Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid. An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be furtRead more
Accrual
Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid.
An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts
Accrual Expense-
Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.
For example- If rent of 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March
For example- Interest of 1,000 for the month of March of the loan amount of 10,000 paid in April then will be accounted for in the books in March
These are the following accrued expense
Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
Accrual Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
Accrual Expense- Acrrual expense means the amount for any expense paid on a later period than the period when it pertains to be paid
Accrual Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due
Accrual Loan Interest– Loan Interest means the amount of interest on a loan which is paid on a later period than the period when it is due on
Accrual Revenue-
Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received in the later period.
For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue
For example- Rent of 10,000 for the month of March received in April month then this rent will be accounted for in the books in March
Accrual Income- Acrrual expense means the amount for any income received on a later period than the period when it pertains to be received
Accrual Rent– Accrual rent means the amount for using the land of the entity by the other party is received at a later period than the period when it is put into use.
Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive
Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
Assets: All the assets including Land and building, Plant and machinery, Furniture, Stock, sundry debtors, and investments are transferred to the debit side of the realisation account. The debit balance of profit and loss balance is not transferred.
Accounting entry for this is as follows:
Realisation A/c Dr…..
To Assets A/c …..
(All the assets transferred to the realisation account)
Cash and bank A/c: Payment for the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit is transferred to the debit side of the realisation account.
Accounting entry for this is as follows:
Realisation A/c Dr…..
To Cash A/c …..
(Payment made for liabilities)
Profit on realisation: If the credit side of the realisation account exceeds the debit side, it results in a profit then the capital account is credited.
Accounting entry for this is as follows:
Realisation A/c Dr…..
To Capital A/c …..
(Being profit transferred to the capital account)
Credit side of realisation account:
All the liabilities and provisions are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred. Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
Credit side of realisation account
Liabilities: All the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred.
Accounting entry for this is as follows:
Liabilities A/c Dr…..
To Realisation A/c …..
(All the liabilities transferred to realisation account)
Provisions: All the provisions including provision for doubtful debts and provision for taxation are transferred to the credit side of the realisation account.
Accounting entry for this is as follows:
Provision A/c Dr…..
To Realisation A/c …..
(All the provisions transferred to the realisation account)
Cash and bank A/c: Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
Accounting entry for this is as follows:
Bank A/c Dr…..
To Realisation A/c …..
(Asset sold for cash)
Loss on realisation: If the debit side of the realisation account exceeds the credit side, it results in loss then the capital account is debited.
Accounting entry for this is as follows:
Capital A/c Dr…..
To Realisation A/c …..
(Being loss transferred to the capital account)
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities thatRead more
The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities that are to be paid are recorded in the Realisation A/c.
DISSOLUTION OF PARTNERSHIP FIRM
It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, it will sell all its assets to realise all the value blocked in the assets, it is liable to pay off all of its liabilities whether due now or on some future date, and the remaining amount (if any) is distributed among the partners.
REALISATION ACCOUNT
This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.
It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.
The Realisation account is a NOMINAL ACCOUNT (Debit all expenses and losses, Credit all incomes and gains)
ITEMS RECORDED IN THE REALISATION ACCOUNT
DEBIT SIDE OF REALISATION ACCOUNT
1. TRANSFER OF ASSETS
Assets are any property or the possession of the business enterprise that allows it to get cash or any other benefit in the future.
Since all assets are sold at the time of the dissolution, all assets that can be converted into cash are transferred to the Debit side of the Realisation A/cat their book values.
Such as Plant & Machinery, Building, Debtors, etc.
EXCEPTIONS
Cash and Bank balances (as already in the most liquid form)
Fictitious assets ( Don’t have any realisable value)
NOTE – If there is any provision against any asset, such as ‘Provisions for Bad debts’ or ‘Provision for Depreciation, then such assets are transferred to the Debit side of the Realisation A/c at its gross value and the Provision is transferred to the Credit side of the Realisation A/c.
For example – Suppose there are Debtors of $50,000 and the Provision for Doubtful Debts is $2,000.
Then, Debtors will be recorded on the Debit side with a value of $50,000 and the Provision for Doubtful Debt on the Credit side with the amount of $2,000.
2. PAYMENT OF LIABILITIES
All liabilities are either paid in cash or the Partner agrees to pay for some liabilities. Since they are expenses, they are recorded on the debit side of the Realisation A/c as “Debit all expenses and Losses”
3. PROFIT ON REALISATION
There is profit when Cr. side > Dr. side, as it means incomes are more than the payments made. This profit is distributed among the partners.
