts are paid.
Exam Tip: Since it is an internal liability, it has its own separate ledger account and is paid directly via cash or bank.

 

Question 10. Partner's current accounts are transferred to respective _____ Partners' (Loan/Capital) Accounts.
Answer: Capital
In simple words: All balances in the partners' current accounts are moved to their main capital accounts before making final payouts.
Exam Tip: Current account balances must be closed by transferring them to the respective Capital Accounts on dissolution.

 

Do It Yourself

 

Question 1. For closure of assets accounts.
Answer:
Realisation A/c Dr.
    To Assets A/c
In simple words: To close the asset accounts, we move their book values to the debit side of the realization account.
Exam Tip: Remember to transfer assets at their book value and exclude cash, bank, or fictitious assets.

 

Question 2. For closure of liabilities accounts.
Answer:
Liabilities A/c Dr.
    To Realisation A/c
In simple words: We close external liability accounts by transferring their balances to the credit side of the realization account.
Exam Tip: Only outside liabilities are transferred to the Realisation Account; internal liabilities like capital or partner loans are excluded.

 

Question 3. For sale of assets.
Answer:
Bank A/c Dr.
    To Realisation A/c
In simple words: When assets are sold for cash, we debit the bank account and credit the realization account with the money received.
Exam Tip: This entry is passed using the actual cash realized, which might be different from the asset's book value.

 

Question 4. For settlement of a creditor by transfer of fixed assets to him.
Answer: No entry
In simple words: No entry is required when an asset is directly given to a creditor to settle their claim fully.
Exam Tip: This is a common trick question; since both an asset and a liability are reduced together, they cancel out, requiring no ledger entry.

 

Question 5. For expenses of realisation when actual expenses are paid by the partner on behalf of the firm.
Answer:
Realisation A/c Dr.
    To Partner's Capital A/c
In simple words: If a partner pays the winding-up costs for the firm, the firm records the cost as an expense and promises to repay the partner by crediting their capital.
Exam Tip: Debit the Realisation Account because it is a firm expense, and credit the specific partner's Capital Account.

 

Question 6. When a partner discharges the liability of the firm.
Answer:
Realisation A/c Dr.
    To Partner's Capital A/c
In simple words: When a partner takes over and pays off a firm's debt, we record the debt settlement in the realization account and credit that partner's capital account.
Exam Tip: This entry is identical to the one for realization expenses paid by a partner on the firm's behalf.

 

Question 7. For payment of partner's loan.
Answer:
Partner's Loan A/c Dr.
    To Bank A/c
In simple words: When the firm pays back a loan taken from a partner, the loan liability is debited and the cash goes out from the bank.
Exam Tip: This payment must not pass through the Realisation Account; it is paid directly from the cash or bank balance.

 

Question 8. For settlement of capital accounts.
Answer:
Partner's Capital A/c Dr.
    To Bank A/c
In simple words: To pay off the final balances due to the partners, we debit their capital accounts and credit the bank account.
Exam Tip: If a partner has a debit balance (deficit), the reverse entry is passed: Bank A/c Dr. to Partner's Capital A/c.

 

Short Answer Type Questions

 

Question 1. State the difference between dissolution of Partnership and Dissolution of Partnership firm.
Answer: The primary distinctions between the Dissolution of a Partnership and the Dissolution of a Partnership Firm are detailed below:

In simple words: Dissolution of partnership is just updating the agreement while the business keeps running, but dissolution of the firm means shutting down the entire business for good.
Exam Tip: In exams, draw a table with clear bases of distinction such as court intervention, continuation of business, and closure of books to score maximum marks.

 

Question 2. State the accounting treatment for (i) Unrecorded assets (ii) Unrecorded liabilities.
Answer:
(i) Accounting Treatment for Unrecorded Assets:
An unrecorded asset refers to a physical asset that has already been completely written off or was never recorded in the firm's books of account, yet still physically exists at dissolution. This asset can either be sold off for cash or taken over by one of the partners. The recording depends on the specific scenario:
(a) When the unrecorded asset is sold for cash:

(b) When the unrecorded asset is taken over by any partner:

(ii) Accounting Treatment for Unrecorded Liabilities:
Unrecorded liabilities are debts or obligations that were left out of the regular ledger books but must still be settled when winding up the firm. The entries vary according to how they are discharged:
(a) When paid off in cash:

 

(b) When the unrecorded liability is taken over by a partner:

 

 

In simple words: Unrecorded assets and liabilities are items that weren't in the account books but still need to be handled during dissolution. Selling them or paying them off always involves the realization account.
Exam Tip: Remember that unrecorded assets have no book value to transfer first; you only record the entry for their sale or takeover by a partner.

