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.

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

• 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.