Question

On the dissolution of a partnership firm, which account is prepared to ascertain the net gain or loss on the sale of assets and payment of liabilities?

• A. Revaluation Account
• B. Realisation Account
• C. Profit and Loss Appropriation Account
• D. Profit and Loss Account

Hint:

Remember: \[ \text{Admission/Retirement} \rightarrow \text{Revaluation Account} \] \[ \text{Dissolution} \rightarrow \text{Realisation Account} \] This distinction is frequently tested in board examinations and competitive exams.

Answer 1

The Correct Option is B

Concept: Dissolution of a partnership firm means the business is permanently closed and all assets are realized, liabilities are settled and the remaining balance is distributed among partners. At the time of dissolution, a special account known as the Realisation Account is prepared. The main purpose of this account is to determine the overall profit or loss arising from the realization of assets and settlement of liabilities. The balance of Realisation Account ultimately represents either: \[ \text{Profit on Realisation} \] or \[ \text{Loss on Realisation} \] which is transferred to partners' capital accounts in their profit-sharing ratio.

Step 1: Understand the purpose of Realisation Account.
When a firm is dissolved:
• Assets are sold.
• Liabilities are paid.
• Expenses of dissolution are settled.
• Partners receive the final balance. To record all these transactions systematically, Realisation Account is prepared.

Step 2: Study the treatment of assets.
All assets except cash and bank are transferred to the debit side of Realisation Account at their book values. For example: \[ \text{Realisation A/c Dr.} \] \[ \text{To Machinery A/c} \] \[ \text{To Furniture A/c} \] etc.

Step 3: Study the treatment of liabilities.
External liabilities are transferred to the credit side of Realisation Account. For example: \[ \text{Creditors A/c Dr.} \] \[ \text{To Realisation A/c} \]

Step 4: Determine profit or loss on realization.
After recording all realization proceeds, liabilities paid and realization expenses:
• Credit side greater than debit side = Profit on Realisation.
• Debit side greater than credit side = Loss on Realisation. This balance is transferred to partners' capital accounts.

Step 5: Examine the given options.
Option (A): Revaluation Account is prepared at the time of admission, retirement or death of a partner, not at dissolution. Hence incorrect. Option (B): Realisation Account is specifically prepared during dissolution to determine profit or loss on realization. Hence correct. Option (C): Profit and Loss Appropriation Account is used for distribution of profits among partners. Hence incorrect. Option (D): Profit and Loss Account determines operating profit of the business and is not prepared for realization purposes. Hence incorrect.

Step 6: Select the correct answer.
The account prepared to ascertain the net gain or loss on realization of assets and settlement of liabilities is: \[ \boxed{\text{Realisation Account}} \] Hence, \[ \boxed{(B)} \]