In case of dissolution of a partnership firm, the business is wound up and all the books of accounts are closed. Also, assets are sold in order to pay off all liabilities. Thus, 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. The main motive to prepare a Realisation Account is to ascertain the profit or loss due to the realisation of assets and liabilities. Any realisation profit or loss is distributed (or borne) by the partners in their profit sharing ratio.
In this lesson, we will learn how to prepare a Realisation Account.
Procedure to Prepare Realisation Account
The following are the various steps involved in the preparation of the Realisation Account.
- First of all, all the assets (except Cash, Bank, Loan to a Partner, Fictitious Assets such as Preliminary Expenses, Deferred Revenue Expenditure, Debit balance of Profit and Loss Account, etc.) are transferred to the Debit side of the Realisation Account.
- Secondly, all the liabilities (except Bank Overdraft, Partner Capital Account, Reserves, Credit balance of Profit and Loss Account, Partner’s Loan, General Reserve, Reserve Fund, etc.) are transferred to the Credit side of the Realisation Account.
- Then, if assets are realised for cash or bank, then it is shown on the Credit side of the Realisation Account as Cash/Bank A/c. On the other hand, if any asset is taken over by any of the partners, then it is shown on the Credit side of the Realisation Account as Partner’s Capital Account, for example, C’s Capital A/c.
- Similarly, if liabilities are paid off in cash or bank, then it is shown on the Debit side of the Realisation Account as Cash/Bank A/c. On the other hand, if any liability is paid off by any of the partners, then it is shown on the Debit side of the Realisation Account as Partner’s Capital Account, for example, B’s Capital A/c.
- For realisation of Unrecorded Assets in cash or in the bank (or taken-over by partner), then it is shown on the Credit side as Cash/Bank A/c (or Partner’s Capital A/c).
- Similarly, for paying off Unrecorded Liabilities in cash or in the bank (or paid-off by partner), then it is shown on the Debit side as Cash/Bank A/c (or Partner’s Capital A/c).
- It should be remembered that it may happen that some of the liabilities remained unpaid and the question is also silent about their realisation. In such a case, these unrealised liabilities are to be paid off before closing the Realisation Account.
- In a similar manner, if nothing is specified in the question regarding the realisation of the assets, then any one of the following practices may be adopted.
- It is either assumed that such assets have not realised for any amount. That is, the assets have remained unrealised. OR
- It is assumed that the assets have been realised at their book value. (Students may adopt any of these two practices for realisation of assets- in absence of information regarding realisation of assets.
- However, as the first practice is more popular and is in fashion, so throughout the chapter of dissolution, we have adopted the first practice only).
- Lastly, if the total of the debit side exceeds the total of the credit side, then it is regarded as Realisation Loss and is transferred to the Debit Side of the Partners’ Capital Account in their profit sharing ratio. On the other hand, if the total of the debit side is short of the total of the credit side, then it is regarded as Realisation Profit and is transferred to the Credit Side of Partners’ Capital Account in their profit sharing ratio.
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