Realisation Account

When the amount realised from an asset is lower than its book value, the difference is a loss on realisation. This loss is debited to the Realisation Account and is ultimately transferred to the partners’ Capital Accounts in their profit-sharing ratio. Therefore, a profit is recorded only when the realisation value exceeds the book value. Exam tip: calculate ‘amount realised − book value’; a negative difference indicates a loss, while a positive difference indicates a profit.

When only part of a liability is paid and the creditor has not waived the balance, the unpaid amount continues as an outstanding liability and must be settled. The balance can be treated as a gain only when the creditor allows it as a concession or accepts the part payment in full settlement. Exam tip: Do not treat partial payment as full settlement; the unpaid balance remains a liability unless it is waived.

Taking an asset at zero value indicates that it has no realizable value and will yield no amount on dissolution. It does not represent a profit, because profit arises only when the amount realised exceeds the asset’s book value. Exam tip: Such an asset is generally treated as written off, with no realisation proceeds recorded.

Realisation expenses are debited to the Realisation Account. If they are recorded at more than the actual amount, the debit side increases; consequently, realisation profit decreases or realisation loss increases. Option C is incorrect because a change in the recorded expense directly affects the realisation result. Exam tip: Higher expenses in the Realisation Account mean lower profit or higher loss.

An unrecorded asset is not transferred to the Realisation Account because it was never recorded in the books. When it is sold, Bank is debited and the Realisation Account is credited with the amount received. Therefore, the correct answer is the credit side. The debit side generally records book assets transferred to realisation and realisation expenses. Exam tip: proceeds from the sale of an unrecorded asset are credited to the Realisation Account.

When a liability is transferred to the Realisation Account, the account is debited. Recording the same liability twice creates an unnecessary additional debit, increases the realisation loss, and consequently reduces the realisation profit. ‘No effect’ is incorrect because the account balance changes due to the error. Exam tip: Liabilities transferred to the Realisation Account are recorded on its debit side.

Bank overdraft is a liability of the firm, but it is not transferred to the Realisation Account. It is settled through the Bank Account and recorded there. Therefore, option A is incorrect: although ordinary liabilities are credited to the Realisation Account, bank overdraft is generally an exception. Exam tip: Remember that bank overdraft and bank loan are normally not transferred to the Realisation Account.

The profit on the sale of an asset is first recorded in the Realisation Account. The net profit of the Realisation Account is then transferred to the partners’ capital accounts in their profit-sharing ratio. It is not transferred to the Bank Account, which records the cash received. Exam tip: On dissolution, transfer the profit or loss on realisation to the partners’ capital accounts in the profit-sharing ratio.

When the cash realised from assets exceeds their book value, the excess is a Realisation Profit and is transferred as profit from the Realisation Account. If the amount realised is less than the book value, it results in a loss. Exam tip: Realisation proceeds − book value = Realisation Profit or Loss.

The proceeds received from an asset are credited to the Realisation Account. If an amount lower than the actual proceeds is credited, the credit side is understated; consequently, realisation profit is understated or realisation loss is overstated. This does not increase the firm’s liabilities. Exam tip: Lower credit for asset proceeds means lower realisation profit.

An unrecorded liability is not already included in the books. When it is paid, the entry is: Realisation Account Dr. and Bank Account Cr. Thus, the debit balance of the Realisation Account increases, resulting in a higher realisation loss. Option B is incorrect because settling a liability does not create a realisation gain. Exam tip: Payment of an unrecorded liability is always recorded on the debit side of the Realisation Account.

When a creditor accepts less than the amount recorded as payable, the difference between the book value of the liability and the amount actually paid is a gain. This gain is credited to the Realisation Account. Therefore, option A is correct; option B is incorrect because the discount creates a gain, not a loss. Exam tip: Discount allowed by a creditor is treated as a gain on realisation.

