AccountancyCBSE Class 12 · Dissolution of Partnership Firm

Journal Entries on Dissolution of a Partnership Firm: Class 12 Complete Guide

Updated 15 October 2026 · Fact-checked

Journal entries on dissolution transfer assets and outside liabilities to the Realisation Account, record sale of assets and payment of liabilities, deal with realisation expenses and partners' loans, distribute reserves and the realisation result, and finally settle partners' capitals in cash. The trickiest 1- and 3-mark items are realisation expenses and creditors who accept assets.

Everything goes through Realisation A/c: assets on the debit side, outside liabilities and sale proceeds on the credit side; the balance is profit or loss.

Illustration drawn for QuestionBuddy.

Understand Journal Entries on Dissolution

The standard sequence.
1. Transfer assets: Realisation A/c Dr; To Sundry Assets (at book value, except cash, bank and fictitious assets).
2. Transfer liabilities and provisions: Sundry Liabilities/Provisions A/c Dr; To Realisation A/c.
3. Sale of assets: Bank A/c Dr; To Realisation A/c. Asset taken by a partner: Partner's Capital A/c Dr; To Realisation A/c.
4. Payment of liabilities: Realisation A/c Dr; To Bank A/c. Liability taken over by a partner: Realisation A/c Dr; To Partner's Capital A/c.
5. Partner's loan: Partner's Loan A/c Dr; To Bank A/c (paid after outside liabilities, not through realisation).
6. Reserves and accumulated profits: Reserve A/c Dr; To Partners' Capital A/cs (PSR). Accumulated losses: Partners' Capital A/cs Dr; To P&L A/c (PSR).
7. Realisation profit: Realisation A/c Dr; To Partners' Capital A/cs. Loss: the reverse.
8. Final settlement: Partners' Capital A/cs Dr; To Bank A/c (or Bank Dr; To Capital if a partner brings in cash).

Creditors accepting assets.

Accepting an asset in full settlement: no entry (both are already in Realisation).
Accepting an asset plus cash: record only the cash: Realisation A/c Dr; To Bank A/c.
Accepting an unrecorded asset in part settlement: record only the cash paid; the unrecorded asset's value shows up as a gain automatically.

Realisation expenses: five cases (CBSE wants a clear indication of who pays).

(a) Borne and paid by the firm: Realisation A/c Dr; To Bank A/c.
(b) Firm's expense paid by a partner: Realisation A/c Dr; To Partner's Capital A/c.
(c) Borne by a partner and paid by him: no entry.
(d) Borne by a partner but paid by the firm: Partner's Capital A/c Dr; To Bank A/c.
(e) A partner is given a remuneration (fixed or a percentage) to carry out dissolution and bear expenses: Realisation A/c Dr; To Partner's Capital A/c (remuneration). Actual expenses: no entry if he pays; Partner's Capital Dr, To Bank if the firm pays for him.

Journal Entries on Dissolution: key facts

Creditor accepts asset plus cash: Cash entry only = Creditor's balance − agreed value of asset; Realisation A/c Dr; To Bank A/c.
Remuneration as a percentage: Remuneration = rate × amount realised (or as defined); Credited to the partner through Realisation.
Realisation expense rule: 1.Firm's expense
2.Realisation Dr; partner's expense
3.no Realisation entry; Then decide who paid.
Final check: Cash available after paying all liabilities and partners' loans = Σ final capital balances

How to answer Journal Entries on Dissolution questions

For each transaction, ask two questions: does it change the realisation result, and who pays or receives cash?

1Identify whether the item is an asset, an outside liability, a partner's loan, a reserve or an expense.
2Assets and outside liabilities: transfer, then record realisation (cash or partner).
3Partner's loan: pay through Bank; never through Realisation.
4Realisation expenses: decide whose expense it is (firm or partner), then who paid.
5Creditors accepting assets: record only the cash part, if any.
6Close Realisation in PSR and settle capitals; the bank account must close at nil.

Journal Entries on Dissolution in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Partner remunerated to carry out dissolution

Suppose three partners close their event-management firm. Jai offers to handle the whole closure: selling equipment, collecting dues and paying bills. The others agree to pay him a fixed ₹6,000 for the work, and he will pay the closing-down expenses himself. The expenses actually come to ₹4,500, which Jai pays from his own pocket.

