Realisation Account

When the amount realised from assets is less than the payments made to settle liabilities and meet realisation expenses, the debit side of the Realisation Account exceeds its credit side, resulting in a loss. Merely having high liabilities does not automatically prove a loss; the realised assets must be compared with the related payments. Exam tip: A higher credit side indicates profit, while a higher debit side indicates loss in the Realisation Account.

The profit or loss shown by the Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio. The Cash or Bank Account records receipts from asset realisation and payments for liabilities, but it does not receive the realisation profit or loss. Exam tip: Transfer realisation profit or loss to partners’ capital accounts, usually in the profit-sharing ratio.

When no amount is received from an asset, its book value is debited to the Realisation Account, but no corresponding realisation is credited. This creates a loss on realisation, which is ultimately transferred to the partners’ Capital Accounts. Exam tip: An asset yielding no proceeds generally causes a loss on realisation.

Payment of liabilities is recorded on the debit side of the Realisation Account because it is an expense incurred in settling the liabilities. The credit side records the transfer of liabilities, not their payment. Exam tip: In the Realisation Account, assets transferred and realisation expenses are generally debited, while liabilities transferred and proceeds from asset realisation are credited.

When the profit from realisation of assets equals the loss incurred on settling liabilities and other realisation expenses, the net effect in the Realisation Account is zero. Therefore, there is neither a realisation profit nor a realisation loss, and no amount is transferred to the partners’ capital accounts on this account. Options B and C would apply only when one amount is greater than the other. Exam tip: The closing balance of the Realisation Account shows the net result; a zero balance means no profit and no loss.

The Realisation Account is a nominal account because it is prepared to determine the profit or loss arising from the transfer and disposal of assets and the settlement of liabilities. It does not represent the balance of any person or specific asset. Therefore, a Real Account is a plausible but incorrect distractor. Exam tip: The profit or loss on realisation is ultimately transferred to the partners’ capital accounts.

The book value of an asset is debited to the Realisation Account, while the sale proceeds are credited. When the sale price exceeds the book value, the excess creates a profit on realisation. A sale below book value would result in a loss. In exams, always compare the sale price with the book value.

The Realisation Account generally records the transfer of the firm’s non-cash assets and the settlement of its external liabilities. Cash or bank balances are not transferred to this account, while partners’ capitals and drawings are dealt with through the partners’ capital accounts. Exam tip: associate the Realisation Account with the disposal of assets and settlement of outside liabilities.

Realisation expenses are debited to the Realisation Account. Therefore, when these expenses decrease and all other items remain unchanged, the debit decreases and the realisation profit increases. Option B states the opposite effect. Exam tip: Lower realisation expenses increase profit, while higher expenses increase loss.

The debtors have a book value of ₹10,000, but only ₹9,000 is realised. The shortfall of ₹1,000 is a loss on realisation and is recorded on the debit side of the Realisation Account. A profit would arise only if the amount realised exceeded the book value. Exam tip: Realisation below book value means loss; realisation above book value means profit.

When creditors are paid more than the amount actually due, the firm sacrifices the excess amount. Therefore, the excess payment is treated as a loss in the Realisation Account and is ultimately transferred to the partners’ capital accounts. It cannot be treated as a profit because the firm has not received any additional benefit. Exam tip: Payment above the amount due to creditors represents a loss.

When the total receipts in the Realisation Account exceed the total payments, the difference represents profit on realisation. This profit is transferred to the partners’ capital or current accounts in their profit-sharing ratio. If payments exceeded receipts, it would indicate a loss on realisation. Exam tip: compare the totals of both sides of the Realisation Account.

At dissolution, all assets except cash and bank balances, along with external liabilities, are transferred to the Realisation Account. This account records the sale of assets and settlement of liabilities to determine the profit or loss on realisation. Partners’ capital accounts and cash/bank accounts are not transferred directly to it. Exam tip: Remember the rule—assets excluding cash/bank and external liabilities are transferred to the Realisation Account.

A loss in the Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio by debiting them. Therefore, each partner’s capital decreases. Capital increases only when there is a realisation profit, not a loss. Exam tip: Realisation loss is debited to partners’ capital accounts, while realisation profit is credited.

At dissolution, the bank balance is not transferred to the Realisation Account because the Bank Account is maintained separately and its balance is used to pay liabilities and realisation expenses. Therefore, it appears on neither the debit nor the credit side of the Realisation Account. Exam tip: Assets other than cash and bank are generally transferred to the Realisation Account.

If a liability has a book value of ₹10,000 but is settled for ₹8,000, the firm saves ₹2,000, resulting in a profit. In the Realisation Account, the book value of the liability is credited and the amount paid is debited; the difference is a gain. Exam tip: Settlement below book value gives a profit, while settlement above book value gives a loss.

The balance of the Realisation Account represents the profit or loss arising from the disposal of assets and settlement of liabilities during dissolution. A credit balance indicates a profit, while a debit balance indicates a loss. Exam tip: this profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio.

When the amount realised from an asset exceeds its book value, the excess represents a profit. This profit arises in the Realisation Account and is ultimately transferred to the partners’ capital accounts in their profit-sharing ratio. If the realised amount were below the book value, it would result in a loss. In exams, always compare the realised amount with the asset’s book value.

A partner’s capital is not transferred to the Realisation Account; it remains in the partner’s Capital Account. Non-cash assets and external liabilities are transferred to the Realisation Account, while realisation expenses are debited to it. Exam tip: Do not confuse a partner’s capital or loan with external liabilities transferred to the Realisation Account.

In the Realisation Account, if the credits from assets realised and liabilities transferred equal the debits for assets transferred, liabilities settled and realisation expenses, there is no net difference. Therefore, neither profit nor loss arises from realisation. Exam tip: excess of credit over debit indicates profit, while excess of debit over credit indicates loss.

In the Realisation Account, profit or loss is determined by the difference between the sale value and the book value. Since both values are ₹5,000, the difference is zero; therefore, there is neither profit nor loss. The options showing a ₹5,000 profit or loss are incorrect because they ignore the equal values. Exam tip: sale value above book value means profit, below it means loss, and an equal value means no profit or loss.

The debtors have a book value of ₹8,000, but only ₹7,000 is received from them. Therefore, the firm incurs a loss of ₹1,000, calculated as ₹8,000 − ₹7,000. This loss is recorded on the debit side of the Realisation Account and transferred to the partners’ capital accounts in their profit-sharing ratio. Receiving less than book value results in a loss, not a gain. Exam tip: Realisation below book value means a loss; realisation above book value means a gain.

Realisation expenses are recorded on the debit side of the Realisation Account because they represent an expense or loss to the firm. The credit side generally records the realisation of assets and the settlement of liabilities. Therefore, the ₹2,000 expense is entered on the debit side. Exam tip: Remember—realisation expenses are debited, while assets realised are credited.

The liability is recorded at ₹6,000 and is settled for the same amount. Therefore, there is no difference between its book value and settlement value, so the transaction causes neither a profit nor a loss in the Realisation Account. A gain or loss would arise only if the settlement amount differed from the book value. Exam tip: For a liability, profit or loss equals book value minus the settlement amount.

Machinery, like other non-cash assets, is transferred to the Realisation Account at its book value. The market value or an agreed value is used only when the asset is actually sold or taken over by a partner. Exam tip: on dissolution, transfer the book value of assets to the debit side of the Realisation Account.