Realisation Account

When the amount realised from the assets is insufficient to meet the firm’s external liabilities, a deficiency arises. This represents a loss on dissolution, which is generally transferred to the partners’ capital accounts in their profit-sharing ratio. Option C is incorrect because there would be no profit and no loss only when the realisation and related adjustments balance out. Exam tip: If realisation proceeds are lower than the liabilities to be paid, identify the result as a deficiency or loss.

On dissolution, the asset’s book value is debited to the Realisation Account, while the amount received from its sale or realisation is credited. If the amount realised is less than the book value, the debit exceeds the credit, creating or increasing a loss in the Realisation Account. Option B would be correct only if the asset were realised for more than its book value. Exam tip: Realisation value less than book value indicates a loss, whereas realisation value greater than book value indicates a profit.

The payment of an unrecorded liability is recorded by debiting the Realisation Account and crediting Cash Account. If the required debit is omitted, the expense in the Realisation Account is understated. Consequently, realisation profit is overstated or realisation loss is understated, so option A is correct. Option B gives the reverse effect. Exam tip: payment of an unrecorded liability is debited to the Realisation Account.

When a partner takes over an asset, the entry is: Partner’s Capital Account Dr. To Realisation Account. The partner’s capital account is debited with the agreed takeover value. Therefore, if that value is higher than the fair value, the capital balance of the partner taking over the asset is directly reduced by the debit. The other partners’ capital accounts, the bank account and the general reserve account are not directly debited by this takeover entry. Exam tip: remember the rule “Partner’s Capital A/c Dr. To Realisation A/c” whenever a partner takes over an asset.

Recording the same transaction twice is an error of commission, specifically a clerical or duplication error, because the entry was incorrectly repeated during the recording process. It is not an error of principle because no accounting rule has been misapplied. It is not an error of original entry, since the amount or details were not initially recorded incorrectly; the complete entry was duplicated. It is also not an arithmetical error because the mistake is in recording, not calculation. Exam tip: If both the debit and credit aspects are duplicated, the trial balance may still agree.

Payment of a liability is debited to the Realisation Account. If the recorded amount is lower than the actual payment, the debit and recorded expense will be understated, causing the realisation profit to be overstated. Hence, option B is correct. Option A shows the reverse effect, and the error does not increase the value of assets. Exam tip: understatement of a realisation expense leads to overstatement of realisation profit.

The correct entry for cash received from the sale of an asset is to debit Bank and credit the Realisation Account. If the partner’s Capital Account is credited instead, the sale proceeds will be omitted from the Realisation Account, while the partner’s capital will be overstated. Thus, both the profit or loss on realisation and the partner’s capital balance will be misstated. The bank balance itself remains correct because the cash was actually received. Exam tip: sale proceeds of an asset are credited to the Realisation Account, not directly to a partner’s Capital Account.

When a partner takes over an asset, the asset’s agreed value is debited to the partner’s Capital Account and credited to the Realisation Account. If the agreed value is not determined or recorded, the partner’s capital balance will be incorrect and the profit or loss on realisation will also be misstated. Therefore, option A is correct. Option B is incorrect because the agreed value must be included in the Realisation Account; option D is incorrect because transferring an asset does not automatically reduce the firm’s liabilities. Exam tip: Whenever a partner takes over an asset, verify the agreed value and the corresponding entries in both the partner’s Capital Account and the Realisation Account.

A liability transferred to the Realisation Account is credited, while its payment is debited. If an actually paid liability is omitted from the account, the related debit is not matched by the liability credit, causing the loss on realisation to be overstated. Therefore, the loss increases rather than the profit. Exam tip: liabilities transferred are credited, and liabilities paid are debited in the Realisation Account.

The correct entry for an asset taken over by a partner is: the partner’s capital account is debited and the Realisation Account is credited. If Cash Account is debited instead, cash is overstated even though no cash was received, and the required debit to the partner’s capital account is omitted. If the same amount is credited to the Realisation Account, the realisation profit generally remains unchanged; therefore, option C is also incorrect. Exam tip: Treat an asset taken over by a partner as an adjustment through the partner’s capital account, not as cash received.

Realisation expenses are debited to the Realisation Account. If they are omitted, the debit side is understated, so the profit on realisation is overstated or the loss is understated. Therefore, option A is correct. Exam tip: omission of an expense generally leads to overstatement of profit.

On dissolution, assets are transferred to the debit side of the Realisation Account at their book values, while the actual sale proceeds are credited. When assets are overstated, the difference between their book value and the amount realised is larger, resulting in a higher realisation loss. Since the liabilities are recorded correctly, they do not create any additional effect here. Exam tip: Overstated assets generally increase the loss on realisation.

