Question

When realisation expenses are paid by a partner on behalf of the firm, what is the journal entry made?
 

• A.

  

• B.

  

• C.

  

• D.

  

Hint:

Think of the partner paying as providing a temporary loan to the firm for these expenses, hence their capital account is credited.

Answer 1

The Correct Option is A

Step 1: Understanding the Transaction.
When a partnership firm undergoes dissolution, certain expenses are incurred to realize the assets and settle the liabilities. If a partner makes a payment for these expenses from their personal funds on behalf of the firm, it signifies that the firm owes this amount to the partner. 

Step 2: Identifying the Accounts and Their Treatment.
The two primary accounts affected are:

• Realisation Account: This account is used to record all transactions related to the disposal of assets and settlement of liabilities during the dissolution process. Realisation expenses are a cost incurred for this process, and therefore, the Realisation Account is debited.
• Partner's Capital Account: When the partner pays the expenses, it effectively increases the amount the firm owes to that partner. This is reflected by crediting the Partner's Capital Account.

Step 3: Formulating the Journal Entry.
Based on the principles of debit and credit, the journal entry would be: 



Step 4: Conclusion.
Therefore, the correct journal entry when realisation expenses are paid by a partner on behalf of the firm is to debit the Realisation Account and credit the Partner's Capital Account. This corresponds to option (a).