Record journal entry for the following on dissolution of a firm: Firm has a stock of ₹2,40,000. Arun, a partner, took over 50% of the stock at a discount of 15%.
Arun’s Capital A/c Dr ₹1,02,000
Understanding Journal Entries on Firm Dissolution
When a partnership firm undergoes dissolution, the assets and liabilities are wound up. Assets are realised (sold) or taken over by partners, and liabilities are paid off. A special account called the Realisation Account is opened to record the process of winding up.
Accounting for Asset Taken Over by a Partner
When an asset is taken over by a partner during the dissolution of a firm, it is treated differently from selling the asset to an outsider. Instead of receiving cash, the partner's capital account is adjusted for the value of the asset taken over.
- The Realisation Account is credited with the value of the asset taken over, as this represents a reduction in the assets available for external sale and is part of the realisation process.
- The Partner's Capital Account is debited with the agreed value of the asset taken over. This is because the partner is effectively 'paying' for the asset by reducing the amount they are entitled to receive from the firm, or increasing the amount they owe to the firm, upon final settlement.
Step-by-Step Calculation for Stock Taken Over
Let's calculate the value at which Arun took over the stock based on the given information:
- Total Stock Value: The firm has a stock of ₹2,40,000.
- Portion Taken Over by Arun: Arun took over 50% of the stock.
- Value of stock taken over = 50% of ₹2,40,000
- Value of stock taken over = $\frac{50}{100} \times 2,40,000 = ₹1,20,000$
- Discount on Stock: Arun took over the stock at a discount of 15% on the value taken over.
- Discount amount = 15% of ₹1,20,000
- Discount amount = $\frac{15}{100} \times 1,20,000 = ₹18,000$
- Agreed Value for Takeover: The value at which Arun took over the stock is the value less the discount.
- Agreed Value = Value of stock taken over - Discount amount
- Agreed Value = ₹1,20,000 - ₹18,000 = ₹1,02,000
So, Arun took over the stock worth ₹1,20,000 at an agreed value of ₹1,02,000.
Journal Entry for Stock Taken Over by Partner Arun
Based on the rule for asset takeover by a partner and the calculated value, the journal entry will be:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| Arun's Capital A/c Dr. | 1,02,000 | |||
| To Realisation A/c | 1,02,000 | |||
| (Being 50% stock taken over by Arun at 15% discount) | ||||
This journal entry correctly reflects that Arun's Capital Account is debited with the agreed value of the stock taken over (₹1,02,000), and the Realisation Account is credited with the same amount.
Comparing with the Options
The question asks for the journal entry. Let's look at the debit part of the entry we derived:
- Arun's Capital A/c Dr. ₹1,02,000
Comparing this with the provided options, the entry that shows Arun's Capital Account being debited with ₹1,02,000 is consistent with our calculation and the accounting rules for dissolution.
Revision Table: Key Dissolution Entries
| Transaction | Journal Entry |
| Transfer of assets to Realisation A/c | Realisation A/c Dr. To Sundry Assets A/c (individually) |
| Sale of asset for cash | Cash/Bank A/c Dr. To Realisation A/c |
| Asset taken over by a partner | Partner's Capital A/c Dr. To Realisation A/c |
| Transfer of external liabilities to Realisation A/c | Sundry Liabilities A/c (individually) Dr. To Realisation A/c |
| Payment of liability | Realisation A/c Dr. To Cash/Bank A/c |
| Liability taken over by a partner | Realisation A/c Dr. To Partner's Capital A/c |
Additional Information on Firm Dissolution Accounting
Dissolution of a partnership firm means the termination of the partnership business. All assets are disposed of, and liabilities are paid off. Any surplus is distributed among the partners according to their rights, or any deficit is contributed by them. The Realisation Account is central to this process.
- Realisation Account: This is a nominal account prepared to ascertain the profit or loss on the realisation of assets and payment of liabilities.
- Debit side of Realisation A/c: Initial transfer of assets (excluding cash/bank and fictitious assets), expenses of realisation, payment of liabilities, partner taking over a liability.
- Credit side of Realisation A/c: Initial transfer of external liabilities, sale of assets, partner taking over an asset, unrecorded assets realised.
- Balancing Realisation A/c: The profit or loss on realisation is transferred to partners' capital accounts in their profit-sharing ratio.
- Partner's Capital Accounts: These are finally settled after all adjustments (including realisation profit/loss, reserves, accumulated profits/losses, loans, etc.). The final balance is paid off through the Cash/Bank account.
- Cash/Bank Account: This account is prepared to record all cash/bank receipts from asset sales and partner contributions and payments for liabilities, expenses, and final settlement to partners. This account should balance in the end.
Understanding the flow of transactions through these accounts is crucial for correctly accounting for the dissolution of a partnership firm.
Important Questions from Dissolution of a Partnership Firm
In case of dissolution of partnership firm, all assets, except cash/bank and fictitious assets, are transferred to debit side of:
Match List I with List II:
List – I List – II A. Dissolution Agreement I. When a partner becomes insane B. Dissolution by Court II. By the completion of venture C. Compulsory dissolution III. In accordance with contract between partners D. On happening of certain contingencies IV. Event making it impossible for partners to carry on business Choose the correct answer from the options given below:
The dissolution of a partnership firm takes place in the following order:
(A) Outsiders’ liabilities are paid out.
(B) Partner’s capital account is settled.
(C) All assets and outside liabilities are transferred to the realization account.
(D) Partner’s loan is repaid in proportion.
(E) Assets are sold and realized.
Choose the correct answer from the options given below:
At the time of dissolution of a partnership firm, the following accounting adjustments are considered:
(A) Partner’s current A/c is transferred to the respective partner’s loan A/c.
(B) Accumulated losses are transferred to the partner’s capital A/c in profit-sharing ratio.
(C) All assets except cash and fictitious assets are transferred to the debit side of Realisation A/c.
(D) Partners’ loans are transferred to Realisation A/c.
(E) All external liabilities are transferred to the credit side of Realisation A/c.
Choose the correct answer from the options given below:
Identify the account/statement which is not required in case of Dissolution of a partnership firm.
