Accountancy Part ADissolution of Partnership Firm

On dissolution of a firm, partner's loan account is transferred to:

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Bank Account

A loan given by a partner to the firm is not taken to the Realisation Account; only outside liabilities go there. It is repaid in cash after the outside creditors and before the partners’ capitals, so it is closed through the Bank Account: Partner’s Loan A/c Dr. to Bank A/c.

In the book this item’s answer is “(d) None of the above”, because none of the three accounts it lists is right; the paper puts Bank Account, the account that settles the loan, in its place.

NCERT (2026-27 edition):
Test your Understanding – II

Extract from the NCERT textbook

NCERT (2026-27 edition):
Settlement of Accounts – “… (b) Application of Assets The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order: (i) In paying the debts of the firm to the third parties; (ii) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan); (iii) In paying to each partner proportionately what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in their profit sharing ratio.”