CREDIT SIDE OF THE REALISATION ACCOUNT
1. TRANSFER OF LIABILITIES
Liabilities refer to the amount owed by the firm to outsiders. All liabilities must be paid off before accounts are closed. So, all external liabilities are transferred to the Credit side of the Realisation account, to make their payment.
Such as creditors, bills payable, loans, outstanding expenses, partner’s wife’s loan, etc.
EXCEPTION (not included)
Partner’s loan (internal liability and a separate account is created for it)
Undistributed Profits (like General reserve, Credit balance of P&L A/c, etc. because they belong to partners and are distributed among them. Also, they can’t be sold)
2. SALE OF ASSETS
Assets can be sold for cash or taken by the Partner. The amount received from the sale of assets is recorded on the credit side of the Realisation account as “Credit all incomes and gains”.
Also, if any asset is given to the creditors in part or full payment of his dues, then the agreed amount is deducted from the creditor’s claim and no other entry is passed.
3. LOSS ON REALISATION:
There is a loss, if the Dr. side> Cr. side, which means Expenses > Incomes. This loss is also distributed among the Partners.
A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be pRead more
A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be paid are transferred to the Realisation A/c.
So, Cash and Bank (already in liquid form), fictitious assets (doesn’t have any value to be realised), Partner’s Loan (internal liability) and Undistributed profits (not something that can be realised) are not included in the Realisation account.
DISSOLUTION OF PARTNERSHIP FIRM
It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, its assets are sold, liabilities are paid off, and the remaining amount (if any) is distributed among the partners.
REALISATION ACCOUNT
This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.
It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.
Items not included in Realisation A/c
1. ASSETS
CASH AND BANK BALANCES are not included in the Realisation account as the purpose of the Realisation account is to sell assets to realise cash, but cash and bank are already in liquid form and thus, not included.
These are directly used for the payment of liabilities and if there is any remaining amount, then that amount is distributed among the partners.
FICTITIOUS ASSETS are huge expenses or losses that are written off over the years by writing off a portion of it every year for the next few years like accumulated losses, balance of Advertisement expenses, Preliminary expenses, Loss on the issue of Debentures, etc. They don’t have any physical existence or realisable value.
Since nothing can be realised from these assets they are not included in the Realisation account. These are transferred to the Partner’s Capital A/c.
2. LIABILITIES
PARTNER’S LOAN refers to the loan given to the firm by any partner of the firm.
Suppose, there are three Partners A, B and C. ‘C’ gave the firm a loan of $5,000. This $5,000 will be recorded as a Partner’s Loan and not just as a normal loan taken from an external party.
Since, Partner’s Loans are the internal obligation of the firm, they are not included in the realisation account instead a separate account is prepared to settle Partner’s Loan after all external liabilities are settled.
So, we can say in the Realisation account only external liabilities are included and paid.
UNDISTRIBUTED PROFITS are the Profits that are not distributed among the Partners like General Reserve, Reserve Fund, and Credit balance of P&L A/c.
They are not included in the realisation account as they can’t be sold as an asset neither they are any liabilities that should be paid. Undistributed profits belong to the Partners of the firm and thus, are transferred to Partner’s capital A/c.
Profit refers to the excess of total revenue over total expenses. According to the rule "Debit all expenses and losses, Credit all incomes and gains", expenses are recorded on the debit side while revenues are recorded on the credit side. There is profit when Total revenue > Total expenses, whichRead more
Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.
There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.
When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal.
PROFIT
Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.
Profit = Total Revenue – Total Expenses
Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.
ASCERTAINING PROFIT
To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.
Trading A/c
Profit and Loss A/c
Points to be noted:
Both accounts are Nominal Account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”
The debit side records expenses while the Credit side records incomes.
Both are balanced accounts, which means its Dr. side is always equal to its Cr. side.
If they are not balanced, then a balancing figure is added to the shorter side which represents profit or the loss depending on which side is greater.
If Dr. side > Cr. side, it means expenses are more than the incomes and thus, there is a loss.
If Cr. side > Dr. side, it means there are more incomes than expenses and thus, there is Profit.
TRADING ACCOUNT
It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.
Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.
Items included on the debit side:
Opening stock
Purchases
Direct expenses like wages, import duty, royalty, manufacturing expenses, etc.
Gross Profit
Items included on the credit side:
Sales
Closing stock
Gross loss
Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.
PROFIT AND LOSS ACCOUNT
A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.
As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.
When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.
The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.
Accounting entry for loss transferred is as follows :
Capital A/c …Dr.
To Profit & Loss A/c
(being net loss transferred to capital account)
Example
A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.