 

Question 3. On dissolution, how will you deal with partner’s loan if it appears on the (a) assets side of the balance sheet, (b) liabilities side of balance sheet.
Answer:
(a) If a partner's loan is listed under the assets of the balance sheet, it means the firm extended a loan to that partner. Upon dissolution, this loan balance is transferred directly to that partner's capital account.
Journal Entry:

(b) When a partner's loan is recorded on the liabilities side of the balance sheet, it indicates that the partner lent money to the firm. This internal liability is paid off in cash after settling all third-party (external) debts. It is important to note that this loan is never transferred to the Realisation Account; instead, it is cleared directly through the cash/bank account.
Journal Entry:

In simple words: If a partner owes the firm money, we deduct it from their capital. If the firm owes the partner money, we pay them back in cash directly after paying outside creditors.
Exam Tip: Never transfer a partner's loan account to the Realisation Account. Treat it as a separate settlement entry.

 

Question 4. Distinguish between Firm’s Debts and Partner’s Private Debts.
Answer: The primary distinctions between a Firm's Debts and a Partner's Private Debts are detailed below:

In simple words: Firm debts are what the business owes, and business assets pay them first. Private debts are what a partner owes personally, and their personal assets pay them first.
Exam Tip: Make sure to state that Section 49 of the Indian Partnership Act, 1932 governs the mutual application of firm and private properties.

 

Question 5. State the order of settlement of accounts on dissolution.
Answer: When a partnership firm is dissolved, it winds up operations and must resolve all outstanding balances as per Section 48 of the Indian Partnership Act, 1932. Unless partners agree otherwise, the settlement proceeds as follows:

(i) Handling of Losses:
Any losses, including any shortages in capital, are settled in this specific sequence:
(a) First, cleared from the firm's accumulated profits.
(b) Next, paid out of the partners' capital contributions.
(c) Finally, if a deficit still remains, the partners must bring in cash individually in their profit-sharing ratio.

(ii) Application of Assets:
The proceeds from selling firm assets (including any cash brought in by partners to cover capital deficits) are distributed in the following strict order:
(a) First, used to pay off all external debts owed to third-party creditors.
(b) Second, used to repay any loans or advances made by the partners to the firm (other than their capital).
(c) Third, used to return the capital balances to each partner.
(d) Lastly, any remaining surplus is divided among the partners according to their profit-sharing ratio.
In simple words: When a business closes, we first pay off outside debts, then return partners' loans, and then give back their capital. Any left-over money is shared as profit. If there are losses, they are paid out of profits, then capitals, and finally by the partners themselves.
Exam Tip: Memorizing Section 48 of the Indian Partnership Act is crucial as examiners look for the exact order of asset distribution (third-party debts first, partner advances second, partner capitals third, surplus last).

 

Question 6. On what account Realisation Account differs from Revaluation Account?
Answer: The major differences between a Revaluation Account and a Realisation Account are summarized below:

In simple words: Revaluation is used to adjust values while the business continues (like when a new partner joins), whereas Realisation is used to sell everything off when the business closes.
Exam Tip: Make sure to highlight that Revaluation Account is prepared on reconstitution of the firm, while Realisation Account is prepared on dissolution.

 

Long Answer Type Questions

 

Question 1. Explain the process of dissolution of partnership firm.
Answer: Dissolution signifies the termination of the contractual relationship among all the partners of a firm. According to Section 39 of the Indian Partnership Act, 1932, dissolving a firm means that the business itself ceases to exist as a legal entity and completely halts its operations. Unlike a simple dissolution of partnership (where the business continues under a new structure), dissolving a firm involves liquidating all assets, paying off all debts, and sharing any remaining surplus or deficit among partners.

Under the Partnership Act, 1932, a firm can be dissolved through the following processes:

(i) Dissolution by Mutual Agreement (Section 40):
Since a partnership is built on mutual consent, it can be dissolved at any time:
(a) If every partner consents to dissolve the firm.
(b) According to existing terms regarding dissolution stated in their partnership agreement.

