Page 128 - ISCDEBK-12

6.2 Double Entry Book Keeping (Section A)—ISC XII

• Application of Assets: The assets of the firm, including any sum contributed by the partners to make
up the deficiencies of capital will be applied in the following manner and order:
(i) in paying firm’s debts to the third parties.
(ii) in paying to each partner rateably what is due to him on account of loans and advances;
(iii) in paying to each partner rateably what is due to him on account of capital;
(iv) the surplus, if any, shall be distributed between/among the partners in their profit-sharing ratio.
[Section 48(b)]

Treatment of Firm’s Debts and Private Debts (Section 49)
1. Application of Firm’s Property: Firm’s property is applied first towards the payment of firm’s debts; then
the surplus, if any, is applied towards the payment of partner’s loan to the firm and balance towards
his capital.
2. Application of Partner’s Private Property: Partner’s private property is applied first in payment of his private
debts and the surplus, if any, in payment of firm’s debts if the firm’s liabilities exceed the firm’s assets.
• Closing of Firm’s Books: Firm’s books are closed by preparing the following accounts:
(i) Realisation Account; (ii) Loan by Partners Accounts;
(iii) Partners’ Capital Accounts; and (iv) Bank or Cash Account.
• Realisation Account: It is a nominal account and is prepared on the dissolution of a firm. The object
of this account is to show the gain (profit) or loss on the realisation of assets and payment of liabilities.
• If Fixed Capital Account Method is followed, balance in Current Accounts is transferred to Capital Accounts
of the Partners and adjustments are passed through the Capital Accounts. No adjustments are required
to be passed through Current Account.
• Bank Overdraft is not to be transferred to Realisation Account.
• Bank Loan is to be transferred to Realisation Account.
• Partner’s Loan Account (Loan by a partner to the firm) is to be passed through Cash or Bank Account.
• Loan given to a partner is transferred (debited) to his Capital Account.

Accounting Entries Relating to Dissolution
The following entries are passed at the time of the dissolution of the firm:
Transfer of assets (except cash and Realisation A/c ...Dr. At book value
bank balance) To Sundry Assets A/c
Transfer of liabilities (except loans by Sundry Liabilities A/c ...Dr. At book value
partners, capitals and undistributed profits) To Realisation A/c
Sale of assets Cash/Bank A/c ...Dr. At realised value
To Realisation A/c
Assets taken over by partner Partner’s Capital A/c ...Dr. At agreed value
To Realisation A/c
Payment of liabilities Realisation A/c ...Dr. Amount of payment
To Cash/Bank A/c
Any liability taken over by the partner Realisation A/c ...Dr. At agreed value
To Partner’s Capital A/c
Payment of realisation expenses Realisation A/c ...Dr. Amount of payment
To Cash/Bank A/c
Sale of unrecorded assets Cash/Bank A/c ...Dr. Amount received on sale
To Realisation A/c