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 dissolution of a firm, after all assets are sold and liabilities are paid through the Realisation Account, the profit or loss on realisation is transferred to the partners' capital accounts in their profit-sharing ratio.
The capital accounts then show the final amount payable to each partner (if credit balance) or receivable from each partner (if debit balance).
These final balances in the partners' capital accounts are settled by actual payment or receipt of cash/cheque. This settlement is recorded by passing entries through the Bank Account (or Cash Account).
The journal entries for closing capital accounts are:
When partner has credit balance:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Partner's Capital A/c Dr | xxx | |
| To Bank A/c | xxx |
When partner has debit balance:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr | xxx | |
| To Partner's Capital A/c | xxx |
Therefore, partner's capital accounts are ultimately closed through Bank Account by making the final payment to partners or receiving any deficiency from them.
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