Closing the books of Partnership Firm (Ledger Accounts only)

When a partnership firm closes, specific ledger accounts are prepared to settle all assets, liabilities, and partner balances. The key account is the Realisation Account, where all non-cash assets and external liabilities are transferred. Assets are debited to the Realisation Account, and liabilities are credited. Proceeds from asset sales and liability payments are also recorded here. Any profit or loss arising from realization is divided among partners and transferred to their Capital Accounts.

The Partners’ Capital Accounts reflect each partner’s capital balance, share of reserves, undistributed profits or losses, drawings, and share of realization profit or loss. After adjustments, the final balance shows what is payable to or receivable from each partner.

The Cash or Bank Account is used to record all cash and bank transactions, including sale proceeds, liability payments, expenses, and final settlements with partners. Once all amounts are paid or received, the cash or bank account should balance to zero.

When a partnership firm is closed (dissolved), the following ledger accounts are typically prepared:

1. Realisation Account

The Realisation Account is the central account prepared during the dissolution process. Its main function is to calculate the profit or loss arising from selling the firm’s assets and paying off its liabilities.

• This account is created to record the sale of all assets (except cash/bank) and the settlement of liabilities.

• Debit side: Records the book value of all assets transferred.

• Credit side: Records liabilities taken over and the proceeds from the sale of assets.

• Profit or loss on realization is transferred to the partners’ capital accounts.

2. Partners’ Capital Accounts

Each partner has a Capital Account that reflects their net investment in the firm. When closing the books, these accounts must be carefully adjusted to ensure that all final amounts are properly settled.

• Each partner’s capital account shows their capital balance, share of profit/loss on realization, and any drawings or additional contributions.

• Debit side: Loss on realization, drawings, any amount due to the firm.

• Credit side: Capital balance, profit on realization, reserves, or undistributed profits.

After all adjustments, the final balance in the Capital Account shows what the firm owes to the partner (if it’s a credit balance) or what the partner owes to the firm (if it’s a debit balance).

3. Cash or Bank Account

The Cash or Bank Account is the final account used to handle all monetary transactions during the dissolution.

• This account records all cash/bank transactions during dissolution.

• Debit side: Cash brought in by partners to settle liabilities or cover deficiency.

• Credit side: Payment of liabilities, realization expenses, and final settlement to partners.

The Cash or Bank Account should balance to zero after all transactions are completed. This ensures that the firm’s cash has been fully distributed, and there are no pending balances.

Steps in Closing the Books (Ledger Focus Only)

• Transfer all assets (except cash/bank) to the Realisation Account.
• Transfer all liabilities to the Realisation Account.
• Record sale proceeds or settlement of assets/liabilities in the Realisation Account.
• Transfer profit/loss on realization to partners’ capital accounts.
• Adjust capital accounts with reserves, accumulated profits, or drawings.
• Settle final capital balances through the Cash/Bank Account.

Key Ledger Accounts Format:

1. Realisation Account

2. Partners’ Capital Account

3. Cash/Bank Account