On dissolution, the profit or loss of the Realisation Account is transferred to the partners' capital accounts in their profit-sharing ratio. If an incorrect capital ratio is used, the amount credited or debited to each partner's account and the final settlement will be incorrect, even though the underlying transactions are recorded correctly. The original cash balance or external liabilities do not automatically change. Exam tip: Use the profit-sharing ratio for distributing Realisation profit or loss, not the capital ratio.

Liabilities and assets are different classes of accounts. Recording a liability as an asset violates the basic classification principle, so it is an error of principle. Although the trial balance may still agree if the same amount is posted on both sides, the financial position will be misstated. Exam tip: posting an item to an account of an incorrect class is an error of principle.

Incorrectly totalling the items of the Realisation Account is an error in addition or calculation; therefore, it is an arithmetic error. It is not an error of principle because no accounting principle has been applied incorrectly. Exam tip: mistakes in addition, subtraction, or calculating a balance are generally classified as arithmetic errors.

When a partner pays a firm’s liability from personal funds, the firm becomes liable to reimburse that partner. Therefore, the Realisation Account is debited and the partner’s Capital Account is credited: Realisation A/c Dr. To Partner’s Capital A/c. Option B reverses the treatment of the two accounts. Exam tip: When a partner pays a firm’s liability, the partner’s Capital Account is generally credited.

The amount received from the sale of an unrecorded asset should be credited to the Realisation Account. If this credit is omitted, the credit side of the account and consequently the realisation profit will be understated. Therefore, profit will appear lower. Profit cannot be overstated because an income credit has been left unrecorded. Exam tip: On sale of an unrecorded asset, credit the proceeds to the Realisation Account.

When a partner takes over an asset on dissolution, that partner’s Capital Account is debited with the agreed value and the Realisation Account is credited. If the asset is transferred to, and recorded in the account of, the wrong partner, the partners’ capital balances become misstated and the final settlement is incorrect. The firm’s external liabilities do not automatically increase. Exam tip: Debit the Capital Account of the partner who actually takes over the asset, using its agreed value.

When an asset is transferred to a creditor in settlement of a liability, the asset is transferred to the Realisation Account at its book value and removed from the asset account. The liability is also transferred to the Realisation Account and closed. The difference between the book value of the asset and the amount of liability settled affects the profit or loss on realisation. Hence, both the asset and the liability are removed from the books; it is not merely the asset that decreases. Exam tip: even when no cash is paid, record the adjustment through the Realisation Account.

The Realisation Account records transactions such as the sale of assets, settlement of liabilities and realisation expenses. If a relevant transaction is omitted, the total debit or credit of the account becomes incorrect, causing the profit or loss on realisation to be misstated. Therefore, ‘no effect’ is incorrect. Exam tip: Before calculating realisation profit or loss, check every asset, liability and realisation expense entry.

Realisation expenses are debited to the Realisation Account. Therefore, recording them at incorrect amounts changes the total debit and causes the profit or loss on realisation to be calculated incorrectly, even when the assets are sold at their correct values. Option B is incorrect because accurate realisation of assets alone is not sufficient; the expenses must also be recorded correctly. Exam tip: Transfer assets and record realisation expenses on the debit side, while transfer liabilities and record proceeds from assets on the credit side of the Realisation Account.

After the liability is transferred to the Realisation Account, its payment is recorded as Realisation Account Dr. To Bank. If this entry is omitted, the amount actually paid will not be deducted from the bank balance, so the bank balance will be overstated. The debit for payment will also be missing from the Realisation Account, causing realisation profit to be overstated (or loss to be understated). Option B states the reverse effect. Exam tip: For every liability payment, debit the Realisation Account and credit Bank.

In a Realisation Account, the book values of assets are debited and the amounts realised from their sale are credited. Wrong classification or recording changes the debit-credit balance of the account and therefore misstates the realisation profit or loss. The effect is not limited to the partners’ capital accounts or the format of the balance sheet. Exam tip: remember that assets are transferred to the debit side, liabilities to the credit side, and the resulting profit or loss is transferred to the partners’ capital accounts.

The profit on realisation is credited to the partners’ capital accounts in their profit-sharing ratio. If one partner is credited with more than the partner’s entitled share, the remaining partners will receive less credit from the same total profit, so their capital accounts will be understated. This error does not increase the value of assets or automatically extinguish external liabilities. Exam tip: Always distribute Realisation Account profit or loss in the old profit-sharing ratio.

When all transactions are recorded correctly in the Realisation Account but an error in addition or subtraction produces an incorrect final balance, it is an arithmetical error. It is not an error of principle because no item has been treated according to an incorrect accounting rule. Exam tip: an incorrect total, balance or calculation generally indicates an arithmetical error.