Accountancy Part ADissolution of Partnership Firm

Identify the correct sequence to be followed at the time of Dissoluti…

Identify the correct sequence to be followed at the time of Dissolution of Partnership firm:

(A) Payment of Partner's Loan Account
(B) Realisation of Assets
(C) Prepare Cash/Bank Account
(D) Prepare Partner's Capital Account
(E) Payment of outsiders liability

Choose the correct answer from the options given below :

Answer & explanation

Correct answer: option 2

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

Section 48 of the Partnership Act fixes the order in which the assets of a dissolved firm are applied: outside debts first, then partners’ loans, then capitals.

(B) Realisation of Assets — the assets are sold first to raise cash.

(E) Payment of outsiders liability — debts to third parties are paid out of that cash first.

(A) Payment of Partner's Loan Account — partners’ loans (advances) come next, before capital.

(D) Prepare Partner's Capital Account — profit or loss on realisation is transferred and the capital balances are settled.

(C) Prepare Cash/Bank Account — the cash account closes last, after the final payments to partners.

NCERT (2026-27 edition):
Settlement of Accounts

Extract from the NCERT textbook

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.”

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.”