What entries does the firm pass, and how much does Jai gain personally?

Try it first, then show the solutionSolution

Remuneration is a firm's expense: Realisation A/c Dr 6,000 To Jai's Capital A/c 6,000.
Expenses are Jai's own, paid by him: no entry.
Jai receives 6,000 and spends 4,500.

Answer: One entry only: Realisation A/c Dr ₹6,000 To Jai's Capital A/c ₹6,000. The ₹4,500 he spends is his own affair, so he nets ₹1,500 for his effort.

Memory hook: The firm records the fee it promised, not the bills the partner chose to pay.

Tricks to remember Journal Entries on Dissolution

Short memory aids. Say each one aloud once, then use it on a question the same day.

Whose expense? Who paid?
Two questions settle all five expense cases: firm's expense hits Realisation; whoever paid is credited (Bank or partner).
Use it when: Realisation expense entries.
Asset to creditor: no entry
If an asset fully settles a creditor, pass nothing; record only cash that changes hands.
Use it when: Creditor settlement MCQs.
Loan of partner: Bank, not Realisation
Partners' loans skip the Realisation Account.
Use it when: Loan entries.

Journal Entries on Dissolution: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Expenses borne and paid by a partner · 1 mark · MCQBoard level

Realisation expenses of ₹5,000 are to be borne by partner A, and he pays them himself. The entry is:
(a) Realisation A/c Dr 5,000 To A's Capital A/c 5,000
(b) A's Capital A/c Dr 5,000 To Bank A/c 5,000
(c) Realisation A/c Dr 5,000 To Bank A/c 5,000
(d) No entry

Try it first, then show the solutionSolution

It is A's own expense and no firm cash is used, so the firm records nothing.

Answer: (d) No entry

Example 2: Three expense cases · 3 marks · Short answerBoard level

Pass journal entries for realisation expenses of ₹4,000 when: (i) paid by the firm; (ii) the firm's expenses are paid by partner B; (iii) to be borne by partner C, but paid by the firm. (3 marks)

Try it first, then show the solutionSolution

(i) Realisation A/c Dr 4,000 To Bank A/c 4,000.
(ii) Realisation A/c Dr 4,000 To B's Capital A/c 4,000.
(iii) C's Capital A/c Dr 4,000 To Bank A/c 4,000.

Answer: (i) Realisation Dr, Bank Cr; (ii) Realisation Dr, B's Capital Cr; (iii) C's Capital Dr, Bank Cr.

Example 3: Remuneration with expenses paid by the firm · 3 marks · Short answerHarder board level

A is to carry out the dissolution for a remuneration of ₹12,000 and is to bear all realisation expenses. Actual expenses of ₹8,500 were paid by the firm on A's behalf. Pass the journal entries and state A's net benefit. (3 marks)

Try it first, then show the solutionSolution

Remuneration: Realisation A/c Dr 12,000 To A's Capital A/c 12,000.
Expenses are A's but paid by the firm: A's Capital A/c Dr 8,500 To Bank A/c 8,500.
A's capital is credited 12,000 and debited 8,500: net benefit ₹3,500.

Answer: Two entries; A gains ₹3,500 net.

Example 4: Settling creditors and a liability taken by a partner · 4 marks · Short answerHarder board level

On dissolution: (i) creditors of ₹50,000 accepted machinery (book value ₹45,000) at ₹42,000 and the balance in cash; (ii) partner B took over bills payable of ₹10,000. Pass the journal entries and state the effect of (i) on the realisation result. (4 marks)

Try it first, then show the solutionSolution

(i) Only the cash is recorded: Realisation A/c Dr 8,000 To Bank A/c 8,000 (50,000 − 42,000).
Effect of (i): creditors Cr 50,000; machinery Dr 45,000; cash Dr 8,000: loss ₹3,000.
(ii) Realisation A/c Dr 10,000 To B's Capital A/c 10,000.

Answer: (i) Realisation A/c Dr 8,000 To Bank 8,000 (loss of ₹3,000 on the settlement). (ii) Realisation A/c Dr 10,000 To B's Capital A/c 10,000.

