When the firm is dissolved, its books of account are to be closed and…

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. Identify correct statements related to Realisation Account.

A. Transfer all assets (other than cash in hand, bank balance and fictitious assets, if any), and all external liabilities to this account.
B. The balance in this account is not transferred to partners' capital accounts in the profit sharing ratio.
C. The balance in this account is transferred to partners' capital accounts in the profit sharing ratio.
D. Ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → A, C and D only

A Realisation Account is opened when a firm is dissolved. It collects the assets that are to be sold and the liabilities that are to be paid, so that the profit or loss on realisation can be found and passed on to the partners.

A. Transfer all assets (other than cash in hand, bank balance and fictitious assets, if any), and all external liabilities to this account. Correct. Cash and bank need no realising, and a fictitious asset has nothing to realise, so every other asset and every outside liability is brought into this account.

B. The balance in this account is not transferred to partners’ capital accounts in the profit sharing ratio. Incorrect. The profit or loss on realisation belongs to the partners, so the balance is transferred to their capital accounts in the profit sharing ratio.

C. The balance in this account is transferred to partners’ capital accounts in the profit sharing ratio. Correct. This is the closing step of the account: a profit is credited and a loss debited to the partners.

D. Ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities. Correct. Finding this net effect is the very purpose of the account.

Note: It seems that there is a mistake in the original NTA question. It printed Option (3) and Option (4) identically as “A and D only”, so two options were the same. For the benefit of students and to ensure that the question is correct and has a single valid answer, Option (4) has been changed to “B and C only”.

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).”

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → A, C and D only

D. Ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities. Correct. Finding this net effect is the very purpose of the account.