The main motive to prepare a Realisation Account is to ascertain the profit or loss due to the realisation of assets and liabilities.
In order to record the transactions related to the sale of assets and discharge of all liabilities, a Realisation Account is prepared. It is a nominal account.
Memorandum Balance Sheet: A balance sheet as we know is a statement (i.e. prepared at a certain point of time) listing all assets and liabilities of the firm. It is prepared using the equation
Retirement of a partner implies a situation when a partner leaves a partnership firm for any reason and the remaining partners of the firm decide to continue with the business.
Calculation of New Profit Sharing Ratio in case of Retirement/Death of a partner: Algebraically, New Profit Share of the Continuing Partners = Old Profit Share + Part of Profit Share acquired from the Outgoing Partner.
A new profit sharing ratio (in case of retirement/death) is defined as a ratio in which the continuing partners agree to share their future profits and losses.
The ratio in which the outgoing partner’s profit share is gained or acquired by the remaining partners is known as the Gaining ratio.
The following are the major points of difference between the sacrificing ratio and gaining ratio: This Gaining ratio is calculated by taking the difference between the new ratio and the old ratio of the partners.
Treatment of Goodwill in the Retirement / Death of a Partner: Goodwill is the value of a firm’s reputation and its good brand name in the market
As per the Accounting Standard 26 of ICAI, goodwill is recorded in the books only when some consideration in money or money’s worth has been paid for it.