When realisation expenses are paid by the Partner on behalf of a Firm, which account will be credited:
When realisation expenses are paid by the Partner on behalf of a Firm, which account will be credited:
Solution
When a partner pays realisation expenses from his personal funds (on behalf of the firm), the firm becomes liable to pay back that amount to the partner.
The journal entry recorded is:
Realisation Account Dr
To Partner's Capital Account
Realisation Account is debited because realisation expenses are costs incurred during dissolution and must be charged to the realisation account.
Partner's Capital Account is credited because the partner has made a payment on the firm's behalf. This increases the firm's liability towards that partner, which is shown by crediting his capital account.
Think of it this way: The partner has effectively given a benefit to the firm by paying its expense. The firm now owes this amount to the partner -> this debt is recorded by crediting the partner's capital account.
Note: Bank Account is not credited because the payment was not made from the firm's bank account. It was made from the partner's personal funds.
Similarly, Partner's Loan Account would only be used if there was a formal loan arrangement, which is not the case here.
Correct Answer: Option 2 - Partner's Capital Account
Related questions:
2025: 3 June Shift 1
2023: 29 May Shift 2
2025: 2 June Shift 2