Identify the steps involved in the accounting treatment in the case o…

Identify the steps involved in the accounting treatment in the case of dissolution of firm:

(A) Capital accounts of partners are prepared and their final settlement is done.
(B) The balance of realisation account (profit or loss on realization) is transferred to partners' capital accounts in the profit sharing ratio.
(C) All assets and all external liabilities are transferred to realisation account.
(D) Realisation account is prepared.
(E) Bank account is prepared.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (D), (C), (B), (A), (E)

On dissolution the books are closed one account after another, each step using the result of the one before:

(D) Realisation account is prepared — it is opened to find the profit or loss on selling the assets and paying the liabilities.
(C) All assets and all external liabilities are transferred to realisation account — the assets (other than cash, bank and fictitious assets) go to its debit and the outside liabilities to its credit; the sales and payments follow.
(B) The balance of realisation account is transferred to partners' capital accounts — the profit or loss on realisation is shared in the profit sharing ratio.
(A) Capital accounts of partners are prepared and their final settlement is done — with every credit and debit in, each partner's final balance is paid to him or brought in by him.
(E) Bank account is prepared — it records every receipt and payment of the process, and it closes only with the final payment to the partners, so it is the last account to be completed.

NCERT (2026-27 edition):
Accounting Treatment – “When the firm is dissolved, its books of account are to be closed and the profit or loss arising on realisation of its assets and discharge of liabilities is to be computed. For this purpose, a Realisation Account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities which may be is transferred to partner’s capital accounts in their profit sharing ratio. Hence, all assets (other than cash in hand bank balance and fictitious assets, if any), and all external liabilities are transferred to this account. It also records the sale of assets, and payment of liabilities and realisation expenses. The balance in this account is termed as profit or loss on realisation which is transferred to partners’ capital accounts in the profit sharing ratio (see figure 4.1).”

NCERT (2026-27 edition):
Journal Entries – “… It may be noted that the aggregate amount finally payable to the partners must equal to the amount available in bank and cash accounts. Thus, all accounts of a firm are closed in case of dissolution.”

NCERT (2026-27 edition):
Dissolution of Partnership Firm – “… When all accounts are settled and the final payment is made to the partners for the amounts due to them, the books of the firm are closed.”