1 April 31 March

P & L A/c
Balance Sheet
Balance Sheet
Liabilities Amount Assets Amount

Payment Realise

Dissolution of Partnership Dissolution of partnership firm

The Partnership is dissolved but the The firm winds up the business.
business continues. The Business is
not terminated
Assets and liabilities are revalued Assets are sold and the liabilities
through revaluation account and the are paid off through Realisation
Balance sheet is prepared account.
The Books of accounts are not closed The Books of accounts are closed.
as the business is not terminated.

The Assets of the firm and the amount contributed by the partners to make up the deficiency of
capital shall be applied for –

i) First to pay the debts of the firm to the third parties.

ii) Next, Partners Loan(Partner has advanced to the firm)
iii) Partners capitals
iv) The residue, if any shall be distributed among the partners in their profit sharing ratio.

 Meaning of external / outside liability eg: Creditors, bills payable, bank loan, bank overdraft,
outstanding expenses, employees provident fund.
Treatment : Transfer in the Cr. side of Realisation account and compulsorily paid.

 Meaning of internal liabilities/special reserves eg: provision for bad debts, provision for
depreciation, investment fluctuation fund, and Joint life policy fund.
Treatment: Transfer in the Cr. side of Realisation a/c only and no payment is to be done.

Preparation of Memorandum Balance Sheet:

It is prepared for calculating the missing figures of various assets or liabilities.
Sometimes, the total value of sundry assets is not given. However, the value
realized from the assets is given, the partner’s capital and other liabilities are also
given. In that case sundry assets have to be ascertained by preparing the old balance sheet. The
amount of capital and other liabilities are added. The sum total is the amount of assets. If
information about contingent liability is given then it will be shown by way of foot note.

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 Dr. Realisation A/c Cr.
Particulars Rs Particulars Rs
To Sundry Assets A/c(Except cash, bank, By Sundry Liabilities A/c(all the external
fictitious assets, accumulated losses, debit /outside liabilities except Partner’s
balance of partner’s capital/current A/c) capital, accumulated profits reserves
To Provision on any liability and partners loan)
To Partners capital a/c (liabilities taken over By Provision on any Assets
by a partner or remuneration/ commission By partners capital a/c(assets taken over
paid to him or any expense borne by him) by a partner)
To Cash/Bank a/c(payment of Realisation By Partner’s Loan A/c(if any sum remain
expenses or outside external and unrecorded unpaid)
liabilities) By Cash/Bank (assets sold /realized and
To Profit on Realisation (bal fig) amount received on unrecorded assets)
By partners capital a/c(Assets taken over
recorded or unrecorded)
By loss on Realisation (bal fig)

Dr. Partner’s Loan A/c Cr.

Particulars Amount Particulars Amount
To Cash/ Bank A/c xxx By Balance b/d( balance from xxx
(from the amount paid) xxx Balance sheet)
To Realisation A/c By Realisation A/c (interest if
(if any sum remain unpaid) any)
xxx xxx

Dr. Partners Capital A/c Cr.

Particulars A B C Particulars A B C
To Balance b/d (opening Dr. bal) By Balance b/d (opening Cr. bal )
To Realisation a/c (Realisation By Realisation a/c (Realisation profit
loss and assets taken over) and liability taken over )
To Profit & loss a/c (dr. bal given By General reserve(old ratio)
in assets side of balance sheet ) By Profit &loss a/c (cr.bal given in
To Deferred revenue liabilities side of b/s)
expenditure(given in the b/s) By Workmen’s Compensation fund
To Bank A/c (surplus capital By Bank A/c (bal fig) deficiency in
withdrawn by partner)(bal fig) capital brought by a partner )

Note: When Partner’s Current Account is given in the question, it means that the capitals are fixed. In such a
case profit or loss on Realisation, accumulated profits and reserves should be transferred to Current A/c.
Dr. Cash or Bank A/c Cr.
Particulars Rs Particulars Rs.
To Balance b/d (opening bal) By Realisation a/c(liabilities paid by firm )
To Realisation a/c (assets sold By Realisation a/c (Realisation expenses paid by firm)
/realized) By Partners loan a/c (loan advanced by a partner)
To Partners capital a/c By Partners Capital a/c (surplus withdrawn by a partner )
(deficiency brought by a partner)

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Note: Bank Overdraft is short term borrowing. It is first transferred to the credit side of Realisation A/c
and then paid off just like other outside liabilities.

