Meaning Realisation Account
Realisation account is a nominal account which is prepared at the time of dissolution of the firm for closing its book of accounts. It is one that determines the profit or loss of a business at the termination of its activities. This account being a nominal account, credit all incomes and debit all expenses. Realisation account records all assets of the business excluding the cash and bank balances on debit side whereas all liabilities (not partner’s capital and loan accounts) on its credit side. Now, when all the assets of the firm are sold then the income earned from them is posted on credit side of realisation account. While on settling of all the business liabilities, the payment is debited to this account. At last, the net result will be either a profit or loss which is transferred to partner’s capital accounts in their profit-sharing ratio. This way the realisation account ascertains profit or loss resulting from realisation of assets and liabilities by business while shutting down its operations.
Preparation of Realisation Account
Various steps involved in preparation of realisation account are as discussed below: –
Step 1: Transfer each of the assets excluding cash/balance and fictitious assets on debit side of realisation account.
Step 2: Transfer all of the outside liabilities of firm on credit side of realisation account.
Step 3: Amount realized from disposing off assets is shown on credit side as it is an income.
Step 4: Payments made for clearing off all outside liabilities is debited to realisation account as it an expense.
Step 5: Showing the payment of realization expenses on debit side.
Step 6: Disposal of all unrecorded assets is shown on credit side of realisation account.
Step 7: Payments of unrecorded liabilities is debited to account.
Step 8: Reserves like depreciation reserve, investment fluctuation reserve and joint life policy reserve are credited to realisation account in case if assets corresponding to all these reserves appears on asset side of balance sheet.
Step 9: Now, at last, the realisation account is closed. Excess of credit side over the debit side of this account shows profit which is credited to capital accounts of partner as per their profit-sharing ratio. Whereas, in case if debit side exceeds the credit side then it represents the loss. This loss amount is debited to the capital accounts of partners.
Format of Realisation Account
|To Land & Building A/c|
To Plant & Machinery A/c
To Furniture A/c
To Stock A/c
To Debtors A/c
To Goodwill A/c
To Investment A/c
To Bank/ Cash A/c (Liabilities Paid):
To Bank/ Cash A/c
To Partner’s Capital A/c
To Partner’s Capital A/cs
(Profit on Realisation)
|By Provision for Doubtful Debts A/c|
By Sundry Creditors A/c
By Bills Payable A/c
By Outstanding Expenses A/c
By Bank Loan, Overdraft, Cash Credit A/c
By Bank/ Cash A/c (Assets realized):
Land and Building
Plant and Machinery
Bad Debts recovered
By Partner’s Capital A/cs
(assets were taken over)
By Partner’s Capital A/cs
(Loss on Realisation)