Q.Legal expenses are recorded in which side of Realisation A/c ?
(A) Debit
(B) Credit
(C) Liabilities
(D) Assets
🔒You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Realisation Expenses Accounting
Realisation Expenses Accounting — A First Look
Think of a partnership firm that has decided to close down. The partners have agreed to sell off everything — land, machinery, stock, debtors — and pay off all liabilities. But selling assets and settling debts costs money: you pay a broker to auction the machinery, a lawyer to draft the sale deed, a transporter to move the stock, and maybe a commission to the person who collects the dues. These out-of-pocket costs incurred only because the firm is being wound up are called realisation expenses.
In everyday life, if you and a friend decide to sell your shared bicycle and split the money, you might spend ₹50 on an advertisement. That ₹50 is a realisation expense — it is not a regular business cost; it is a cost of closing down.
What the NCERT Textbook Says
The NCERT Class-12 Accountancy textbook (Part II, Chapter 5: Dissolution of a Partnership Firm) defines realisation expenses as:
"Expenses incurred on the dissolution of a firm, such as expenses on the sale of assets, payment of liabilities, legal charges, etc."
The key point: these expenses arise only after the decision to dissolve and are directly linked to converting assets into cash and clearing debts. They are not part of normal trading or operating expenses.
Why It Matters
If you ignore realisation expenses, the final amount available for distribution among partners will be overstated. Partners would think they have more money to share than they actually do. The accounting treatment ensures that:
- The Realisation Account (which summarises all gains and losses on sale of assets and settlement of liabilities) is charged with these expenses.
- The net profit or loss on realisation is correctly computed.
- Partners' capital accounts are adjusted only for the true final figure.
Accounting Treatment — The Core Rule
Realisation expenses are always debited to the Realisation Account.
The journal entry is:
Realisation A/c Dr. [Amount]
To Bank A/c (or Cash A/c) [Amount]
(Being realisation expenses paid)
Why debit Realisation Account?
The Realisation Account is a temporary account that collects all gains and losses from dissolution. Paying an expense reduces the net gain (or increases the net loss) from realisation. So it is debited — just like any expense is debited to a profit-and-loss account.
Why credit Bank/Cash?
Because the firm pays cash out of its bank balance or cash in hand.
What If a Partner Bears the Expenses?
Sometimes the partnership deed says that a particular partner will personally pay the realisation expenses (or the firm pays, but the partner is entitled to a fixed fee for doing the work). Two common variations:
-
Partner pays from his own pocket
The firm does not record any entry. The partner simply bears the cost. No accounting treatment needed in the firm's books.
-
Partner is paid a fixed amount for handling dissolution
Example: Partner A is to be paid ₹5,000 for his services in winding up. This is treated as a realisation expense. Entry:
Realisation A/c Dr. 5,000 To Bank A/c 5,000(If the amount is to be credited to the partner's capital account instead of paying cash, credit the partner's capital account.)
The Format / Proforma — Where Does It Appear?
In the NCERT textbook, the Realisation Account is prepared in a T‑shape (two-sided account). Realisation expenses appear on the debit side of this account. Here is the standard format:
Realisation Account
| Dr. | Cr. | ||
|---|---|---|---|
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Sundry Assets (transferred) | xxx | By Sundry Liabilities (transferred) | xxx |
| To Bank (liabilities paid) | xxx | By Bank (assets sold) | xxx |
| To Bank (realisation expenses) | xxx | By Loss transferred to Partners' Capital A/c (if loss) | xxx |
| To Profit transferred to Partners' Capital A/c (if profit) | xxx | ||
| Total | xxxx | Total | xxxx |
Legal expenses incurred on dissolution are an expense of realising the firm's assets and settling it, so they are recorded on the debit side of the Realisation Account. Hence it is the debit side. …
Legal expenses paid at dissolution are realisation expenses (a cost of closing the firm), which are recorded on the debit side of the Realisation Account. Hence the answer is (A) Debit.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the Realisation Account records the closing of all assets and liabilities on dissolution:
- Debit side: book value of assets transferred, and all expenses of realisation (such as legal expenses, brokerage, dissolution costs) and liabilities paid. …
Showing the 12 most recent of 14 on this concept.
- CBSE 2026Set 67/3/11 markMCQQ.On 31st March, 2025, the partnership between Hari and Om was dissolved. Hari was appointed to look after dissolution work for which he was allowed a commission of ₹ 9,700. He agreed to bear the dissolution expenses. The actual expenses of dissolution amounted to ₹ 8,900 which were paid by Hari's friend, Bhanu on his behalf. The amount debited to Realisation Account will be : (A) ₹ 9,700 (B) ₹ 8,900 (C) ₹ 10,000 (D) Nil
›Reveal solutionSolution
The Realisation Account will be debited only with the commission payable to Hari for undertaking the dissolution work, as he agreed to bear the actual dissolution expenses personally.
When a partnership firm is dissolved, the Realisation Account is prepared to ascertain the profit or loss arising from the realisation of assets and payment of liabilities. All expenses incurred during the dissolution process are generally debited to the Realisation Account. However, the treatment changes significantly if a partner is appointed to oversee the dissolution and agrees to bear these expenses.
