Question

What is a Realisation Account?

Answer 1

On dissolution of a firm, all the books of account are closed, all assets are sold and all liabilities are paid off. In order to record the sale of assets and discharge of liabilities, a nominal account is opened named Realisation Account. The main purpose to open Realisation Account is to ascertain the profit or loss due to the realisation of assets and liabilities. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the Partner's Capital Account in their profit sharing ratio.

Concisely, following are the important objectives of preparing Realisation Account.
1) To close all the books of account.
2) To record transactions relating to the sale of assets and discharge of liabilities.
3) To determine profit or loss due to the realisation of assets and liabilities.

Accounting treatment of items related to Realisation Account :
1) For transfer of assets :
Realisation A/c                                                                  Dr.
        To Sundry Assets A/c (Individually)
(All Assets transferred to realisation account, except Cash/Bank, P and L debit balance, Loan to a Partner)

2) For transfer of liabilities :
Sundry Liabilities A/c (Individually)                                  Dr.
        To Realisation A/c
(All Liabilities transferred to Realisation account except Partner's Capitals, P and L credit balance, Loan from Partner)

3) For sale of assets :
Bank A/c (Amount received)                                           Dr.
        To Realisation A/c
(Assets sold for cash)

4) For payment of liabilities :
Realisation A/c                                                               Dr.
        To Bank A/c
(Liabilities paid in cash)

5) For payment of realisation expenses :
Realisation A/c                                                             Dr.
      To Bank A/c
(Expenses paid)

6) For transfer of profit on realisation :
Realisation A/c                                                             Dr.
          To Partner's Capital A/c
(Profit on realisation transferred to partner 's capital account)

7) For transfer of loss on realisation :
Partner's Capital A/c                                                  Dr.
          To Realisation A/c
(Loss transferred to partner's capital account)

                              Format of Realisation Account

Dr.                                                                                            Cr.

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
Various Assets (Excluding Cash/Bank, fictitious assets, Debit balance of P and L A/c, partner Capital A/c, Current A/c, Loan to Partner)	-	Various Liabilities (Excluding Partner Capital account, reserves, P and L A/c, Current A/c, Loan to Partner)	-
Cash/Bank (Payment for realisation expenses)	-	Provision on assets (like, Provision for doubtful debts; Provision for depreciation)	-
Cash/Bank (Payment to outside and unrecorded liabilities)	-	Cash/Bank (Amount received from realisation of assets and unrecorded assets)	-
Partner's Capital A/c (If any liability taken on expenses paid by him or remuneration payable to him)	-	Partner 's Capital A/c (If any asset taken over by any partner)	-
Partner Capital A/c (Profit on realisation distributed in the profit sharing ratio among all the partners)	-	Partner Capital A/c (Loss on realisation borne by all the partners in their profit sharing ratio)	-
	-		-