Realisation Account

The profit arising from the Realisation Account is distributed among the partners in their predetermined profit-sharing ratio, not in the capital or drawings ratio. The realisation profit or loss is transferred to the partners’ capital or current accounts in this ratio. Exam tip: if no profit-sharing ratio is specified, it is generally treated as equal.

A partner’s loan is an amount payable to a partner, not an external liability. Therefore, it is not transferred to the Realisation Account and is settled separately. Trade creditors, bills payable and a bank overdraft are external liabilities and are normally transferred to the Realisation Account. Exam tip: on dissolution, settle external liabilities first, then partners’ loans, and finally partners’ capital balances.

Realization expenses are recorded on the debit side of the Realisation Account. Therefore, an increase in these expenses increases the debit balance and consequently increases the loss on realization. Option C is incorrect because realization expenses directly affect the account. Exam tip: Remember that assets transferred and realization expenses are generally recorded on the debit side, while proceeds from asset realization are recorded on the credit side.

The Realisation Account determines the profit or loss arising from the realisation of assets and settlement of liabilities at the time of dissolution. The final capital balances of partners are shown in their capital accounts, so option B is not correct. Exam tip: remember that the balance of the Realisation Account represents the profit or loss on realisation.

At dissolution, all assets, including assets that remain unrealised, are transferred to the Realisation Account at their book values. Therefore, book value is correct. Market value becomes relevant only when an asset is actually sold or realised. Exam tip: remember that assets are transferred to the Realisation Account at book value, while the actual sale proceeds are recorded separately.

When a liability is settled for more than its book value, the excess payment is a loss to the firm. This loss is debited to the Realisation Account and increases its loss balance. A payment below the book value would result in a profit instead. Exam tip: Excess payment for a liability means a loss in the Realisation Account.

At dissolution, the asset accounts, except Cash and Bank, and all external liability accounts are transferred to the Realisation Account. The profit or loss arising from the sale of assets and settlement of liabilities is determined through this account. Partners’ Capital and Loan Accounts are not transferred to it. Exam tip: Remember that Cash/Bank and partners’ personal accounts are generally excluded from the Realisation Account.

At dissolution, machinery is an asset of the firm and is normally sold. If it remains unsold, a partner may take it over at an agreed value. In that case, the partner’s Capital Account is debited and the Realisation Account is credited. Therefore, option A is correct; discarding the machinery without value or accounting is incorrect. Exam tip: When a partner takes over an asset, credit the Realisation Account with the agreed value.

At dissolution, the Realisation Account records the sale or transfer of the firm’s assets and the settlement of its liabilities. It is used to determine the profit or loss on realisation. Recording only cash receipts does not describe its complete purpose, while distribution of profit and partners’ salaries are not recorded in this account. Exam tip: associate the Realisation Account with the disposal of assets and settlement of liabilities.

In the Realisation Account, the proceeds from the sale of assets are compared with their book value. When the sale proceeds equal the book value and there are no realisation expenses, the two amounts are equal; therefore, neither a profit nor a loss arises. Realisation expenses, if any, could create a loss. Exam tip: use sale proceeds minus book value as the basic basis for determining realisation profit or loss.

At dissolution, the Realisation Account records transactions relating to the sale or transfer of assets and the payment or settlement of liabilities. Its balance reveals the profit or loss on realisation, which is transferred to the partners’ capital accounts. Therefore, option B is correct. It is not prepared for calculating salaries, determining income tax, or starting a new business. Exam tip: During dissolution, transactions involving assets and liabilities are generally routed through the Realisation Account.

On dissolution, the firm first realises its assets and pays the external liabilities. After the profit or loss on realisation is transferred to the partners’ capital accounts, the resulting balances are finally paid through cash or bank. Therefore, option B is correct. Exam tip: remember the sequence—realise assets, pay external liabilities, transfer realisation profit or loss, and then settle partners’ capital accounts.