Example 5: Six dissolution transactions · 6 marks · Long answerHOTS / competency

Pass journal entries on the dissolution of the firm of A, B and C: (i) debtors of ₹40,000 realised ₹38,000; (ii) investments (book value ₹25,000) were taken over by C at ₹27,000; (iii) creditors of ₹30,000 were paid ₹28,500 in full settlement; (iv) A's loan of ₹15,000 was paid; (v) another creditor of ₹4,000 accepted an unrecorded typewriter valued at ₹3,000 and ₹1,000 in cash; (vi) realisation expenses of ₹4,000, a firm's expense, were paid by B. (6 marks)

Try it first, then show the solutionSolution

(i) Bank A/c Dr 38,000 To Realisation A/c 38,000.
(ii) C's Capital A/c Dr 27,000 To Realisation A/c 27,000.
(iii) Realisation A/c Dr 28,500 To Bank A/c 28,500.
(iv) A's Loan A/c Dr 15,000 To Bank A/c 15,000.
(v) Realisation A/c Dr 1,000 To Bank A/c 1,000 (the typewriter needs no entry; it yields a gain of ₹3,000 automatically).
(vi) Realisation A/c Dr 4,000 To B's Capital A/c 4,000.

Answer: Six entries as shown; note that (iv) bypasses Realisation and (v) records only the cash.

Example 6: Partner's expense paid by the firm · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): When a partner has agreed to bear realisation expenses for a commission, and the firm pays those expenses, the partner's capital account is debited.
Reason (R): The expenses are the partner's own liability under the agreement.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

The firm paid the partner's own expense, so it recovers it from his capital. R explains A.

Answer: (a) Both A and R are true, and R is the correct explanation of A.

Where students lose marks in Journal Entries on Dissolution

The slips examiners see most often, and what to write instead.

Mistake: Debiting Realisation for a partner's own expenses
Treating all expenses as the firm's.
Wrong working
Realisation A/c Dr 8,500 To Bank 8,500 (A to bear expenses).
Right working
A's Capital A/c Dr 8,500 To Bank 8,500.
Do this: Ask whose expense it is first.
Usually costs: 1 mark.
Mistake: Passing an entry when a creditor accepts an asset in full settlement
Forgetting both items are already in Realisation.
Wrong working
Creditors A/c Dr To Machinery A/c
Right working
No entry.
Do this: Record only cash that moves.
Usually costs: 1 mark.
Mistake: Paying a partner's loan through Realisation
Treating it like a creditor.
Wrong working
Realisation A/c Dr 15,000 To Bank 15,000
Right working
A's Loan A/c Dr 15,000 To Bank 15,000
Do this: Partners' loans are not realised.
Usually costs: 1 mark.
Mistake: Forgetting the narration for remuneration
Hurrying.
Wrong working
Realisation A/c Dr 12,000 To A's Capital A/c 12,000 (no narration).
Right working
Add: 'being remuneration allowed to A for carrying out dissolution'.
Do this: Narrations make the case clear to the examiner.
Usually costs: Up to 1/2 mark per entry.

Exam tips

Read the expense wording twice: 'borne by', 'paid by', 'on behalf of' and 'remuneration' each change the entry.
Where no entry is needed, write 'No entry' with a one-line reason; it earns the mark.
Use Bank (not Cash) unless the question says cash.
Dissolution entries come as 1-mark MCQs and 3- or 4-mark journal questions.