When a partner takes over an asset at zero value, it means that the asset has no realisable value. Therefore, no credit is recorded in the Realisation Account for its takeover value. It should not be confused with a realisation profit or cash receipt. Exam tip: An asset taken over by a partner is credited to the Realisation Account at its agreed value; when that value is zero, the credit is nil.

When the cash proceeds from selling an asset are less than its book value, the difference represents a loss on realisation and is transferred to the partners’ capital accounts in their profit-sharing ratio. A profit arises only when the sale proceeds exceed the book value. Exam tip: calculate sale proceeds minus book value; a negative result indicates a realisation loss.

Realisation expenses borne by the firm are debited to the Realisation Account because they are costs incurred in disposing of assets and settling liabilities. When the expense is paid, the Bank or Cash Account is credited. Therefore, the credit side is incorrect. Exam tip: In the Realisation Account, assets transferred and expenses are generally recorded on the debit side, while proceeds from assets and liabilities transferred are recorded on the credit side.

When a partner personally bears the realisation expenses and does not claim reimbursement from the firm, the firm records neither an expense nor a liability; therefore, no accounting entry is passed. If the firm reimbursed the partner, Realisation Account would be debited and the Partner’s Capital Account would be credited. Exam tip: Distinguish carefully between expenses borne personally by the partner and expenses reimbursed by the firm.

When external liabilities are paid in full, the obligation is discharged and the balances of the related liability accounts become nil. The payment is generally recorded by debiting the Realisation Account and crediting the Bank Account. This payment does not automatically eliminate the profit or loss on realisation; that result is determined separately from the disposal of assets and settlement of liabilities. Exam tip: payment extinguishes the liability, whereas realisation profit or loss is calculated independently.

When an asset is realised for an amount equal to its book value, the amount credited to the Realisation Account equals the amount transferred from the asset account. Therefore, no profit or loss arises on realisation. A profit occurs only when the realisation value exceeds the book value, while a loss occurs when it is lower. Exam tip: Calculate realisation value − book value to identify the profit or loss on realisation.

The Realisation Account records transactions related to the realisation of assets and settlement of liabilities at the time of dissolution. Its main purpose is to determine the profit or loss arising from these realisation and settlement activities. Partners’ capital accounts are settled subsequently, so option B is not the primary objective. Exam tip: The balance of the Realisation Account represents profit or loss, which is transferred to the partners’ capital accounts in their profit-sharing ratio.

The Realisation Account records items relating to assets, liabilities and realisation expenses. The difference between the totals of its debit and credit sides represents profit or loss: a higher credit total indicates profit, while a higher debit total indicates loss. Therefore, considering only asset sales or only expenses is incorrect. Exam tip: total both sides first, then identify the difference as profit or loss.

When the sale proceeds equal the asset’s book value, the difference between the realisation value and book value is zero. Therefore, no profit or loss is recorded in the Realisation Account for that asset. Exam tip: If sale proceeds − book value = 0, the result is no profit and no loss.

When the creditor pays the realisation expenses and the amount is adjusted against the amount payable to that creditor, the Creditor’s A/c is debited because the liability payable to the creditor decreases. The Realisation A/c is credited because the expense is borne through an adjustment with the creditor rather than being paid by the firm through the bank. Therefore, the entry is: Debit Creditor’s A/c; Credit Realisation A/c. Option B would apply only when the firm itself pays the expense through the bank. Exam tip: first identify who bears the realisation expense, then determine which related account is debited or credited.

The asset’s book value is ₹80,000, but only ₹50,000 is realised. Therefore, the loss is ₹80,000 − ₹50,000 = ₹30,000. This loss appears as a debit balance in the Realisation Account and is transferred to the partners’ capital accounts in their profit-sharing ratio. ₹50,000 is the amount realised, not the loss. Exam tip: Realisation below book value results in a loss, while realisation above book value results in a profit.

Realisation Account shows profit or loss on sale of assets and payment of external liabilities. In exams keep it separate from capital accounts.

Book value of asset is debited to Realisation Account and sale proceeds are credited. The difference automatically becomes realisation profit or loss.