Realisation Account

An unrecorded asset is not transferred to the Realisation Account because it was not present in the books. When it is sold for cash, the bank account is debited with the proceeds and the Realisation Account is credited: Bank Account Dr. To Realisation Account. Option A reverses this entry. Exam tip: credit the Realisation Account with the sale proceeds of an unrecorded asset; if a partner takes over the asset, the entry is different.

When an unrecorded liability is discovered, the Realisation Account is debited and the Unrecorded Liability Account is credited to bring the liability into the books. This records the liability and its effect on the realisation process. Option B reverses the normal debit-credit treatment. Exam tip: For recording an unrecorded liability, remember the entry—Realisation Account Dr. To Unrecorded Liability Account.

When a partner pays a realisation expense that is the firm’s liability from personal funds, the expense is debited to the Realisation Account, while the amount payable to the partner is credited to the partner’s Capital Account. Therefore, option A is correct. Option B reverses the treatment of the two accounts. Exam tip: For an expense paid personally by a partner on behalf of the firm, remember: Realisation A/c Dr. to Partner’s Capital A/c.

When a creditor takes over an asset, the creditor’s liability is settled to the extent of the asset’s agreed value. Thus, the Creditors’ Account is adjusted; generally, the entry is Creditors’ Account Dr. to Realisation Account. It is not a cash receipt. Any profit or loss depends on the difference between the asset’s book value and its agreed value, so profit does not necessarily increase. Exam tip: Treat an asset taken over by a creditor as a settlement of liability, not as cash realised.

Bills receivable are current assets of the firm. On dissolution, like other non-cash assets, they are transferred to the Realisation Account at their book value, so the Realisation Account is debited and the Bills Receivable Account is credited. Therefore, option A is correct. They are not liabilities or profits, and the debit is made because the asset is transferred for realisation, not because it is an ordinary expense. Exam tip: Assets transferred to the Realisation Account are debited, while external liabilities transferred to it are credited.

Bills Receivable is an asset of the firm. On dissolution, like other non-cash assets, it is transferred to the Realisation Account at its book value. When the bill is collected, Bank is debited and the Realisation Account is credited with the amount realised. Hence, option A is correct; option B is wrong because the asset is not settled directly through the partners’ Capital Accounts. Exam tip: Remember that assets are transferred to the Realisation Account, while proceeds from their sale or collection are credited to that account.

A loss in the Realisation Account is transferred to the partners’ Capital Accounts in their profit-sharing ratio. Therefore, the capital ratio is not used even when the partners have unequal capitals. Exam tip: Always apply the profit-sharing ratio to realisation profit or loss unless the partnership agreement provides otherwise.

When a partner takes over a firm’s asset, the amount payable by the partner is debited to the partner’s Capital Account, while the Realisation Account is credited with the agreed value. It is not a cash receipt because the asset is taken over by a partner rather than sold for cash to an outside buyer. Exam tip: For an asset taken over by a partner, remember: Partner’s Capital Account Dr. to Realisation Account.

Prepaid insurance represents a payment for future insurance coverage, so it is an asset of the firm. On dissolution, assets transferred to the Realisation Account are debited; therefore, prepaid insurance is debited as an asset. Treating it as an expense is incorrect because its benefit relates to a future period. Exam tip: Assets transferred to the Realisation Account are debited, while liabilities transferred to it are credited.

On transferring a liability to the Realisation Account, the liability account is debited and the Realisation Account is credited. When the liability is paid, the Realisation Account is debited. If the transfer entry is omitted but the payment is recorded, an extra debit remains in the Realisation Account. Consequently, realisation profit is understated or loss is overstated. Therefore, option B is correct. Exam tip: Check both entries—transfer of the liability and its settlement—separately.

When a creditor bears the realisation expenses, the firm does not make a cash payment. Instead, the creditor’s account is debited by the amount of the expense and the Realisation Account is credited: Creditors A/c Dr. To Realisation A/c. Option B is incorrect because it records a cash payment by the firm, which does not occur in this case. Exam tip: For expenses borne by a creditor, remember the entry ‘Creditors A/c Dr. To Realisation A/c’.

When a partner takes over an asset without making a cash payment, no entry is made in the Cash Account. The partner’s Capital or Current Account is debited with the agreed value, and the Realisation Account is credited. Therefore, cash does not increase and liabilities do not increase. Realisation profit or loss depends on the agreed value compared with the book value, so it does not necessarily increase. Exam tip: ‘taken over in kind’ generally means adjustment through the partner’s account, not a cash transaction.