(ii) Compulsory Dissolution (Section 41):
A firm is legally required to close down under these conditions:
(a) When all partners, or all but one, are declared insolvent or mentally unfit.
(b) If the business operations of the firm become unlawful due to a change in legislation.
(c) If all partners except one decide to leave or retire.
(d) If all partners except one pass away.

(iii) Dissolution by Notice (Section 43):
When a partnership is established "at will" (without a fixed duration), any partner can dissolve it by serving a written notice to all other partners declaring their intent to close the firm.

(iv) Dissolution ordered by Court (Section 44):
A partner can file a lawsuit asking the court to dissolve the firm. The court may issue a dissolution order on any of the following grounds:
(a) If a partner is declared medically insane.
(b) If a partner willfully breaks the partnership agreement repeatedly.
(c) When a partner's misconduct harms the business reputation or operations.
(d) If a partner transfers their entire business interest or share to a third party.
(e) If the business cannot be run except at a continuous financial loss.
(f) When a partner becomes permanently incapable of performing their duties.
(g) On any other grounds that the court finds to be fair and equitable.
In simple words: Dissolving a firm means shutting down the business completely. This can happen by mutual agreement, by law (like if the business becomes illegal or partners go bankrupt), by written notice, or by a court order if partners are fighting or the firm is losing money.
Exam Tip: Write down the relevant sections (Section 40 to 44) of the Indian Partnership Act, 1932 along with each mode of dissolution to earn full marks in long answers.

 

Question 2. What is a Realisation Account?
Answer: A Realisation Account is a nominal account opened specifically during the dissolution of a partnership firm to facilitate the closure of all accounting books, the sale of assets, and the payment of liabilities. Its primary aim is to compute the net profit or loss arising from the liquidation of the business, which is then distributed to the partners' capital accounts according to their established profit-sharing ratio.

Key Objectives of the Realisation Account:
(i) To bring all asset and external liability accounts to a close.
(ii) To record cash inflows from selling assets and cash outflows from paying off creditors.
(iii) To calculate the net profit or loss resulting from these liquidation activities.

Salient Features of the Realisation Account:
(i) All cash proceeds from the sale of assets are recorded on its credit side at their actual realized values.
(ii) All actual cash paid to clear debts is entered at settlement value on its debit side.
(iii) The final balancing figure of this account indicates either a net realization profit or loss.
(iv) A profit is made if:
(a) Assets are sold for more than their recorded book values.
(b) Liabilities are settled for less than their recorded book values.
(v) A loss is incurred if the opposite conditions occur (assets sell for less or liabilities cost more to clear).
(vi) Any net gain or loss on realization is transferred directly to the partners' capital accounts in their profit-sharing ratio.
In simple words: A realization account is a temporary account used when closing a business. It records how much money was made from selling assets and how much was paid to clear debts, showing if the final shutdown resulted in a profit or a loss for the partners.
Exam Tip: Remember that the Realisation Account is a nominal account, so its balance must be closed out by transferring it to the partners' capital accounts.

 

Question 3. Reproduce the format of Realisation Account.
Answer: The standard format of the Realisation Account is presented as follows:

In simple words: This format shows how we list assets on the left and liabilities on the right to start, then record asset sales on the right and liability payments on the left to see the final balance.
Exam Tip: Ensure that provisions (like Provision for Doubtful Debts) are transferred to the credit side of the Realisation Account, but the corresponding debtors are transferred at their gross value on the debit side.

 

Question 4. How deficiency of creditors is paid off?
Answer: When a firm is dissolved, the funds generated from selling its assets are first used to pay off creditors. If these proceeds are insufficient, the partners' private assets are called upon to meet the remaining liabilities. If a gap still remains, it is termed a "deficiency of creditors" and can be resolved in two main ways:

(i) First Approach (Deficiency Account):
A separate Creditors Account and Cash Account are prepared. Available cash (including partners' private contributions) is distributed proportionally among external creditors. The remaining unpaid balance of the creditors is then transferred to a newly opened Deficiency Account.

(ii) Second Approach (Partner's Capital Account):
All creditors are paid fully using the firm's cash, which is augmented by cash contributions from the partners. This unpaid deficit is transferred to the partners' capital accounts and is distributed among them according to their profit-sharing ratio. If a partner becomes insolvent and cannot pay their share of this loss, it is treated as a capital loss for the firm.