Practice questions on Journal Entries on Dissolution

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Realisation expenses paid by the firm are recorded as:
(a) Realisation A/c Dr To Bank A/c
(b) Bank A/c Dr To Realisation A/c
(c) Partners' Capital A/cs Dr To Bank A/c
(d) No entry
Hint
A firm's expense paid in cash.
Answer
(a) Realisation A/c Dr To Bank A/c
Q2 · 1 mark · MCQBoard level
On dissolution, a partner's loan to the firm is paid by:
(a) Realisation A/c Dr To Bank A/c
(b) Partner's Loan A/c Dr To Bank A/c
(c) Partner's Capital A/c Dr To Bank A/c
(d) Bank A/c Dr To Partner's Loan A/c
Hint
Close the loan account.
Answer
(b) Partner's Loan A/c Dr To Bank A/c
Q3 · 3 marks · Short answerBoard level
X and Y share profits 2 : 1. On dissolution, the balance sheet shows General Reserve ₹30,000 and a debit balance of Profit and Loss ₹9,000. Pass the journal entries. (3 marks)
Hint
Both go to capitals in 2 : 1.
Answer
General Reserve A/c Dr 30,000 To X's Capital 20,000; To Y's Capital 10,000. X's Capital Dr 6,000; Y's Capital Dr 3,000; To Profit and Loss A/c 9,000.
Q4 · 1 mark · Very short answerHarder board level
Partner Q agreed to take over creditors of ₹20,000. Pass the journal entry. (1 mark)
Hint
The firm's liability is paid by a partner.
Answer
Realisation A/c Dr 20,000 To Q's Capital A/c 20,000.
Q5 · 3 marks · Short answerHarder board level
X is allowed a remuneration of 2% of the assets realised (₹1,50,000) for carrying out the dissolution, and is to bear all expenses. Actual expenses of ₹2,000 were paid by X. Pass the journal entries. (3 marks)
Hint
Only the remuneration is recorded.
Answer
Realisation A/c Dr 3,000 To X's Capital A/c 3,000 (2% of 1,50,000). No entry for the expenses, as X bore and paid them.
Q6 · 1 mark · Very short answerHarder board level
Goodwill, which did not appear in the books, realised ₹15,000 on dissolution. Pass the journal entry. (1 mark)
Hint
Unrecorded asset sold.
Answer
Bank A/c Dr 15,000 To Realisation A/c 15,000.
Q7 · 3 marks · Short answerHarder board level
Creditors of ₹25,000 agreed to accept stock (book value ₹30,000) in full settlement. Pass the journal entry and state the effect on the realisation result. (3 marks)
Hint
Both are already in Realisation.
Answer
No entry. Effect: stock Dr 30,000 and creditors Cr 25,000 remain in Realisation, giving a loss of ₹5,000.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Realisation expenses of the firm paid by a partner are credited to his capital account.
Reason (R): The firm owes the partner for the amount he paid on its behalf.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Realisation Dr; partner Cr.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q9 · 4 marks · Short answerHOTS / competency
P, Q and R share profits 3 : 2 : 1. The Realisation Account shows a loss of ₹24,000. After this, their capital accounts show credit balances of P ₹46,000, Q ₹30,000 and R ₹4,000. Pass the entries for the loss and the final settlement. (4 marks)
Hint
Loss first, then pay the balances.
Answer
P's Capital Dr 12,000; Q's Capital Dr 8,000; R's Capital Dr 4,000; To Realisation A/c 24,000. Final: P's Capital Dr 46,000; Q's Capital Dr 30,000; R's Capital Dr 4,000; To Bank A/c 80,000.
Q10 · 3 marks · Short answerHOTS / competency
A student passed: 'Realisation A/c Dr 15,000 To Bank A/c 15,000 (being A's loan repaid)' and 'Realisation A/c Dr 5,000 To Bank A/c 5,000 (being expenses to be borne by B paid by the firm)'. Identify the errors and correct the entries. (3 marks)
Hint
Both involve partners.
Answer
A partner's loan does not pass through Realisation: A's Loan A/c Dr 15,000 To Bank 15,000. Expenses to be borne by B are his own: B's Capital A/c Dr 5,000 To Bank 5,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Entry when a creditor accepts an asset in full settlement?Show answer
No entry.
2.Entry when realisation expenses are borne and paid by a partner?Show answer
No entry.
3.Entry for a liability taken over by a partner?Show answer
Realisation A/c Dr To Partner's Capital A/c.
4.Entry for a partner's own expense paid by the firm?Show answer
Partner's Capital A/c Dr To Bank A/c.
5.In which ratio are reserves distributed on dissolution?Show answer
Profit sharing ratio.

Journal Entries on Dissolution: frequently asked questions

What are the main journal entries on dissolution in Class 12?

Transfer of assets and liabilities to Realisation, sale of assets, payment of liabilities, realisation expenses, partner's loan, reserves and losses, realisation profit or loss, and final settlement of capitals.

Why is no entry passed when a creditor takes an asset?

Both the asset and the creditor are already in the Realisation Account at book value; no cash moves, and the difference shows up in the realisation result.

How are realisation expenses treated if a partner gets a remuneration?

The remuneration is debited to Realisation and credited to the partner; the actual expenses are his own, so they are recorded only if the firm pays them for him (his capital is debited).

Does the CBSE syllabus include insolvency of a partner on dissolution?

No. Piecemeal distribution, sale to a company and insolvency of a partner are excluded in 2026-27.