Identify the steps involved in the accounting treatment in the case of dissolution of firm:

(A) Capital accounts of partners are prepared and their final settlement is done.

(B) The balance of realisation account (profit or loss on realization) is transferred to partners' capital accounts in the profit sharing ratio.

(C) All assets and all external liabilities are transferred to realisation account.

(D) Realisation account is prepared.

(E) Bank account is prepared.

Choose the correct answer from the options given below:

When a partnership firm is dissolved, the accounting treatment follows a specific sequence:

(D) Realisation Account is prepared - This is the first step. The realisation account is opened to record all transactions related to the dissolution process.

(C) All assets and external liabilities are transferred to Realisation Account - All assets (except cash/bank) are transferred to the debit side and all external liabilities are transferred to the credit side of the Realisation Account. This centralizes all items that need to be settled during dissolution.

(B) Balance of Realisation Account is transferred to Partners' Capital Accounts - After assets are realized (sold) and liabilities are paid off, the resulting profit or loss is calculated. This profit or loss is then distributed among partners in their profit sharing ratio by transferring it to their respective capital accounts.

(A) Capital Accounts are prepared and final settlement is done - Partners' capital accounts are prepared showing opening balance, share of profit/loss on realisation, and any other adjustments. The final balances represent amounts payable to or receivable from partners.

(E) Bank Account is prepared - The bank/cash account records all cash receipts (from sale of assets) and payments (for liabilities and to partners) throughout the dissolution process. This is prepared last to show the complete cash flow during dissolution.

The correct sequence is: D → C → B → A → E

Correct Answer: Option 2