If the partnership deed does not mention how to handle such a capital loss, the deficiency in the insolvent partner's capital account is borne by the remaining solvent partners in proportion to their capitals. In this situation, the landmark ruling of Garner vs Murray is applied to settle the accounts.
In simple words: When a firm cannot pay its creditors, we use the partners' personal money. If that still isn't enough, we can either transfer the unpaid balance to a special Deficiency Account after paying creditors proportionally, or transfer the deficit to the partners' capital accounts according to their sharing ratio.
Exam Tip: When a partner becomes insolvent, remember to apply the Garner vs Murray rule if the partnership deed is silent. Under this rule, solvent partners bear the capital deficiency of the insolvent partner in the ratio of their capitals.

 

Numerical Questions

 

Question 1. Journalise the following transactions regarding realisation expenses :
(a) Realisation expenses amounted to Rs.2,500.
(b) Realisation expenses amounting to Rs.3,000 were paid by Ashok, one of the partners.
(c) Realisation expenses Rs.2,300 borne by Tarun, personally.
(d) Amit, a partner was appointed to realise the assets, at a cost of Rs.4,000. The actual amount of realisation amounted to Rs.3,000.
Answer: The required journal entries are recorded as follows:

In simple words: When the firm pays expenses, we debit realization and credit bank. If a partner pays them or is paid a fixed fee, we credit that partner's capital account. No entry is made if a partner pays personal expenses.
Exam Tip: When a partner is appointed at a fixed remuneration to carry out dissolution, only the agreed remuneration is debited to the Realisation Account, irrespective of the actual expenses incurred.

 

Question 2. Record necessary journal entries in the following cases:
(a) Creditors worth Rs.85,000 accepted Rs.40,000 as cash and Investment worth Rs.43,000, in full settlement of their claim.
(b) Creditors were Rs.16,000. They accepted Machinery valued at Rs.18,000 in settlement of their claim.
(c) Creditors were Rs.90,000. They accepted Buildings valued Rs.1,20,000 and paid cash to the firm Rs.30,000.
Answer: The required journal entries are recorded as follows:

In simple words: When assets and liabilities are swapped directly to settle a debt, we don't record the swap. We only record the actual cash that is paid out or received during the settlement.
Exam Tip: A direct transfer of an asset to a creditor in full settlement requires no entry. Only the cash paid (debited to Realisation) or cash received (credited to Realisation) is recorded.

 

Question 3. There was an old computer which was written-off in the books of accounts in the pervious year. The same has been taken over by a partner Nitin for Rs.3,000. Journalise the transaction, supposing. That the firm has been dissolved.
Answer: The required journal entry is recorded as follows:

In simple words: When a partner takes over a computer that was already written off, we record it by debiting their capital account and crediting the realization account.
Exam Tip: Since the computer was already written off, it has no book value to transfer. We only pass the entry for the takeover at the agreed value of Rs.3,000.

 

Question 4. What journal entries will be recorded for the following transactions on the dissolution of a firm:
[a] Payment of unrecorded liabilities of Rs.3,200.
[b] Stock worth Rs.7, 500 is taken by a partner Rohit.
[c] Profit on Realisation amounting to Rs.18, 000 is to be distributed between the partners Ashish and Tarun in the ratio of 5:7.
[d] An unrecorded asset realised Rs.5,500.
Answer: The journal entries required to record these transactions upon the firm's dissolution are as follows:

In simple words: On closing down a business, any cash paid for unrecorded debts or received from unrecorded assets is adjusted through the Realisation Account. When a partner takes over an asset, their capital is reduced, and the final profit on closing is shared in the partners' profit-sharing ratio.
Exam Tip: Always mention clear narrations for every journal entry and calculate the distribution of profits or losses strictly in the agreed ratio.

