The correct answer is Option (4) → Dissolution of a firm
The Profit & Loss Adjustment Account is another name for the Revaluation Account: “Profit and Loss Adjustment Account (Revaluation Account)”. It records the gain or loss on revaluing assets and liabilities when the firm carries on with changed partners or changed shares. On dissolution the firm does not carry on: its books are closed through a Realisation Account instead, so Option (4) is the answer.
Option (1) Admission of a partner — A case where it is prepared. Assets and liabilities are revalued and the gain or loss goes to the old partners in the old ratio.
Option (2) Retirement of a partner — A case where it is prepared. The same revaluation is made, and the result is shared by all partners, including the one retiring.
Option (3) Change in profit sharing ratio — A case where it is prepared. The partners stay the same but their shares change, so assets and liabilities are revalued first and the result goes to the capital accounts in the old ratio.
NCERT (2026-27 edition):
Adjustment for Revaluation of Assets and Liabilities – “At the time of retirement or death of a partner there may be some assets which may not have been shown at their current values. Similarly, there may be certain liabilities which have been shown at a value different from the obligation to be met by the firm. Not only that, there may be some unrecorded assets and liabilities which need to be brought into books. As learnt in case of admission of a partner, a Revaluation Account is prepared in order to ascertain net gain (loss) on revaluation of assets and/or liabilities and bringing unrecorded items into firm’s books and the same is transferred to the capital account of all partners including retiring/deceased partners in their old profit sharing ratio.” 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.” |
