Partnership Accounts : Dissolution of Firm

Partners' Capital Accounts in their profit sharing ratio

Step 1: General Reserve is an undistributed profit that has been accumulated over the years and not yet distributed among partners. Step 2: At the time of dissolution, undistributed profits like General Reserve, Reserve Fund, etc., are NOT transferred to the Realisation Account. Step 3: Instead, they are directly credited to the Partners' Capital Accounts in their profit sharing ratio. Step 4: The journal entry is: General Reserve A/c Dr. → To Partners' Capital A/cs (in profit sharing ratio). Step 5: This is because the reserve belongs to the partners and must be given to them before the final

Outside liabilities first, then partners' loans, then partners' capitals

Step 1: The Indian Partnership Act, 1932 (Section 48) specifies the order of payment on dissolution. Step 2: FIRST – Pay off third party (outside) liabilities such as creditors, bank loans, etc. Step 3: SECOND – Pay off loans taken from partners (e.g., Partner's Loan Account). Step 4: THIRD – Pay off partners' capitals. Step 5: FINALLY – If any surplus remains, it is distributed among partners in their profit sharing ratio. This order protects the interests of outside creditors before partners are paid.

Cash in Hand

Step 1: The Realisation Account is debited with all assets EXCEPT certain items that are treated separately. Step 2: Cash in Hand and Cash at Bank are NOT transferred to Realisation Account because they are already in liquid (cash) form and are used to make payments during dissolution. Step 3: Partners' Capital Accounts and Partners' Loan Accounts are also not transferred to Realisation Account. Step 4: All other assets like Stock, Machinery, Debtors, Building, Goodwill, Investments, etc., ARE transferred to the Realisation Account. Step 5: The Cash/Bank Account is the last account to be close

The asset is treated as valueless (nil realisation)

Step 1: This is an important rule for solving dissolution problems. Step 2: If a question does not mention the realisation value of any asset (tangible like machinery, or intangible like goodwill), the assumption is that it is realised at ZERO (nil value). Step 3: This means the asset is transferred to the debit of Realisation Account at its book value, but no corresponding credit entry is made for cash received. Step 4: This creates a loss in the Realisation Account for that asset's book value. Step 5: This rule is specifically mentioned in the CBSE/ISC syllabus scope and is important for exa