 

Question 5. Give journal entries for the following transactions :
1. To record the realisation of various assets and liabilities,
2. A Firm has a Stock of Rs. 1,60,000. Aziz, a partner took over 50% of the Stock at a discount of 20%,
3. Remaining Stock was sold at a profit of 30% on cost,
4. Land and Buildging (book value Rs. 1,60,000) sold for Rs. 3,00,000 through a broker who charged 2%, commission on the deal,
5. Plant and Machinery (book value Rs. 60,000) was handed over to a Creditor at an agreed valuation of 10% less than the book value,
6. Investment whose face value was Rs. 4,000 was realised at 50%
Answer: The required journal entries are shown in the tables below:

Standard Entries for Transfer and Realisation (Item 1):

Specific Transactions (Items 2 to 6):

In simple words: When assets are sold or partners take them over during dissolution, the transaction is recorded through the Realisation Account. If a creditor takes over an asset in settlement, no journal entry is recorded because no cash changes hands.
Exam Tip: Make sure to subtract brokerage or commission from the gross sale proceeds before recording the net amount realised. Also, remember that handing over an asset to a creditor requires no journal entry.

 

Question 6. How will you deal with the realisation expenses of the firm of Rashim and Bindiya in the following cases:
1. Realisation expenses amounts to Rs. 1,00,000,
2. Realisation expenses amounting to Rs. 30,000 are paid by Rashim, a partner.
3. Realisation expenses are to be borne by Rashim for which he will be paid Rs. 70,000 as remuneration for completing the dissolution process. The actual expenses incurred by Rashim were Rs. 1,20,000.
Answer: The accounting treatment and journal entries for the realisation expenses are as follows:

In simple words: When the firm pays for its own dissolution expenses, we debit Realisation Account and credit Bank. If a partner pays these expenses on behalf of the firm, we credit that partner's Capital Account. When a partner is given a fixed sum to handle all dissolution costs, the firm only records this agreed amount, and any extra costs spent by the partner are their personal concern.
Exam Tip: When a partner is paid a fixed remuneration to bear the realisation expenses, ignore any actual expenses paid by that partner from their own pocket.

 

Question 7. The book value of assets (other than cash and bank) transferred to Realisation Account is Rs. 1,00,000. 50% of the assets are taken over by a partner Atul, at a discount of 20%; 40% of the remaining assets are sold at a profit of 30% on cost; 5% of the balance being obsolete, realised nothing and remaining assets are handed over to a Creditor, in full settlement of his claim. You are required to record the journal entries for realisation of assets.
Answer: The journal entries to record the realisation of assets are as follows:

In simple words: First, all assets are moved to the Realisation Account at their book values. If a partner takes an asset at a discount, their capital account is debited. If assets are sold, cash comes in. No entries are needed when assets are given directly to settle a creditor's claim or when they become worthless.
Exam Tip: Work out the remaining balance step-by-step: after taking out the first 50% (Rs. 50,000), the next calculations are based on the remaining Rs. 50,000, not the original Rs. 1,00,000.

 

Question 8. Record necessary journal entries to record the following unrecorded assets and liabilities in the books of Paras and Priya:
1. There was an old furniture in the firm which had been written-off completely in the books. This was sold for Rs. 3,000,
2. Ashish, an old customer whose account for Rs. 1,000 was written-off as bad in the previous year, paid 60%, of the amount,
3. Paras agreed to takeover the firm’s goodwill (not recorded in the books of the firm), at a valuation of Rs. 30,000,
4. There was an old typewriter which had been written-off completely from the books. It was estimated to realize Rs. 400. It was taken away by Priya at an estimated price less 25%,
5. There were 100 shares of Rs. 10 each in Star Limited acquired at a cost of Rs. 2,000 which had been written-off completely from the books. These shares are valued @ Rs. 6 each and divided among the partners in their profit sharing ratio.
Answer: The required journal entries for recording unrecorded assets and liabilities are as follows:

In simple words: When an unrecorded or completely written-off asset is sold for cash, we debit Bank and credit the Realisation Account. If a partner takes over such an asset, we debit their capital account instead of Bank. If shares are divided among partners, we debit their capital accounts in their profit-sharing ratio.
Exam Tip: If no profit-sharing ratio is mentioned in the problem, distribute profits, losses, or assets equally among the partners.

