Question 34 of 53intermediate🔧 ApplyShort Answer2 marks

Give the journal entry(ies) to be recorded for the following, in case of the dissolution of a partnership firm: For settlement of capital accounts.

Correct Answer

For settlement of capital accounts, two situations arise during dissolution of a partnership firm:

When a partner's capital account shows a debit balance, the partner brings in the necessary cash to settle the account. The journal entry recorded is: Bank A/c Dr. To Partner's Capital A/c

When a partner's capital account shows a credit balance, the balance is paid to the partner. The journal entry recorded is: Partners' Capital A/cs (individually) Dr. To Bank A/c

It is important to note that the aggregate amount finally payable to the partners must equal the amount available in bank and cash accounts. Thus, all accounts of the firm are closed in case of dissolution.

Exercise: Do it Yourself | Q: 8 | (Page 19)
For More Understanding

Explanation

This question tests the student's understanding of the final settlement entries during dissolution. The textbook clearly outlines two scenarios in entry #17: handling debit balances (where partners pay the firm) and credit balances (where the firm pays partners). The key point is that the total amount payable must match the available cash/bank balance, ensuring all accounts are properly closed.

Solution Steps

  1. Step 1: Identify if partner's capital account has debit or credit balance

  2. Step 2: If debit balance - partner brings cash (Bank A/c Dr. to Partner's Capital A/c)

  3. Step 3: If credit balance - firm pays partner (Partners' Capital A/c Dr. to Bank A/c)

  4. Step 4: Ensure total payable equals available cash/bank balance

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