When a partner has agreed to undertake the dissolution work for an agreed remuneration bear the realization expenses, then what will be the journal entry if payment of realization expenses is made by the firm ?

Question

Accepted Answer

The correct option is 2:
Partners Capital A/c Dr. To Bank A/c

This entry is correct because the key clause states the partner has agreed to not only undertake the work but also *bear the realization expenses*. This makes the expense a personal liability of the partner. When the firm makes the payment for this personal liability, it is essentially paying on behalf of the partner. Therefore, the firm must recover this amount from the partner, which is achieved by **debiting the Partner's Capital Account**. Debiting the capital account reduces the partner's final claim on the firm's assets. The **Bank Account is credited** to reflect the actual outflow of cash from the firm's funds, adhering to the rule of crediting what goes out. The Realisation Account is bypassed entirely because the expense is not an actual loss or cost to the firm.

The incorrect option is 1: Bank A/c Dr. To Realization A/c.
This journal entry signifies a cash inflow to the firm from the sale of an asset during the dissolution process. Debit to Bank A/c correctly shows an increase in the firm's bank balance, and the credit to Realisation A/c closes the book value of the asset sold. However, the scenario describes an *expense payment* by the firm, which is a cash outflow, not an asset sale, which is a cash inflow. Since the firm is making a payment, not receiving one, this entry is conceptually incorrect for this transaction.

The incorrect option is 3: Realization A/c Dr. To Bank A/c.
This entry is the standard journal entry recorded when the realisation expenses are *borne by the firm* itself, meaning the firm is liable for the cost. Debiting the Realisation A/c treats the expense as a business loss that will be distributed among all partners. However, the question specifies that a single partner is to *bear* the expense, which makes it a personal liability and not a charge against the Realisation Account.

The incorrect option is 4: Bank A/c Dr. To Partner's Capital A/c.
This entry implies that the firm is receiving money (Bank A/c Dr.) from the partner, or the firm is paying the partner their remuneration, which would be *Realization A/c Dr. To Partner's Capital A/c* if the remuneration were due. The given entry, Bank A/c Dr., means cash is increasing, which is opposite to the transaction where the firm pays the expense. It is a reversal of the correct entry, incorrectly treating a cash outflow as an inflow and misstating the partner's liability towards the firm.