 

Question 9. All partners wishes to dissolve the firm. Yastin , a partner wants that her loan of Rs. 2,00,000 must be paid off before the payment of capitals to the partners. But, Amart, another partner wants that the capitals must be paid before the payment of Yastin’s loan. You are required to settle the conflict giving reasons.
Answer: As per Section 48 of the Indian Partnership Act, 1932, a specific order of preference is laid down for making payments when a partnership firm is dissolved. According to these provisions, any loans or advances advanced by a partner to the firm must be paid off prior to returning the capital balances to the partners. Consequently, Yastin's demand is legally correct. Her loan of Rs. 2,00,000 must be settled before any capital distribution is made to the partners, as capital is always repaid at the very last stage.
In simple words: When closing down a business, we must pay back any loan given by a partner before we return the capital they invested. Therefore, Yastin should receive her loan payment first.
Exam Tip: Cite Section 48 of the Indian Partnership Act, 1932, as this legal reference carries significant weight in the marking scheme for theory questions on dissolution.

 

Question 10. What journal entries would be recorded for the following transactions on the dissolution of a firm after various assets (other than cash) on the third party liabilities have been transferred to Realisation account.
1. Arti took over the Stock worth Rs. 80,000 at Rs. 68,000.
2. There was unrecorded Bike of Rs. 40,000 which was taken over By Mr. Karim.
3. The firm paid Rs. 40,000 as compensation to employees.
4. Sundry creditors amounting to Rs. 36,000 were settled at a discount of 15%.
5. Loss on realisation Rs. 42,000 was to be distributed between Arti and Karim in the ratio of 3:4.
Answer: The journal entries required are as follows:

In simple words: When assets are taken by partners or liabilities are paid off during closing, all these entries go through the Realisation Account. Any final loss is shared by the partners by debiting their capital accounts.
Exam Tip: For creditors paid at a discount, perform the subtraction (e.g., Rs. 36,000 less 15% discount = Rs. 30,600) and enter the net paid amount.

 

Question 11. Rose and Lily shared profits in the ratio of 2:3. Their Balance Sheet on March 31, 2006 was as follows:

Rose and Lily decided to dissolve the firm on the above date. Assets (except bills receivables) realised Rs. 4, 84,000. Bills receivable were taken over by Rose at X 30,000. Creditors agreed to take Rs 38,000. Cost of realisation was Rs 2400. There was a Motor Cycle in the firm which was bought out of the firm’s money, was not shown in the books of the firm. It was now sold for Rs 10,000. There was a contingent liability in respect of outstanding electric bill of Rs 5,000. Bill receivable taken over by Rose at Rs 33,000. Show realisation account, partners’ capital account, loan account and cash account.
Answer: The necessary ledger accounts are shown below:

Realisation Account

Partners' Capital Account

Lily's Loan Account

Cash Account

Note: The problem mentions Bills Receivable taken over by partner Rose at Rs. 30,000 and subsequently at Rs. 33,000. In this solution, Rs. 33,000 has been used to calculate the balances.
In simple words: When closing down the business, we move all ledger assets and liabilities to the Realisation Account. Once we sell the assets and pay the debts, any remaining balance (profit or loss) is shared between partners. Finally, we settle the partner's loan and capital accounts through cash payments.
Exam Tip: Distribute the accumulated Balance Sheet Profit and Loss account balance among the partners in their profit-sharing ratio before settling capital accounts.

 

Question 12. Shilpa, Meena and Nanda decided to dissolve their partnership on March 31,2006. Their profit sharing ratio was 3:2:1 and their Balance Sheet was as under:

The stock of value of Rs. 41,660 are taken over by Shilpa for Rs. 35,000 and she agreed to discharge bank loan. The remaining stock was sold at Rs. 14,000 and debtors amounting to Rs. 10,000 realised Rs. 8,000. land is sold for Rs. 1,10,000. The remaining debtors realised 50% at their book value. Cost of realisation amounted to Rs. 1,200. There was a typewriter not recorded in the books worth Rs. 6,000 which were taken over by one of the Creditors at this value. Prepare Realisation Account
Answer: The ledger accounts for closing the firm's books are prepared below:

Realisation Account

Partners' Capital Account

Cash Account

In simple words: When we close the firm, assets sold for cash go to the debit of Cash and credit of Realisation. When an unrecorded typewriter is taken over by a creditor, it reduces our payment to that creditor, and only the balance cash is paid to them.
Exam Tip: If an unrecorded asset is given to a creditor in full or partial settlement, no entry is passed for the asset transfer itself. Just deduct the asset's value from the creditor's liability and pay the remaining balance.

