Realisation Account

The Realisation Account records the disposal of assets and settlement of liabilities during dissolution. Comparing the amounts realised and paid with the relevant book values helps determine the resulting profit or loss on realisation.

The Realisation Account is prepared at the time of dissolution of the firm. It records the sale or realisation of assets and the settlement of liabilities, along with the resulting profit or loss. It is not ordinarily prepared at the end of every year. Exam tip: associate the Realisation Account with dissolution, whereas the Revaluation Account is used for changes in the partnership arrangement.

In the Realisation Account, assets to be realised are debited and external liabilities are credited. The account also records the sale of assets, settlement of liabilities and realisation expenses. Partners’ capital, salaries or interest on capital are not the principal items transferred to this account. Exam tip: Cash or bank balance and fictitious assets are generally not transferred to the Realisation Account.

If an asset is not sold during dissolution, a partner may take it over at an agreed value. The partner’s Capital or Current Account is debited, and the Realisation Account is credited with that value. The asset is not automatically treated as zero or deposited in the bank. Exam tip: when a partner takes over an asset, credit the Realisation Account and debit the partner’s account.

The Realisation Account records the realisation of assets and the settlement of liabilities. Its balance shows the profit or loss on realisation, which is transferred to the partners’ capital accounts in their profit-sharing ratio. Therefore, it may show either a profit or a loss, not only one of them. Exam tip: a credit balance indicates profit on realisation, while a debit balance indicates loss.

When liabilities are paid, the amount owed by the firm is settled; therefore, liabilities decrease or are extinguished. Cash or bank balance also decreases in exchange for the payment, but capital or assets do not increase. Exam tip: settlement of a liability reduces both the liability and cash/bank balance.

During dissolution, cash received from selling assets and cash paid for liabilities and expenses are recorded in the Bank Account because it shows the firm’s actual cash movements. In contrast, the Realisation Account is used to determine the profit or loss arising from the settlement of assets and liabilities; it is not the account for maintaining the cash balance. Exam tip: distinguish the profit or loss in the Realisation Account from the actual cash transactions in the Bank Account.

The settlement of an unrecorded liability is recorded in the Realisation Account because it relates to the settlement of the firm’s liabilities during dissolution. When the liability is paid in cash, the Realisation Account is debited and the Cash Account is credited. Thus, the Cash Account records the payment, whereas the Realisation Account records its dissolution-related effect. Exam tip: Items concerning the realisation or settlement of assets and liabilities are recorded in the Realisation Account.

At the dissolution of a firm, the partners prepare the Realisation Account to determine the profit or loss arising from the realisation of assets and settlement of liabilities. A bank handles banking transactions but does not prepare this account. Exam tip: The main purpose of the Realisation Account is to ascertain the profit or loss on the realisation of assets and settlement of liabilities.

Profit or loss arising from the sale of assets and settlement of liabilities is determined in the Realisation Account. When there is a profit, the Realisation Account is debited and the profit is transferred to the partners’ Capital or Current Accounts. Thus, the partners’ capital accounts receive the final transfer, but the profit is determined in the Realisation Account. Exam tip: remember that the Realisation Account determines the profit or loss on dissolution, which is then distributed among the partners.

On dissolution, the loss in the Realisation Account is debited to the partners’ capital accounts in their profit-sharing ratio. Therefore, each partner’s capital decreases. Increasing capital would be correct only when the Realisation Account shows a profit. Exam tip: add realisation profit to capital and deduct realisation loss from capital.

An amount that cannot be recovered from debtors is a loss to the firm. Therefore, it is recorded on the debit side of the Realisation Account. It is not directly entered in the partners’ capital accounts; its effect reaches them when the final profit or loss is transferred. Exam tip: gains or losses arising from the realisation of assets are recorded in the Realisation Account.

The Realisation Account is prepared to determine the profit or loss arising from the sale of assets and settlement of liabilities. Its closing balance is transferred to the partners’ capital accounts: credited when there is a profit and debited when there is a loss. Therefore, the correct answer is ‘profit or loss on realisation’. Exam tip: Realisation profit or loss is distributed among partners in their profit-sharing ratio.

