What is Dissolution of a Partnership Firm? Steps, Accounts & MCQs Explained
MCQs for Accountancy Class 12 Chapter 5 focus on the dissolution of a partnership firm, a crucial topic for both CBSE Board exams and day-to-day business practices. Understanding this concept helps students answer exam questions confidently and prepares them for real-world accounting scenarios. At Vedantu, we present this topic in a concise, student-friendly manner.
| Step | Main Dissolution Entry | Description |
|---|---|---|
| 1 | Transfer of Assets | Non-cash assets are transferred to the Realisation Account. |
| 2 | Transfer of Liabilities | Outside liabilities are also transferred to the Realisation Account. |
| 3 | Sale of Assets / Payment of Liabilities | Assets are sold, and liabilities paid or settled via bank/partners. |
| 4 | Settlement of Surplus/Deficiency | Balance transferred to Partners’ Capital Accounts according to their profit-sharing ratio. |
Dissolution of Partnership Firm: Meaning and Importance
Dissolution of partnership firm means ending the business and closing all accounts. All firm assets are sold, and liabilities settled. Any profits or losses are distributed among the partners based on their agreement. This topic ensures clarity on closing procedures and helps in scoring high in Accountancy exams.
Key Concepts in Dissolution of Partnership
This topic includes several accounting principles and entries related to the ending of a partnership firm. Major concepts are realisation accounts, treatment of goodwill, capital account settlement, and handling unrecorded assets or liabilities. Mastering these helps tackle all related MCQs confidently in exams.
Types of Dissolution in Partnership
- Voluntary Dissolution: By mutual agreement of all partners.
- Compulsory Dissolution: Legal reasons (e.g., insolvency of all partners).
- Court Order: On application by a partner, sometimes due to misconduct or incapacity.
Accounting Entries for Dissolution of a Partnership Firm
During dissolution, accounting entries involve transferring assets and liabilities to the realisation account. Then, proceeds from asset sales and payments to settle liabilities are recorded. Unrecorded assets and liabilities are adjusted as needed. The realisation profit or loss is finally shared among partners.
| Transaction | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Transfer assets (except cash/bank) | Realisation Account | Asset Account |
| Transfer outside liabilities | Liability Account | Realisation Account |
| Asset realised (sold for cash) | Cash/Bank Account | Realisation Account |
| Liability paid | Realisation Account | Cash/Bank Account |
| Profit on realisation | Realisation Account | Partners’ Capital Account |
| Loss on realisation | Partners’ Capital Account | Realisation Account |
Realisation Account: Purpose and Example
The realisation account is a special nominal account prepared to find out the profit or loss on the sale of assets and settlement of liabilities during dissolution. It helps in recording all gains and losses accurately and ensures proper distribution among partners.
Example of Realisation Account Recording
- If machinery is sold for more than its book value, the gain appears as a profit in the realisation account.
- Payment of unrecorded liabilities is entered as a loss.
Goodwill Treatment on Dissolution
Goodwill is an intangible asset. During dissolution, it is either sold along with other assets, written off, or adjusted among partners' capital accounts according to their profit-sharing ratio. Its proper treatment is necessary for exam-based practical questions.
Settlement of Partners' Capital Accounts
After all assets and liabilities are settled, the remaining cash is distributed to partners based on their final capital account balances. Deficient partners may have to pay from personal funds, or in some cases, the deficiency is borne by solvent partners.
MCQs for Accountancy Class 12 Chapter 5 (Dissolution of Partnership Firm)
- The realisation account is debited with _______ on dissolution.
(a) all assets to be realised (b) liabilities (c) cash received (d) assets taken by partners
Answer: (a) - If total assets are ₹3,35,000 and external liabilities are ₹35,000, partners’ capitals total ________.
(a) ₹3,70,000 (b) ₹2,80,000 (c) ₹3,00,000 (d) None
Answer: (b) - Amount realised from unrecorded asset is credited to ________.
(a) Partners’ capital (b) Cash (c) Realisation account (d) Revaluation account
Answer: (c) - Realisation account is a ______.
(a) Personal (b) Real (c) Nominal (d) Representative account
Answer: (c) - Unrecorded liabilities, when paid, are shown in ______.
(a) Debit of realisation account (b) Credit of realisation account
(c) Debit of cash account (d) Credit of cash account
Answer: (a)
For a full list of MCQs and detailed explanations, you can refer to Vedantu’s downloadable PDFs or further reading.
