What is a Realisation Account?
When a company is dissolved, its financial records are closed, its assets are sold, and all of its obligations are paid in full. A realisation account is a nominal account with the name realisation account to record the sale of assets and the discharge of obligations. The realisation account is opened primarily to determine whether a profit or loss was realised owing to the realisation of assets and liabilities. Realisation profit is transferred to the partner's capital account in their profit-sharing ratio if the credit side of the ledger is greater than the debit side. Realisation loss is transferred to the partner's capital account if the debit side of the ledger is greater than the credit side.
Defining the Term Realisation Account
Primary Goals for Realisation Account
The following is a condensed list of the primary goals that should be kept in mind while producing a realisation account for realisation expenses:
The primary objective is to shut the books on all financial transactions.
To keep a record of transactions that pertain to the sale of assets and the satisfaction of obligations.
To ascertain whether or not a profit was made due to the realisation of assets and liabilities.
Also, the dissolution expenses are treated as a liability to be paid.
Format for Realisation Account
The realisation account format is as follows:
Journal Entries Explained With Transactions
The journal entries of realisation account of the following:
To keep track of the sale of different assets and debts.
A company has Rs. xxx in stock. Aziz, a partner, bought xx% of the stock for xx% less than it was worth.
The rest was sold for xx% more than it cost.
A broker sold land and a building with a book value of Rs xxx for Rs xxx. The broker took x% of the sale price as his fee.
The dissolution of partnership firm journal entries are as follows:
Conclusion
Realisation account is a notional account used to close a company's books upon dissolution. It determines a company's final profit or loss. All revenues and spending should be credited to this nominal account. The realisation account debits all firm assets, excluding cash and bank balances, and credits all obligations (excluding the partner's capital and loan accounts).
The proceeds are credited to the realisation account when all business assets are sold. This account is debited for paying business obligations. Net profit or loss is allocated to partners' capital accounts in their profit-sharing ratio. When it closes, the realisation account determines the profit or loss from selling a company's assets and liabilities.
FAQs on Journal Entries of Realisation Account
1. What is a Realisation Account and what is its main purpose in the dissolution of a partnership firm?
A Realisation Account is a special nominal account prepared during the dissolution of a partnership firm. Its primary purpose is to ascertain the net profit or loss from the sale of the firm's assets and the settlement of its liabilities. All assets (except cash, bank, and fictitious assets) are transferred to its debit side at their book values, while all external liabilities are transferred to its credit side. The final balance in this account represents the profit or loss on realisation, which is then transferred to the partners' capital accounts in their profit-sharing ratio.
2. What are the fundamental journal entries for transferring assets and third-party liabilities to the Realisation Account?
The fundamental journal entries for opening the Realisation Account are:
For transferring assets: The entry is to debit the Realisation Account and credit the individual asset accounts at their book value. The journal entry is:
Realisation A/c Dr.
To Sundry Assets A/cFor transferring liabilities: The entry is to debit the individual third-party liability accounts and credit the Realisation Account. The journal entry is:
Sundry Liabilities A/c Dr.
To Realisation A/c
Note that only third-party liabilities are transferred. Partners' loans, capital accounts, and accumulated profits are settled separately.
3. What is the journal entry for an unrecorded asset that is sold for cash during dissolution?
Since an unrecorded asset has no book value, it is not transferred to the Realisation Account initially. When it is sold, the entire amount received is a gain. The journal entry simply records the inflow of cash and credits the Realisation Account. The entry is:
Bank/Cash A/c Dr. (with the amount realised)
To Realisation A/c
This is different from a recorded asset, where the asset account is first closed by transferring it to the Realisation Account's debit side.
4. How is the accounting treatment of Goodwill different in the Realisation Account if it already exists in the books versus when it is unrecorded?
The treatment of Goodwill depends on whether it is a recorded asset:
If Goodwill exists in the Balance Sheet: It is treated like any other asset. First, it is transferred to the debit side of the Realisation Account at its book value. If any amount is realised from its sale, the Bank/Cash account is debited and the Realisation Account is credited.
If Goodwill is unrecorded: It has no book value, so there is no entry for transferring it to the Realisation Account. If any amount is received for this unrecorded Goodwill, the entry is simply to debit Bank/Cash Account and credit the Realisation Account, treating it as a gain.
5. What is the essential difference between a Realisation Account and a Revaluation Account?
The key differences between a Realisation Account and a Revaluation Account are:
Purpose: A Revaluation Account is prepared to record changes in the value of assets and liabilities upon the admission, retirement, or death of a partner, while the firm continues to operate. A Realisation Account is prepared only at the time of the firm's dissolution to close the books of accounts.
Frequency: A Revaluation Account can be prepared multiple times during the life of a firm. A Realisation Account is prepared only once, when the firm ceases to exist.
Outcome: The Revaluation Account helps in restating assets and liabilities to their current values. The Realisation Account helps in winding up the firm's affairs by selling assets and paying off liabilities.
6. Can you provide an example of a journal entry when a partner agrees to pay for a firm's liability?
Certainly. Suppose a creditor of ₹20,000 is taken over by Partner A. The liability (Creditor) would have already been transferred to the credit side of the Realisation Account. When Partner A agrees to pay this liability, the firm's liability to the partner increases. Therefore, the partner's capital account is credited, and the Realisation Account is debited. The journal entry would be:
Realisation A/c Dr. ₹20,000
To Partner A's Capital A/c ₹20,000
(Being the creditor's payment undertaken by Partner A)
7. Why is a Partner's Loan to the firm not transferred to the Realisation Account?
A partner's loan is an internal liability, not a third-party or external liability. According to Section 48 of the Indian Partnership Act, 1932, external debts must be paid first before settling any loans from partners. Therefore, a partner's loan is not transferred to the credit of the Realisation Account along with other liabilities like creditors or bills payable. Instead, it is settled separately by making a direct payment from the firm's bank account after all outside debts have been paid. The entry for its payment is simply: Partner's Loan A/c Dr. To Bank/Cash A/c.