When an asset is sold for more than its book value, the excess of sale proceeds over book value is a realisation profit. This profit is transferred from the Realisation Account to the partners’ capital or current accounts in their profit-sharing ratio. Therefore, option B is correct. Option A would apply if the asset were sold below its book value. Exam tip: Sale proceeds greater than book value indicate a realisation profit.

The liability is transferred to the Realisation Account at its book value of ₹50,000, but it is actually settled for only ₹45,000. The difference of ₹5,000 is a gain for the firm and is recorded as a profit in the Realisation Account. The closest distractor is a loss of ₹5,000, but a loss arises when a liability is settled for more than its book value. Exam tip: settlement below book value gives a gain, while settlement above book value gives a loss.

During dissolution, partners may bring cash when the firm does not have enough funds to pay realisation expenses. This contribution is recorded in the Realisation Account; the usual entry is Cash A/c Dr. To Realisation A/c. Its purpose is not to increase profit or pay interest to partners. Exam tip: distinguish between a partner paying an expense personally and bringing cash into the firm to meet that expense.

When a partner takes over the unsold stock, the firm recovers the value of the asset from that partner’s capital account. Therefore, the partner’s Capital Account is debited and the Realisation Account is credited. Option B reverses the entry, while the Bank Account is affected only when the stock is sold for cash. Exam tip: For an asset taken over by a partner, debit the partner’s Capital Account and credit the Realisation Account.

On dissolution, a partner’s loan is paid after the external liabilities have been settled but before the partners’ capital is repaid. The partner’s loan is not treated as an external liability and is not transferred to the Realisation Account; it is generally settled through the Cash or Bank Account. Exam tip: remember the order—external liabilities, partner’s loan, and then partners’ capital.

The Realisation Account is a nominal account because it records the income and expenses arising from the dissolution, including the transfer and sale of assets, transfer of liabilities, and realisation expenses. Its balance represents the profit or loss on dissolution, which is transferred to the partners’ capital accounts. It is therefore not a real account, even though assets and liabilities are recorded through it. Exam tip: Remember that the primary purpose of the Realisation Account is to determine profit or loss on dissolution.

At dissolution, non-cash assets are debited to the Realisation Account at their book value. The account records the proceeds from selling those assets and the relevant settlement items, enabling the firm to determine the profit or loss on realisation. Therefore, option B is correct. Options A and C refer to payment or distribution activities, while option D is unrelated to the Realisation Account. Exam tip: The Realisation Account is prepared to determine the profit or loss arising from the realisation of assets and settlement of liabilities.

When a firm is dissolved, the proceeds from selling its assets are credited to the Realisation Account; therefore, the cash sale of assets is correct. Credit purchase of goods is an ordinary business transaction, while a partner’s personal loan and distribution of dividend are not recorded in the Realisation Account. Exam tip: Remember that this account records the transfer, sale and settlement of the firm’s assets and liabilities during dissolution.

When the amount realised from assets is less than the payments for liabilities and realisation expenses, the debit side of the Realisation Account exceeds its credit side. The resulting debit balance represents a loss, which is transferred to the partners’ capital accounts in their profit-sharing ratio. Exam tip: A debit balance in the Realisation Account indicates loss, while a credit balance indicates profit.

During dissolution, the Realisation Account records the sale of assets and settlement of liabilities, resulting in a realisation profit or loss. At the end, this profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio, thereby closing the account. It is neither carried forward nor treated as interest or dividend. Exam tip: The final balance of the Realisation Account is transferred to the partners’ capital accounts.

Fictitious assets have no actual realisable value. Therefore, on dissolution, they are not transferred to the Realisation Account; instead, they are written off by debiting the partners’ Capital Accounts in their profit-sharing ratio. Option C is incorrect because actual assets and external liabilities are transferred to the Realisation Account. Exam tip: Fictitious assets are written off through the partners’ Capital Accounts, not the Realisation Account.

The Realisation Account is based on the realisation principle because, on dissolution, the firm’s assets are sold and its liabilities are settled to determine the profit or loss on realisation. The going-concern principle is not appropriate because the firm is being dissolved rather than continuing its normal operations. Exam tip: associate the Realisation Account with the sale of assets, payment of liabilities, and calculation of realisation profit or loss.