Extract of a Profit and loss a/c showing net loss is as under:
Profit and loss A/c for the year ended …..
Particulars
Amount (Dr.)
Particulars
Amount (Cr.)
To gross loss b/d
xxx
By gross profit b/d
xxx
To salaries
xxx
By bank interest
xxx
To office rent
xxx
By commission received
xxx
To printing and stationery
xxx
By rent received
xxx
To insurance
xxx
By dividend
xxx
To audit fees
xxx
By profit on sale of asset
xxx
To electricity chares
xxx
By Net Loss
xxx
To depreciation
xxx
To bad debts
xxx
To bank charges
xxx
To miscellaneous expenditure
xxx
To interest on loans
xxx
Total
xxx
The debit balance for a non-corporate entity is shown as a reduction from the capital account
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on…
Liabilities
Amount
Equity and liabilities
Capital
Less: Profit & Loss A/c
While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on..
Liabilities
Amount
Equity and liabilities
Reserves And Surplus
Less: Profit & Loss A/c
Conclusion: Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.
The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.
What is the best example of accrual accounting?
Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid. An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be furtRead more
Accrual
Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid.
An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts
Accrual Expense-
Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.
For example- If rent of 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March
For example- Interest of 1,000 for the month of March of the loan amount of 10,000 paid in April then will be accounted for in the books in March
These are the following accrued expense
Accrual Revenue-
Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received in the later period.
For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue
For example- Rent of 10,000 for the month of March received in April month then this rent will be accounted for in the books in March
- Accrual Income- Acrrual expense means the amount for any income received on a later period than the period when it pertains to be received
- Accrual Rent– Accrual rent means the amount for using the land of the entity by the other party is received at a later period than the period when it is put into use.
- Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive
See lessWhat comes in debit side of Realisation account?
Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
Realisation A/c Dr…..
To Assets A/c …..
(All the assets transferred to the realisation account)
Realisation A/c Dr…..
To Cash A/c …..
(Payment made for liabilities)
Realisation A/c Dr…..
To Capital A/c …..
(Being profit transferred to the capital account)
Credit side of realisation account:
All the liabilities and provisions are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred. Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.
Format for realisation Account is as under:
What is recorded on the credit side of a Realisation account?
Realisation account A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more
Realisation account
A realisation account is a nominal account prepared at the time of dissolution of a business. All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.
All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.
If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.
Credit side of realisation account
Liabilities A/c Dr…..
To Realisation A/c …..
(All the liabilities transferred to realisation account)
Provision A/c Dr…..
To Realisation A/c …..
(All the provisions transferred to the realisation account)
Bank A/c Dr…..
To Realisation A/c …..
(Asset sold for cash)
Capital A/c Dr…..
To Realisation A/c …..
(Being loss transferred to the capital account)
The debit side of the realisation account
All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.
Format for realisation Account is as under:
See lessWhat is recorded in the Realisation account?
The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities thatRead more
The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities that are to be paid are recorded in the Realisation A/c.
DISSOLUTION OF PARTNERSHIP FIRM
It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, it will sell all its assets to realise all the value blocked in the assets, it is liable to pay off all of its liabilities whether due now or on some future date, and the remaining amount (if any) is distributed among the partners.
REALISATION ACCOUNT
This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.
It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.
The Realisation account is a NOMINAL ACCOUNT (Debit all expenses and losses, Credit all incomes and gains)
ITEMS RECORDED IN THE REALISATION ACCOUNT
DEBIT SIDE OF REALISATION ACCOUNT
1. TRANSFER OF ASSETS
Assets are any property or the possession of the business enterprise that allows it to get cash or any other benefit in the future.
Since all assets are sold at the time of the dissolution, all assets that can be converted into cash are transferred to the Debit side of the Realisation A/c at their book values.
Such as Plant & Machinery, Building, Debtors, etc.
EXCEPTIONS
NOTE – If there is any provision against any asset, such as ‘Provisions for Bad debts’ or ‘Provision for Depreciation, then such assets are transferred to the Debit side of the Realisation A/c at its gross value and the Provision is transferred to the Credit side of the Realisation A/c.
For example – Suppose there are Debtors of $50,000 and the Provision for Doubtful Debts is $2,000.
Then, Debtors will be recorded on the Debit side with a value of $50,000 and the Provision for Doubtful Debt on the Credit side with the amount of $2,000.
