Realisation Account

Incorrect valuation changes the difference between the book value and the actual settlement value of an asset or liability. This difference is recorded in the Realisation Account, so the profit or loss on realisation is misstated and an incorrect amount may ultimately be transferred to the partners’ capital accounts. Option C is incorrect because realisation profit or loss affects the partners’ capital accounts. Exam tip: always compare the book value, settlement value and resulting realisation profit or loss.

When a partner takes over an asset at zero value, it means that no recoverable amount has been obtained from the asset; therefore, it is treated as worthless or valueless. It does not represent the firm’s profit, liability, or the partner’s capital. Exam tip: Such an asset is written off in the Realisation Account with no realisation proceeds.

The non-cash assets transferred at their book values are recorded first on the debit side of the Realisation Account. External liabilities are transferred to its credit side, while realisation profit and partners’ capital are dealt with later. Exam tip: remember the basic rule—assets are debited and liabilities are credited in the Realisation Account; cash and bank balances are generally not transferred to it.

When a partner brings additional cash during dissolution, the firm receives cash and credits the partner’s capital account. The entry is: Cash Account Dr. to Partner’s Capital Account. Therefore, option A is correct; the Cash Account is debited, not credited. Exam tip: For capital brought in by a partner, remember Cash/Bank Dr. and Partner’s Capital Cr.

The correct entry for realisation expenses is to debit the Realisation Account and credit Bank. This expense reduces the realisation profit. Since ₹5,000 was wrongly debited to the partner’s Capital Account, the Realisation Account was not debited, so the profit is overstated by ₹5,000. Option B would apply if the expense had been correctly recorded in the Realisation Account. Exam tip: During dissolution, debit all realisation expenses to the Realisation Account unless the agreement specifically assigns the expense to a partner.

After revaluation, the revised amount becomes the asset’s new book value in the books. Therefore, the asset is transferred to the Realisation Account at this revalued amount. The original book value is used only when no revaluation has been recorded. Exam tip: When revaluation is carried out before dissolution, first record its effect in the Revaluation Account and then transfer the asset at its revised book value to the Realisation Account.

Partners’ Capital Accounts are not transferred to the Realisation Account; they are settled through the partners’ Current Accounts or the Cash Account. In contrast, book assets and external liabilities are transferred to the Realisation Account, and realisation expenses are debited to it. Exam tip: Keep partners’ capital and loan accounts separate from the Realisation Account.

In the Realisation Account, the book value of assets and the transfer of liabilities are generally recorded on the debit side, while cash realised from assets and relevant settlement items are recorded on the credit side. If the total debit balance exceeds the total credit balance, the account shows a realisation loss, which is debited to the partners’ capital accounts in their profit-sharing ratio. Conversely, an excess of the credit balance indicates a realisation profit. Exam tip: Debit excess in the Realisation Account means loss; credit excess means profit.

Interest related to the dissolution of the firm, when paid by the firm, is treated as a realisation expense and is debited to the Realisation Account. Therefore, option A is correct. It is neither income nor an asset. Exam tip: Expenses incurred specifically for dissolution are debited to the Realisation Account. However, interest on a partner’s loan may have a separate treatment, so always read the context carefully.

When a creditor accepts less than the amount due, the firm settles its liability for an amount lower than its book value. The difference between the book value of the liability and the amount actually paid is recorded as a gain in the Realisation Account. Therefore, option A is correct. Option B is incorrect because paying less than the liability creates a gain, not a loss. Exam tip: A discount allowed by a creditor is treated as a gain on realisation.

At dissolution, assets are sold to obtain cash for paying the firm’s liabilities and distributing any remaining amount among the partners. Therefore, option A is correct. The purpose is not to increase profit; any profit or loss arising from the sale is determined separately through the Realisation Account. Exam tip: The Realisation Account records the disposal of assets and settlement of liabilities during dissolution.

The purpose of the Realisation Account is to record the realisation of assets and settlement of liabilities. Therefore, if an asset is not sold immediately, further efforts are made to sell it; alternatively, a partner may take it over at an agreed value. An unsold asset does not automatically become a liability or profit. Exam tip: When a partner takes over an asset, the partner’s capital account is debited and the Realisation Account is credited.

