CBSE Class 12 Accountancy – Chapter 5: Dissolution of Partnership Firm
NCERT/CBSE-aligned study resource
1. Meaning of Dissolution
Dissolution of a firm involves closing the business and settling its assets and liabilities. It is different from merely changing the relationship among partners.
2. Realisation Account
The Realisation Account records the transfer and settlement of assets and liabilities at dissolution and determines profit or loss on realisation.
3. Basic Accounting Treatment
| Item | Typical treatment |
|---|---|
| Assets | Transferred to Realisation Account at book value |
| External liabilities | Transferred to Realisation Account |
| Asset realised for cash | Bank/Cash Dr. to Realisation |
| Liability paid | Realisation Dr. to Bank/Cash |
| Realisation profit/loss | Transferred to partners’ capital accounts in profit-sharing ratio |
4. Unrecorded Assets and Liabilities
An unrecorded asset realised for cash is credited to Realisation Account. An unrecorded liability paid is debited to Realisation Account. Special facts in a question must be followed carefully.
5. Partner’s Loan and Firm’s Liabilities
Settlement priority depends on the nature of the claim and the prescribed order. A partner’s loan is treated separately from the partner’s capital.
6. Realisation Profit or Loss
Profit or loss arises from the difference between amounts realised/settled and the book values transferred, after considering realisation expenses and other relevant items.
7. Worked Illustration
Suppose assets transferred to Realisation total ₹1,00,000 and liabilities transferred total ₹40,000. Assets are realised for ₹90,000 and liabilities are settled for ₹38,000, with realisation expenses of ₹2,000. Net realisation result = ₹90,000 + ₹40,000 − ₹1,00,000 − ₹38,000 − ₹2,000 = −₹10,000, a loss, subject to the exact items included in the question.
8. Settlement Sequence
Exam Focus
- Distinguish firm liabilities from partner capital.
- Transfer only the prescribed items to Realisation Account.
- Check every cash receipt/payment before balancing.
Chapter-Specific MCQs
- Realisation Account is prepared mainly to determine: (A) profit/loss on realisation (B) sales (C) depreciation only (D) bank balance only. Answer: A.
- Profit/loss on realisation is transferred to partners in: (A) profit-sharing ratio (B) capital ratio always (C) gaining ratio always (D) equal ratio always. Answer: A.
- Unrecorded asset sold for cash results in: (A) cash receipt and credit to Realisation (B) debit to Realisation only (C) no entry (D) partner salary. Answer: A.
Competency Questions
- Prepare a Realisation Account from a given list of assets, liabilities and settlement amounts.
- Determine the realisation profit/loss after considering expenses.
- Explain why partner capital is settled only after the firm’s external claims are dealt with.