Ravneet and Manmeet were partners in a firm sharing profits and losses in the ratio of 7 : 3. On 31st March, 2025, their Balance Sheet was as follows :
Balance Sheet of Ravneet and Manmeet as on 31st March, 2025
Liabilities Amount (Rs.) Assets Amount (Rs.) Creditors 4,50,000 Cash at Bank 2,50,000 Capitals : Stock 2,50,000 Ravneet 5,00,000 Debtors 2,00,000 Manmeet 3,00,000 8,00,000 Plant & Machinery 5,50,000 12,50,000 12,50,000
On the above date, the firm was dissolved. The plant and machinery was sold at Rs. 4,87,000 and stock at 20% less than the book value. Debtors realised Rs. 1,40,000.
Ravneet agreed to bear all realisation expenses for which he was allowed a commission of Rs. 9,000. Actual realisation expenses amounted to Rs. 7,500.
Prepare Realisation Account and Partners' Capital Accounts.
Ravneet and Manmeet were partners in a firm sharing profits and losses in the ratio of 7 : 3. On 31st March, 2025, their Balance Sheet was as follows :
Balance Sheet of Ravneet and Manmeet as on 31st March, 2025
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Creditors | 4,50,000 | Cash at Bank | 2,50,000 |
| Capitals : | Stock | 2,50,000 | |
| Ravneet 5,00,000 | Debtors | 2,00,000 | |
| Manmeet 3,00,000 | 8,00,000 | Plant & Machinery | 5,50,000 |
| 12,50,000 | 12,50,000 |
On the above date, the firm was dissolved. The plant and machinery was sold at Rs. 4,87,000 and stock at 20% less than the book value. Debtors realised Rs. 1,40,000.
Ravneet agreed to bear all realisation expenses for which he was allowed a commission of Rs. 9,000. Actual realisation expenses amounted to Rs. 7,500.
Prepare Realisation Account and Partners' Capital Accounts.
Working — Amount realised: Plant & Machinery Rs. 4,87,000 + Stock (Rs. 2,50,000 less 20% = Rs. 2,00,000) + Debtors Rs. 1,40,000 = Rs. 8,27,000
Realisation Account
| Dr. | Amount (Rs.) | Cr. | Amount (Rs.) |
|---|---|---|---|
| To Stock A/c | 2,50,000 | By Creditors A/c | 4,50,000 |
| To Debtors A/c | 2,00,000 | By Bank A/c (Assets realised) | 8,27,000 |
| To Plant & Machinery A/c | 5,50,000 | By Loss transferred to: | |
| To Bank A/c (Creditors paid) | 4,50,000 | Ravneet's Capital A/c (7/10) | 1,27,400 |
| To Ravneet's Capital A/c (Commission) | 9,000 | Manmeet's Capital A/c (3/10) | 54,600 |
| Total | 14,59,000 | Total | 14,59,000 |
Partners' Capital Accounts
| Particulars | Ravneet (Rs.) | Manmeet (Rs.) | Particulars | Ravneet (Rs.) | Manmeet (Rs.) |
|---|---|---|---|---|---|
| To Realisation A/c (Loss) | 1,27,400 | 54,600 | By Balance b/d | 5,00,000 | 3,00,000 |
| To Bank A/c (Final payment) | 3,81,600 | 2,45,400 | By Realisation A/c (Commission) | 9,000 | — |
| Total | 5,09,000 | 3,00,000 | Total | 5,09,000 | 3,00,000 |
Ravneet is finally paid Rs. 3,81,600 and Manmeet Rs. 2,45,400 in full settlement.
Marking Scheme
- 11 mark: transferring all assets (Stock, Debtors, Plant & Machinery) to the debit of Realisation Account at book values, and Creditors to the credit side.
- 21.5 marks: correct realised values credited to Realisation Account — Plant & Machinery Rs. 4,87,000, Stock Rs. 2,00,000 (20% less), Debtors Rs. 1,40,000.
- 31 mark: correct treatment of Ravneet's commission (Rs. 9,000 debited to Realisation, credited to Ravneet's Capital) with the actual expense of Rs. 7,500 ignored in the firm's books.
- 41 mark: correct computation and allocation of realisation loss (Rs. 1,82,000) in the profit-sharing ratio 7:3.
- 51.5 marks: correctly balanced Partners' Capital Accounts showing final payments of Rs. 3,81,600 to Ravneet and Rs. 2,45,400 to Manmeet.
Hint
Transfer all assets and creditors to the Realisation Account, record actual realised amounts and the commission, and split the balancing profit/loss in the old ratio 7:3.
Quick Oral Answer
On dissolution, all assets (at book value) and external liabilities are transferred to the Realisation Account, actual sale proceeds and payments are recorded against it, and the resulting profit or loss is transferred to the partners' capital accounts in their profit-sharing ratio before final settlement through the bank.
Analysis & Explanation
This is a comprehensive dissolution problem combining asset realisation, liability settlement, and a partner-borne-expense arrangement.
Concept: On dissolution, every asset (except cash/bank) and every external liability is transferred to the Realisation Account at book value; actual amounts realised or paid are then recorded against it.
Key rule: Since Ravneet personally agreed to bear realisation expenses for a fixed commission, only the commission (Rs. 9,000) is recorded in the firm's books — the actual Rs. 7,500 he spends is his personal cost, never entered in the Realisation Account.
Exam trap: Students often wrongly record the actual expense of Rs. 7,500 as well, double-counting the cost.
Real-world use: Such commission-for-expenses arrangements are common in real winding-up situations to compensate a partner for administrative effort.
Common Mistakes
- 1Recording the actual realisation expenses of Rs. 7,500 in the firm's books when a partner has agreed to bear them personally in return for a fixed commission — only the commission (Rs. 9,000) is recorded.
- 2Crediting Stock at its book value instead of the reduced realised value (20% less than book value = Rs. 2,00,000).
- 3Forgetting to transfer Creditors to the credit side of the Realisation Account, distorting the Realisation Account's balancing figure.
Interesting Facts
When a partner agrees to bear realisation expenses for an agreed commission, the firm records ONLY the commission — the actual expenses paid become the personal cost of that partner, entirely outside the firm's accounts.
The Realisation Account acts as a single clearing account through which every asset and external liability passes on dissolution, so that the final balancing figure represents the true profit or loss on winding up.
Ravneet effectively earned Rs. 1,500 extra (Rs. 9,000 commission received vs. Rs. 7,500 actually spent) — a real-world incentive structure to compensate a partner for handling dissolution.
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Frequently Asked Questions
Why is Rs. 7,500 (actual realisation expenses) not recorded anywhere in the firm's books?
Because Ravneet personally agreed to bear all realisation expenses in exchange for a fixed commission of Rs. 9,000; the firm only records the commission payable to him, and the Rs. 7,500 he actually spends is his personal expense.
How is the loss on realisation shared between the partners?
It is shared in the partners' profit-sharing ratio, i.e., 7:3 here, giving Ravneet Rs. 1,27,400 and Manmeet Rs. 54,600 out of the total realisation loss of Rs. 1,82,000.
What is the final amount paid to each partner on dissolution?
After adjusting for the realisation loss and Ravneet's commission, Ravneet receives a final payment of Rs. 3,81,600 and Manmeet receives Rs. 2,45,400 from the firm's bank balance.