On dissolution of the firm, partner's capital accounts are closed through:
On dissolution of the firm, partner's capital accounts are closed through:
Solution
During the dissolution of a partnership firm, the Realisation Account is prepared to record the sale of assets and payment of liabilities. The profit or loss from this account is then transferred to the Partners' Capital Accounts.
After all adjustments, the Partners' Capital Accounts will show either:
- Credit balance → Amount due to the partner
- Debit balance → Amount due from the partner
These final balances in the capital accounts are settled through Bank Account.
The journal entry for closing Partners' Capital Accounts is:
When partner has a credit balance:
Partners' Capital A/c ... Dr.
To Bank A/c
When partner has a debit balance:
Bank A/c ... Dr.
To Partners' Capital A/c
The Realisation Account is used for recording transactions related to assets and liabilities during dissolution, but the actual payment or receipt of final amounts to/from partners happens through Bank Account only. This is why Bank Account closes the Partners' Capital Accounts, not the Realisation Account.
Loan Account and Drawings Account are not involved in this final settlement process. Drawings are already adjusted against capital before dissolution begins.
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