Why Study Dissolution of Partnership Firm?
Understanding the dissolution process is vital for Board exams, competitive commerce exams, and gaining practical accounting skills. Competence in this topic allows for correct and timely completion of related questions, boosting your exam performance.
Vedantu Resources for More Practice
- For a complete guide to dissolution, visit Dissolution of Partnership.
- To master realisation account concepts, check Realisation Account and Its Concept.
- Sample chapter questions with answers are available in DK Goel Solutions Class 12 Accountancy Chapter 5.
- Revisit partnership structure before dissolution at Reconstitution of Partnership Firm.
- Solve confusion about adjusting accounts with Rectification of Errors.
Tips for Exam Success
- Read each MCQ carefully and look for keywords in the question.
- Memorise major rules for realisation and capital account entries.
- Practise using tables to remember transaction treatments.
- Quickly verify each answer using sample explanations on Vedantu.
- For deeper review, download MCQ PDFs for offline revision.
In summary, MCQs for Accountancy Class 12 Chapter 5 help master dissolution of partnership firm and related topics. With proper understanding of realisation accounts, goodwill treatment, and structured practice, you can secure high marks in exams and sharpen your practical skills for the future.
FAQs on MCQs for Accountancy Class 12 Chapter 5: Dissolution of Partnership
1. What is the dissolution of a partnership firm?
Dissolution of a partnership firm refers to the termination of the partnership agreement, resulting in the winding up of the business. This involves settling all assets and liabilities, and distributing the remaining funds among the partners according to their agreed-upon terms. The process often includes the preparation of a realisation account to track these transactions.
2. How are assets and liabilities settled when a partnership is dissolved?
Settling assets and liabilities during partnership dissolution involves several steps. First, all assets are realised (sold) at their market value. Then, all known liabilities are paid. Any remaining assets are then distributed amongst partners according to the partnership agreement. Unrecorded liabilities are addressed after all assets are realised. Goodwill is either accounted for based on the agreement or written off. This process is often recorded in a realisation account.
3. Which account is used to record dissolution transactions?
A realisation account is specifically used to record all transactions related to the sale of assets and the payment of liabilities during the dissolution of a partnership firm. It shows the profit or loss from the realisation of assets and the settlement of liabilities. This account helps in calculating the final distribution of funds among the partners.
4. Where is goodwill shown on dissolution?
Goodwill, if any, is usually shown in the realisation account during partnership dissolution. It's either written off against the profits or losses of the realisation account, or it's taken into account when dividing the remaining funds among the partners, depending on the partnership agreement. The treatment of goodwill varies case-by-case.
5. How are unrecorded liabilities treated during dissolution?
Unrecorded liabilities, discovered during the dissolution of a partnership firm, are paid off from the cash realised from the sale of assets after the payment of recorded liabilities. The process requires careful identification of all outstanding amounts to ensure a fair settlement.
6. What is dissolution of partnership firm in class 12?
In Class 12 accountancy, dissolution of a partnership firm is a crucial topic covering the process of winding up a partnership business. It involves the realization of assets, settlement of liabilities, and distribution of the remaining funds among the partners. Understanding the preparation of a realisation account and the treatment of goodwill are key elements of this chapter.
7. How are assets and liabilities settled on dissolution?
The settlement of assets and liabilities during dissolution follows a specific sequence. Firstly, assets are realised (sold). Secondly, all known liabilities are paid. Finally, any remaining balance is distributed to partners based on their profit-sharing ratio. Unrecorded liabilities are dealt with after all known liabilities are settled.
8. Which account is prepared at the time of dissolution?
The primary account prepared during dissolution is the realisation account. This account records all transactions related to the sale of assets and the payment of liabilities. It helps determine the profit or loss on realisation, impacting the final distribution of funds among partners. Partner's capital accounts are also adjusted accordingly.
9. What happens to goodwill on dissolution?
The treatment of goodwill upon dissolution depends on the partnership agreement. It may be written off against profits or losses in the realisation account, or it could be adjusted in the partner's capital accounts, affecting the final distribution of funds. The specific approach is determined at the time of dissolution.
10. Who pays unrecorded liabilities at dissolution?
Unrecorded liabilities discovered during dissolution are paid from the remaining cash after settling known liabilities and distributing agreed-upon amounts to partners. If there is insufficient cash, partners may need to contribute from their personal funds to meet these obligations. The liability is typically shared between the partners according to the partnership agreement.