Cash and a positive bank balance are already liquid assets, so they are not transferred to the Realisation Account. The Realisation Account generally records the transfer of non-cash assets and liabilities, along with the gain or loss arising from their realisation and settlement. Option B is incorrect because cash and bank balances are not debited to the Realisation Account. Exam tip: Exclude Cash in Hand and a normal Bank Balance from the Realisation Account; bank overdraft is treated separately.

When liabilities are transferred to the Realisation Account, they are recorded on its credit side. If a liability is omitted, the credit side is understated, so the profit of the Realisation Account is understated or its loss is overstated. Therefore, option B is correct. Exam tip: remember the transfer entry—Liability Account Dr. and Realisation Account Cr.

The profit or loss on the Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio. The Bank Account records cash collected and payments made, while a Revaluation Account is not prepared for dissolution. Exam tip: Remember that the final transfer of realisation profit or loss is made to the partners’ capital accounts.

When an asset is realised at an amount equal to its book value, the difference between the realisation value and book value is zero. Therefore, the asset contributes neither profit nor loss to the Realisation Account. A value higher than the book value would result in a profit, while a lower value would result in a loss. Exam tip: Realisation profit or loss = Realisation value − Book value.

On dissolution, the Realisation Account records the sale or transfer of assets, settlement of liabilities and related realisation expenses. The resulting profit or loss is ascertained through this account, so option A is correct. Option B relates to ordinary trading profit, while C and D concern partners’ capital or reconstitution. Exam tip: Any profit or loss on realisation is transferred to the partners’ capital accounts in their profit-sharing ratio.

In the Realisation Account, assets are debited at their book values and liabilities are credited at their book values. When the assets are realised and the liabilities are settled at those same book values, no difference remains. Therefore, the account shows neither profit nor loss. Cash is not transferred to the Realisation Account. Exam tip: A realisation profit or loss arises only when assets are realised or liabilities are settled at amounts different from their book values.

Once the Realisation Account has been closed, it is not normally reopened. An adjustment entry is passed through the partners’ capital accounts, generally in their profit-sharing ratio, to give effect to the omitted item or error. Therefore, option B is incorrect. Exam tip: rectify an error before closure through the relevant original entry; rectify it after closure through an adjustment entry.

In the Realisation Account, the asset’s book value is debited and the amount realised is credited. Therefore, ₹80,000 − ₹50,000 = ₹30,000 loss, which is transferred to the partners’ capital accounts in their profit-sharing ratio. A ₹30,000 profit would arise only if the asset were realised for ₹1,10,000. Exam tip: realisation below book value means a loss, while realisation above book value means a profit.

After recording the transfer and settlement of assets and liabilities, the profit or loss on realisation is determined. The final step is to transfer this profit or loss to the partners’ capital accounts in their profit-sharing ratio. Transfer of assets, payment of liabilities, and recording cash received from asset sales are earlier steps, not the final one. Exam tip: Profit or loss on realisation is ultimately transferred to the partners’ capital accounts.

When assets are sold immediately for cash, the amount received is recorded at once as cash realisation in the Realisation Account. The timing of sale does not guarantee a profit; profit or loss depends on the difference between the sale proceeds and the book value of the assets. Therefore, option D is incorrect. Exam tip: Do not equate immediate sale with certain profit—compare sale proceeds with book value to determine the result.

When an asset is sold for more than its book value, the excess is credited as a gain in the Realisation Account, thereby increasing realisation profit. Higher realisation expenses, selling an asset below book value, or settling a liability for more than its recorded amount increases the loss instead. Exam tip: For an asset, sale proceeds minus book value gives the gain; a negative difference represents a loss.

On dissolution, the book value of an asset is debited to the Realisation Account. If the asset becomes useless and no amount is recovered from it, this debit represents the loss; the Asset Account is credited with its book value and closed. Option B is incorrect because a loss is debited, not credited, to the Realisation Account. Exam tip: remember that assets transferred are recorded on the debit side and liabilities transferred on the credit side of the Realisation Account.

When a liability is legally extinguished, the firm is no longer required to pay it. The liability account is therefore debited and the Realisation Account is credited, increasing the profit on realisation. It does not increase the loss because no cash payment is made. Exam tip: A liability that is no longer payable creates a gain in the Realisation Account.