2. PAYMENT OF LIABILITIES
All liabilities are either paid in cash or the Partner agrees to pay for some liabilities. Since they are expenses, they are recorded on the debit side of the Realisation A/c as “Debit all expenses and Losses”
3. PROFIT ON REALISATION
There is profit when Cr. side > Dr. side, as it means incomes are more than the payments made. This profit is distributed among the partners.
CREDIT SIDE OF THE REALISATION ACCOUNT
1. TRANSFER OF LIABILITIES
Liabilities refer to the amount owed by the firm to outsiders. All liabilities must be paid off before accounts are closed. So, all external liabilities are transferred to the Credit side of the Realisation account, to make their payment.
Such as creditors, bills payable, loans, outstanding expenses, partner’s wife’s loan, etc.
EXCEPTION (not included)
2. SALE OF ASSETS
Assets can be sold for cash or taken by the Partner. The amount received from the sale of assets is recorded on the credit side of the Realisation account as “Credit all incomes and gains”.
Also, if any asset is given to the creditors in part or full payment of his dues, then the agreed amount is deducted from the creditor’s claim and no other entry is passed.
3. LOSS ON REALISATION:
There is a loss, if the Dr. side> Cr. side, which means Expenses > Incomes. This loss is also distributed among the Partners.
See lessWhat is not included in Realisation account?
A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be pRead more
A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be paid are transferred to the Realisation A/c.
So, Cash and Bank (already in liquid form), fictitious assets (doesn’t have any value to be realised), Partner’s Loan (internal liability) and Undistributed profits (not something that can be realised) are not included in the Realisation account.
DISSOLUTION OF PARTNERSHIP FIRM
It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, its assets are sold, liabilities are paid off, and the remaining amount (if any) is distributed among the partners.
REALISATION ACCOUNT
This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.
It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.
Items not included in Realisation A/c
1. ASSETS
CASH AND BANK BALANCES are not included in the Realisation account as the purpose of the Realisation account is to sell assets to realise cash, but cash and bank are already in liquid form and thus, not included.
These are directly used for the payment of liabilities and if there is any remaining amount, then that amount is distributed among the partners.
FICTITIOUS ASSETS are huge expenses or losses that are written off over the years by writing off a portion of it every year for the next few years like accumulated losses, balance of Advertisement expenses, Preliminary expenses, Loss on the issue of Debentures, etc. They don’t have any physical existence or realisable value.
Since nothing can be realised from these assets they are not included in the Realisation account. These are transferred to the Partner’s Capital A/c.
2. LIABILITIES
PARTNER’S LOAN refers to the loan given to the firm by any partner of the firm.
Suppose, there are three Partners A, B and C. ‘C’ gave the firm a loan of $5,000. This $5,000 will be recorded as a Partner’s Loan and not just as a normal loan taken from an external party.
Since, Partner’s Loans are the internal obligation of the firm, they are not included in the realisation account instead a separate account is prepared to settle Partner’s Loan after all external liabilities are settled.
So, we can say in the Realisation account only external liabilities are included and paid.
UNDISTRIBUTED PROFITS are the Profits that are not distributed among the Partners like General Reserve, Reserve Fund, and Credit balance of P&L A/c.
They are not included in the realisation account as they can’t be sold as an asset neither they are any liabilities that should be paid. Undistributed profits belong to the Partners of the firm and thus, are transferred to Partner’s capital A/c.
See lessWhy is profit on debit side?
Profit refers to the excess of total revenue over total expenses. According to the rule "Debit all expenses and losses, Credit all incomes and gains", expenses are recorded on the debit side while revenues are recorded on the credit side. There is profit when Total revenue > Total expenses, whichRead more
Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.
There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.
When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal.
PROFIT
Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.
Profit = Total Revenue – Total Expenses
Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.
ASCERTAINING PROFIT
To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.
Points to be noted:
TRADING ACCOUNT
It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.
Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.
Items included on the debit side:
Items included on the credit side:
Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.
PROFIT AND LOSS ACCOUNT
A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.
As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.
Items written on the Debit side
Items written on the Credit side
Net Profit is when the Cr. side (incomes)> Dr. side(expenses). It is recorded on the Debit side as a balancing figure.
See lessDebit balance of profit and loss account should be transferred to?
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.
When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.
The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.
Accounting entry for loss transferred is as follows :
Capital A/c …Dr.
To Profit & Loss A/c
(being net loss transferred to capital account)
Example
A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.
Extract of a Profit and loss a/c showing net loss is as under:
Profit and loss A/c for the year ended …..
The debit balance for a non-corporate entity is shown as a reduction from the capital account
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on…
Less: Profit & Loss A/c
While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on..
Less: Profit & Loss A/c
Conclusion: Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.
The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.
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