Profit on the Realisation Account belongs to the partners on dissolution, so it is transferred to the partners’ capital accounts in their profit-sharing ratio. Creditors and the bank are involved in settlement of liabilities and cash transactions, while partners’ current accounts are not normally used for this transfer. Exam tip: Realisation profit is credited to partners’ capital accounts, whereas a realisation loss is debited to them.

At dissolution, the firm must settle its external liabilities and dissolution expenses. If the cash realised from the assets is insufficient, the partners bring in the amount required to pay those obligations, generally in their profit-sharing ratio. Liabilities cannot be ignored, and a cash shortage cannot be covered by artificially increasing the profit of the Realisation Account. Exam tip: when realised cash falls short of the amount payable, look for a contribution by the partners.

Expenses incurred for dissolving the firm, such as costs of selling assets or completing legal formalities, are debited to the Realisation Account. Partners’ salary and interest on capital are generally items of the Profit and Loss Account, while dividend is not an expense of a partnership firm. Exam tip: Remember that the Realisation Account records the realisation of assets and settlement of liabilities, including dissolution expenses.

An unrecorded liability is not already present in the books, so when it is paid, the Realisation Account is debited and the Cash/Bank Account is credited. In option B, the debit and credit treatment is reversed. Exam tip: payment of any liability during dissolution is recorded by debiting the Realisation Account and crediting Cash/Bank.

At dissolution, the firm’s assets, except cash and bank balances, and its external liabilities are transferred to the Realisation Account. This account is prepared to determine the profit or loss arising from the sale of assets and settlement of liabilities. Partners’ capital accounts are not transferred directly to it. Exam tip: Remember that cash and bank balances are generally excluded from the transfer to the Realisation Account.

When an asset is sold for less than its book value, the difference between the book value and the sale proceeds is a loss. On dissolution, this loss is recorded on the debit side of the Realisation Account and is ultimately transferred to the partners’ capital accounts in their profit-sharing ratio. Therefore, option B is correct. Exam tip: Sale below book value means loss, while sale above book value means profit.

At dissolution, a partner’s loan is not transferred to the Realisation Account. It is paid directly through the Bank Account. Generally, external liabilities are settled first, followed by the partner’s loan and then the partners’ capitals. Exam tip: Remember that a partner’s loan is paid through the Bank Account, not through the Realisation Account.

After the assets are realised and the liabilities are settled, the resulting profit or loss is transferred to the partners’ capital accounts. This is the final entry, after which the Realisation Account is closed. Revaluing assets is not the final entry in this account. Exam tip: Realisation profit is credited to the partners’ capital accounts, while realisation loss is debited to them.

A Realisation Account records transactions related to the sale or transfer of assets and the payment or settlement of liabilities at the time of dissolution. Its balance reveals the profit or loss on realisation, which is transferred to the partners’ capital accounts. Option A is incorrect because this account is not prepared to increase capital; it is prepared to record the closing transactions of the firm. Exam tip: Remember Realisation Account as assets realised, liabilities settled, and profit or loss on realisation determined.

Once all external liabilities are paid, they are no longer outstanding and the balances of the liability accounts are extinguished. The payment is generally recorded by debiting the Realisation Account and crediting the Bank/Cash Account. This payment does not automatically eliminate a loss on realisation; that profit or loss is determined from the final balance of the Realisation Account. Exam tip: distinguish between settlement of a liability and determination of realisation profit or loss.

The profit or loss on realisation belongs to the partners. Therefore, it is transferred to their capital accounts in their profit-sharing ratio: profit is credited and loss is debited.

The partner’s Capital Account is debited and Cash/Bank is credited because the firm has paid an expense that the partner agreed to bear. If the partner pays the expense directly, no entry is made in the firm’s books.

Non-cash assets, excluding fictitious assets, and external liabilities are transferred to the Realisation Account at their book values. Cash or bank balances and partners’ loans are not included in this transfer.