POINTS TO REMEMBER:
1) Make sure that all accounts are closed. No account should remain opened.
2) If nothing is mentioned about payment of liabilities it is assumed that the amount is fully paid.
3) If nothing is mentioned about Realisations of assets, it is assumed that nothing is realized.
4) Goodwill shown in balance sheet is treated like any other assets.
5) Partner’s Loan will have to be repaid; even it is not specifically stated in the question.
6) In case of unrecorded assets and unrecorded liabilities, only the amount realized and paid is written in the
Realisation account.
7) If any Creditor or any liability accepts assets in full settlement of his account than in such a case there will
be no treatment of his account.
8) Assets to be taken over by any partner should be recorded at agreed value and not book value.
9) If any partner’s capital account shows a debit balance (i.e., deficit). It will be assumed that he brings in
necessary cash to clear off his debit balance, unless it is specifically mentioned in the question that he has
become insolvent.
10) Contingent liabilities are those liabilities which have not arisen but may arise upon the happening of
certain event. So, the amount of contingent liabilities is never shown in the balance sheet but these are
always shown in the form of footnote under the balance sheet.
11) In the absence of any information, goodwill will be treated as valueless.
12) Provisions are not to be paid as these are not the liabilities. Thus, when an asset or liability is taken to
Realisation account, any related fund or reserve is transferred to Realisation account, otherwise it will be
transferred to partner’s capital account.
13) An assets or liability against which a provision or reserve has been created, should be transferred as its
gross figure and not its net figure.
14) If cash balance and bank balance both are appearing in the balance sheet, only one account, either a Cash
Account or a Bank Account is prepared. If cash account is prepared, an entry is passed for withdrawing the
Bank Account is prepared and if Bank account is prepared, the Cash Balance is deposited into the Bank.
15) Goodwill shall be treated as any other asset by being transferred to the Realisation account.
16) Loan given to a Partner will be transferred (debited) to his Capital Account.

JOURNAL ENTRIES:
Transfer all the assets (except Cash account and or Realisation A/c Dr.
bank account) to Realisation Account. This essentially To Sundry Assets A/c
closes down the affected assets accounts.
Where a Partner takes up an asset, this should be Partners Capital A/c Dr.
charged upon the Partners capital account at an To Realisation A/c
agreed value.
Transfer all the Liabilities into the Realisation Account Sundry Liability A/c Dr.
(except Capital Accounts). This will close down all To Realisation A/c
liabilities accounts.
Where a partner has taken up a liability, charge the Realisation A/c Dr.
agreed value against the partner’s capital account. To All Partners Capital A/c
Where undistributed profits/Reserves are in existence, General Reserve A/c
transfer all the reserves to the partner’s capital Reserve Fund
account in the old profit and loss sharing ratios. Contingency Reserve A/c
Profit & Loss A/c
Workmen Compensation Reserve A/c
To Partner’s Capital A/c
Following entry is passed for the transfer of Provision for Bad debts A/c Dr.
reserves/provisions: Provision for Depreciation A/c Dr.
Machinery Replacement Reserves A/c Dr.
Investment Fluctuation Reserve A/c Dr.
Joint Life Policy reserve A/c Dr.
To Realisation A/c
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 * Assets are always recorded in Realisation A/c on book values
*Investment Fluctuation Fund is transferred to the Cr. Side of Realisation A/c, but it is not the actual
liability. It should be also noted that Investment Fluctuation Fund will be transferred to Realisation
A/c only if investments are appearing on the Assets side, otherwise, it will be credited to Capital A/c.
When assets are sold for cash Cash/Bank A/c Dr.
To Realisation A/c
If B/R received from a customer discounted from bank:
Discounting charges paid to the bank Realisation A/c Dr.
To Cash/Bank A/c
If any amount recovered from the customer or the Bank A/c Dr.
official receiver of the customer: To Realisation A/c
When Liabilities are paid for cash Realisation A/c Dr.
To Cash/Bank A/c
For payment of Realisation expenses:
When expenses are paid by the firm Realisation A/c Dr.
To Cash/ Bank A/c
When expenses of Realisation are paid by a partner on behalf of the Realisation A/c Dr
firm: To Partner’s Capital A/c
When the firm has agreed to pay a fixed amount to the partner Realisation A/c Dr
towards Realisation expenses and the partner has to bear the To Partner’s Capital A/c
expenses
When Realisation expenses are to be borne by the partner and the Partner’s Capital A/c Dr.
expenses are paid by the firm: To Cash/ Bank A/c
No entry will be passed if the expenses are to be borne and paid by the partner out of his pocket.
Close the Realisation A/c to the partners Capital Accounts in their profit and Loss sharing Ratios:
In case of Profit: Realisation A/c Dr.
To Partners Capital Accounts (in their P.S.R.)
In case of Loss: Partners Capital Accounts Dr. (in their P.S.R.)
To Realisation A/c
Payment to Partner’s Loan:
Partner’s Loan A/c Dr. Partner’s Loan A/c Dr.
To Cash/ Bank A/c(If amount paid) To Realisation A/c (If amount not settled)
Transferring the balance of Partner’s Current Account:
Partner’s Capital A/c Dr. Partner’s Current A/c Dr.
To Partner’s Current A/c To Partner’s Capital A/c
(Debit balance in current account transferred (Credit Balance in current account transferred to
to Capital account) Capital account)
Final Payment of Partner’s Capital Account
When a partner is required to ring in cash to Partners Capital Accounts Dr. (in their P.S.R.)
clear off debit balance, the entry will be: To Cash/Bank A/c
When a partner is paid the credit balance of Partner’s Capital A/c Dr.
his account: To Cash/Bank A/c

Accountancy by Yashdeep Chaturvedi- +91-7007705331