Realisation Account – Preparation & Settlement

Introduction

The Realisation Account is the master account prepared upon dissolution. Its objective is to calculate the final profit or loss on the winding up of the firm. It acts like a "garbage bin" where all assets and liabilities are dumped to close their individual accounts.

Step-by-Step Procedure

Step 1: Transfer Assets to Realisation A/c

Close all asset accounts (Except Cash/Bank and Fictitious Assets/Losses) by transferring them to the Debit side of Realisation.

Entry:

Realisation A/c ...Dr          (Amount)
    To Land & Building             (Amount)
    To Stock                       (Amount)
    To Debtors (Gross Amount)      (Amount)

(Note: Provision for Bad Debts is transferred to Credit Side).

Step 2: Transfer Liabilities to Realisation A/c

Close all outside liabilities (Creditors, Bills Payable, Bank Loan) to the Credit side.

Entry:

Creditors A/c ...Dr            (Amount)
Bills Payable A/c ...Dr        (Amount)
    To Realisation A/c             (Amount)

(Note: Partner’s Capital and Reserves are NOT transferred).

Step 3: Realisation of Assets (Selling)

When assets are sold for cash.

Entry:

Bank A/c ...Dr                 (Amount)
    To Realisation A/c             (Amount)

If a Partner takes over an asset:

Partner's Capital A/c ...Dr    (Amount)
    To Realisation A/c             (Amount)

Step 4: Payment of Liabilities

When liabilities are paid off.

Entry:

Realisation A/c ...Dr          (Amount)
    To Bank A/c                    (Amount)

If a Partner agrees to pay a liability:

Realisation A/c ...Dr          (Amount)
    To Partner's Capital A/c       (Amount)

Step 5: Realisation Expenses

Expenses incurred for winding up (Legal fees, Auctioneer charges).

Entry:

Realisation A/c ...Dr          (Amount)
    To Bank A/c                    (Amount)

Step 6: Close Realisation Account

Find the balancing figure (Profit or Loss).

• Profit: Transfer to Partners' Capital (Cr) in Profit Ratio.
• Loss: Transfer to Partners' Capital (Dr) in Profit Ratio.

Format of Realisation Account

Key Points to Remember

1. Unrecorded Assets: If sold, Credit Realisation (Bank). If taken by partner, Credit Realisation (Partner's Cap).
2. Unrecorded Liabilities: If paid, Debit Realisation.
3. Goodwill: Even if Goodwill appears in Balance Sheet, transfer it to Realisation Debit. If it realizes nothing, do not record anything on Credit side.
4. Secured Liability: If a creditor takes over an asset in full settlement, NO ENTRY is passed for that settlements. (Asset cancels Liability).

Exam Notes: Writing the Answer

Question: "Journal Entry for: Creditors of ₹10,000 accepted Stock of ₹8,000 in full settlement." (2 Marks)

Answer: No Entry. Reason: Since the liability (Creditor) and Asset (Stock) have already been transferred to Realisation A/c, mutual set-off requires no further entry.

Question: "Journal Entry for: Realisation Expenses ₹5,000 were paid by Partner X on behalf of the firm."

Answer:

Realisation A/c ...Dr  5,000
    To X's Capital A/c     5,000

(Being firm's expense paid by partner)

Summary

• Step 1: Empty Balance Sheet into Realisation.
• Step 2: Settle outside world (Wait for cash/bank entries).
• Step 3: Find Profit/Loss.
• Rule: Cash Account should generally be the last account to be prepared; it must tally automatically.

Quiz Time! 🎯

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