An amount from debtors that cannot be recovered represents an actual loss to the firm. It is therefore debited to the Realisation Account, increasing the loss on realisation. Crediting it would be incorrect because the credit side records amounts realised from assets and other gains. Exam tip: an irrecoverable amount from debtors is treated as a realisation loss, not as a gain or a direct capital adjustment.

The gross sale proceeds of a mortgaged asset are used partly to repay the related mortgage loan. Therefore, the net amount available to the partners is reduced by the amount of the secured debt. Option C is incorrect because a mortgage creates a secured liability that must be settled. Exam tip: Distinguish between the gross realisation proceeds and the net proceeds remaining after repayment of the mortgage loan.

A loan given by a partner is a separate liability of the firm towards that partner, not an external liability to be transferred to the Realisation Account. Therefore, it is settled separately through the Partner’s Loan Account, generally after payment of outside liabilities and before settlement of partners’ capital. Option B is incorrect because the partner’s loan is not transferred to the Realisation Account as a liability. Exam tip: Do not transfer Partner’s Loan to the Realisation Account; settle it separately.

A loan given by a partner is an amount payable by the firm, so it is credited to the partner's loan account and shown as a liability. It does not create an asset or profit for the firm. On dissolution, the partner's loan is generally paid after outside liabilities but before the partners' capital is returned. Exam tip: A partner's loan is separate from the partner's capital and is generally not transferred to the Realisation Account.

Bank balance is already a readily available liquid asset, so it is not transferred to the Realisation Account like other non-cash assets. It remains in the Bank Account and is used to pay liabilities and dissolution expenses. Therefore, option B is incorrect because the bank balance is not debited to the Realisation Account as an asset. Exam tip: Cash and bank balances are generally excluded from the Realisation Account.

Commission paid for selling an asset is a realisation expense arising from the dissolution. Therefore, it is debited to the Realisation Account, while the Bank or Cash Account is credited when the payment is made. It is not directly debited to the partners’ capital accounts unless a partner has personally borne the expense. Exam tip: Expenses connected with realisation, such as commission, legal charges and advertising expenses, are generally debited to the Realisation Account.

Unearned income means income received in advance, so it represents a liability of the firm. On dissolution, liabilities are transferred to the Realisation Account by crediting the Realisation Account and debiting the respective liability account; therefore, option A is correct. Treating it as an asset and debiting it is incorrect. Exam tip: When external liabilities are transferred to the Realisation Account, the Realisation Account is credited.

The overstated book value is transferred to the debit side of the Realisation Account, while the actual amount realised is lower. This increases the difference between the debit and credit sides, resulting in a higher realisation loss. ‘Profit will increase’ would apply only when the asset is realised for more than its book value. Exam tip: If book value exceeds the actual realisation value, the result is a realisation loss.

The final balance of the Realisation Account represents the profit or loss arising from the dissolution of the firm. This profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio. Therefore, Partners’ Capital Accounts are correct; the bank, creditors and assets do not receive this balance. Exam tip: Always transfer the Realisation profit or loss to the partners’ capital accounts in the profit-sharing ratio.

An unrecorded liability was not included in the books before dissolution. When it is paid, the Realisation Account is debited and the Cash Account is credited. This increases the debit side of the Realisation Account and may increase the loss on realisation. Option B is incorrect because cash is paid, not received. Exam tip: payment of an unrecorded liability is recorded as Realisation Account Dr. and Cash Account Cr.

When a liability is waived, the firm is released from the obligation to pay it. The liability is debited and the Realisation Account is credited, resulting in a gain in the Realisation Account. Therefore, ‘no effect’ is incorrect because the firm benefits by being relieved of the payment. Exam tip: A liability waived without payment creates a gain on realisation.

Sale proceeds are credited to the Realisation Account, while the Cash or Bank Account is debited. Therefore, option A is correct. Do not confuse this with the transfer of an asset to the Realisation Account, when the asset’s book value is debited. Exam tip: the entry for a cash sale is Cash/Bank Account Dr. To Realisation Account.

The amount actually received for the asset is recorded immediately: Cash/Bank Account is debited and Realisation Account is credited. The firm need not wait for the entire amount to be collected. Transfer of the asset to the Realisation Account at book value is a separate entry. Exam tip: Cash received from the sale of an asset is credited to the Realisation Account.