Realisation Account is a nominal account which is prepared at the time of dissolution of firm. It is prepared to find out the profit or loss realized by the firm on its closing or shutting down. Being a nominal account, it is credited with all the incomes and debited with all the expenses.
Firstly, all the assets are transferred to the debit side and all the liabilities are transferred to the credit side of this account Then the assets realized resulting into income earned are posted on the credit side and the liabilities paid off resulting in expenditure is posted on the debit side of this account. The net result will be either profit or loss which is distributed among the partners in their profit sharing ratio.
The purpose of preparing this account is to close the books of accounts of the dissolved firm and to determine the gain or loss on the realisation of assets and liabilities.
STEPS TO PREPARE REALISATION ACCOUNT
Transfer all the assets except cash/bank balance, fictitious assets, Debit balance of Profit and Loss A/c, Debit balance of Partner’s Capital/ Current A/cs, Loan to partner).
Transfer outside liabilities to the credit side of Realisation Account.
Show the disposal of assets at the credit side of realisation account, with the actual amount realized.
Make the payment of the realisation expenses at the debit side of realisation account.
Show the payment of outside liabilities at an agreed value or the book value at the debit side of Realisation Account.
Show the disposal of unrecorded assets at the credit side of realisation account.
Show the payment of unrecorded liabilities at the debit side of Realisation Account.
Transfer investment Fluctuation reserve, Joint Life Policy reserve, Depreciation reserve, to the credit of realisation account, if assets corresponding to these funds appear to the assets side of Balance Sheet.
Close the realisation Account. Excess of credit side over debit side represents profit will be transferred to the credit side of Partner’s Capital Accounts. Excess of debit side over credit side is loss which will be transferred to the Debit side of Partner’s Capital Accounts.
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 taken over)
By Partner’s Capital A/cs
(Loss on Realisation)
DIFFERENCE BETWEEN REVALUATION ACCOUNT AND REALISATION ACCOUNT
|BASIS OF DIFFERENCE||REVALUATION ACCOUNT||REALISATION ACCOUNT|
|MEANING||It records the effect of revaluation and reassessment of liabilities.||It records the realisation of assets and settlement of liabilities.|
|PURPOSE||It is prepared to make necessary adjustments in the value of assets and liabilities.||It is prepared for calculating net profit/ loss on realisation of assets and settlement of liabilities.|
|TIME||It is prepared at the time of reconstitution of firm i.e. at the time of admission, retirement or death of a partner.||It is prepared at the time of dissolution of partnership business.|
|CONTENTS||In this account, only changes in the value of assets and liabilities are recorded.||In this account, all the assets and liabilities are recorded.|
|PREPARATION OF ACCOUNT||This account may be prepared at a number of occasions during the life of the firm.||This account is prepared once in the lifetime of the firm i.e. at the time of its closure.|
|RESULT||Even after the preparation of Revaluation Account the firm continues to function, though with a changed relationship among the partners.||The firm comes to an end after the preparation of this account.|
|CLOSING OF ACCOUNTS||Accounts of assets and liabilities shown in this account are not closed.||Accounts of assets and liabilities transferred here are closed.|