 

Question 13. Surjit and Rahi were sharing profits (losses) in the ratio of 3:2, their Balance Sheet as on March 31, 2012 is as follows:

The firm was dissolved on March 31, 2006 on the following terms:
1. Surjit agreed to take the investments at Rs. 8,000 and to pay Mrs. Surojit’s loan.
2. Other assets were realised as follows:
Stock Rs.5,000
Debtors Rs. 18,500
Furniture Rs. 4,500
Plant Rs. 25,000
3. Expenses on realisation amounted to Rs. 1,600.
4. Creditors agreed to accept Rs. 37,000 as a final settlement. You are required to prepare Realisation account, Partner’s Capital account and Bank account
Answer: The required accounts are prepared as follows:

Realisation Account

Partners' Capital Account

Rahi's Loan Account

Bank Account

Note: Partner's loan can be settled directly through the loan account rather than routing it through the Realisation Account.
In simple words: When closing down the business, the partner's wife's loan is treated as a third-party liability and moved to the Realisation Account. However, a partner's personal loan is paid off directly from cash without moving it to the Realisation Account.
Exam Tip: Remember that a partner's relative's loan (such as Mrs. Surjit's Loan) is an external liability, so it must be transferred to the Realisation Account, whereas the partner's own loan (Rahi's Loan) is paid directly.

 

Question 14. Rita, Geeta and Ashish were partners in a firm sharing profits/losses in the ratio of 3:2:1. On March 31, 2006 their balance sheet was as follows:

On the date of above mentioned date the firm was dissolved:
1. Rita was appointed to realise the assets. Rita was to receive 5% commission on the rate of assets (except cash) and was to bear all expenses of realisation,
2. Assets were realised as follows:
Debtors 30,000
Stock 26,000
Plant 42,750
3. Investments were realised at 85% of the book value,
4. Expenses of realisation amounted to Rs. 4,100,
5. Firm had to pay Rs. 7,200 for outstanding salary not provided for earlier,
6. Contingent liability in respect of bills discounted with the bank was also materialised and paid off Rs. 9,800, Prepare Realisation account, Capital Accounts of Partner’s and Cash Account.
Answer: The required accounts are prepared as follows:

Realisation Account

Partners' Capital Account

Cash Account

Note: No entry is passed for the realisation expenses of Rs. 4,100 because Rita was given a fixed commission to bear all such expenses herself.
In simple words: When a partner is appointed to liquidate assets for a commission, that commission is debited to the Realisation Account and credited to their capital. Since the partner agreed to bear the realisation costs themselves, any expenses they actually pay are not recorded in the firm's books.
Exam Tip: When a partner bears the realisation expenses, make sure not to show those expenses in the Realisation or Cash Accounts of the firm.

 

Question 15. Anup and Sumit are equal partners in a firm. They decided to dissolve the partnership on December 31, 2006. When the balance sheet is as under :

The Assets were realised as follows :
Rs.
Lease hold land 72,000
Furniture 22,500
Stock 40,500
Plant 48,000
Sundry Debtors 10,5000
The Creditors were paid Rs. 25,500 in full settlement. Expenses of realisation amount to Rs. 2,500. Prepare Realisation Account, Bank Account, Partners Capital Accounts to close the books of the firm.
Answer: The required ledger accounts to close the firm's books are prepared as follows:

Realisation Account

Partners' Capital Account

Bank Account

Note: The third-party loan can alternatively be settled directly through the loan account instead of transferring it to the Realisation Account.
In simple words: When closing down the firm, we first transfer all the external assets and liabilities to the Realisation Account. Once we pay off the external creditors and receive cash from the sold assets, we distribute any remaining profit or loss equally and make the final cash payments to clear the partners' capital.
Exam Tip: Make sure to distribute any accumulated reserves (like Reserve Fund) to the partners' capital accounts in their profit-sharing ratio before making final payments.

 

Question 16. Ashu and Harish are partners sharing profit and losses as 3:2. They decided to dissolve the firm on December 31, 2006. Their balance sheet on the above date was:

Ashu is to take over the building at Rs. 95,000 and Machinery and Furniture is take over by Harish at value of Rs. 80,000. Ashu agreed to pay Creditor and Harish agreed to meet Bank overdraft. Stock and Investments are taken by both partner in profit sharing ratio. Debtors realised for Rs. 46,000, expenses of realisation amounted to Rs. 3,000. Prepare necessary ledger account.
Answer: The required ledger accounts are prepared below:

Realisation Account

Partners' Capital Account