In this scenario, Hari is appointed to look after the dissolution work. For this, he is allowed a commission of ₹9,700. This commission is an expense for the firm related to the dissolution process, and thus, it will be debited to the Realisation Account.
Crucially, Hari agreed to bear the dissolution expenses. This means that any actual expenses incurred for dissolution become Hari's personal liability, not the firm's. The firm has discharged its responsibility by paying the commission to Hari, which implicitly covers his obligation to bear the expenses. Therefore, the actual dissolution expenses of ₹8,900, even though paid by Hari's friend Bhanu on his behalf, are a personal matter for Hari. The firm's books will not record these actual expenses. The payment by Bhanu is a transaction between Bhanu and Hari, and it does not involve the firm.
Thus, the only amount related to this arrangement that will be debited to the Realisation Account is the commission payable to Hari.
SOLUTION
Journal Entries
Date Particulars L.F. Debit (₹) Credit (₹) 2025 Mar 31 Realisation A/c 9,700 To Hari's Capital A/c 9,700 (Being commission allowed to Hari for undertaking dissolution work) 2025 Mar 31 (No entry for actual dissolution expenses) (Hari agreed to bear the dissolution expenses, so the firm is not liable for them. The payment by Bhanu on Hari's behalf is a personal transaction.) - CBSE 2026Set MARCH1 markQ.Write the journal entry at the time of dissolution of the firm for payment of realisation expenses.
›Reveal solutionSolution
Payment of realisation expenses is recorded as Realisation A/c Dr. To Cash/Bank A/c.
When a firm is dissolved, various expenses are incurred to realise the assets and settle the liabilities — legal fees, brokerage, advertising, commission, etc. These are debited to the Realisation Account (they reduce the realisation profit) and credited to Cash/Bank when paid.
| Journal Entry | Debit (₹) | Credit (₹) |
|---|---|---| …
- CBSE 2025Set 67/5/11 markMCQQ.On dissolution of a firm, there was an unrecorded asset of ₹ 15,000 which was taken over by a partner at ₹ 13,000. Partner’s capital account will be debited by : (A) ₹ 15,000 (B) ₹ 28,000 (C) ₹ 2,000 (D) ₹ 13,000
›Reveal solutionSolution
The partner’s capital account is debited by ₹13,000 — the agreed takeover value of the unrecorded asset, not its original or notional value.
Concept First: Realisation Expenses Accounting for Unrecorded Assets
When a firm dissolves, all assets (including those not recorded in the books) are transferred to the Realisation Account. An unrecorded asset is one that was never entered in the firm’s books — perhaps an old machine, a patent, or a piece of furniture that was fully written off or never capitalised.
The accounting treatment follows a clear rule:
- Credit the Realisation Account with the realised value of the asset — that is, the amount at which it is sold or taken over.
- Debit the partner’s capital account (or cash/bank) with the same amount when the asset is taken over by a partner.
Why? Because the Realisation Account is the central clearing account for all gains and losses on dissolution. When an unrecorded asset is taken over by a partner, the firm is effectively “selling” it to that partner. The partner’s capital account is debited because the partner owes the firm that amount (it reduces their claim on the firm’s net assets). The Realisation Account is credited because the asset has been realised — it has generated value for the firm.
Watch outCommon Pitfall
Many students mistakenly debit the partner’s capital account with the original value (₹15,000) or with the difference (₹2,000). Neither is correct. The debit is always the agreed takeover price — the actual consideration received from the partner. The unrecorded asset’s original value is irrelevant because it was never in the books; only the realised value matters.
Solution: Journal Entry
The journal entry for this transaction is:
Date Particulars L.F. Debit (₹) Credit (₹) Partner’s Capital A/c Dr. 13,000 To Realisation A/c 13,000 (Being unrecorded asset taken over by partner at agreed value of ₹13,000) Working Note …
- CBSE 2025Set 67/5/11 markMCQQ.On the dissolution of the partnership firm of Raman, Hari and Suresh, realisation expenses ₹ 17,000 were paid by a debtor of ₹ 75,000 on behalf of the firm. The remaining amount was received from him along with interest of ₹ 2,000 for delayed payment. Realisation Account will be __________ by __________. (A) debited, ₹ 17,000 (B) credited, ₹ 50,000 (C) debited, ₹ 77,000 (D) credited, ₹ 60,000
›Reveal solutionSolution
Realisation Account is credited by ₹ 60,000 — the net amount received from the debtor after adjusting the realisation expenses paid by him.
Concept First: How Realisation Expenses Paid by a Debtor Are Treated
When a firm is dissolved, the Realisation Account is the central ledger account that records all gains and losses from converting assets into cash and paying off liabilities. The rule is simple: every asset realised (cash received) is credited to Realisation Account, and every liability paid or expense incurred is debited to Realisation Account.
Now, here the debtor of ₹ 75,000 does something unusual — he pays realisation expenses of ₹ 17,000 on behalf of the firm. This means the firm does not pay those expenses out of its own pocket; the debtor pays them directly. So the firm's cash outflow for expenses is zero, but the expense has still been incurred. The correct treatment: Realisation Account must be credited with the net cash that actually comes into the firm from this debtor.
Let's trace the cash flow. The debtor owed ₹ 75,000. He pays ₹ 17,000 as realisation expenses to some third party (say, to the auctioneer or the bank). So the firm does not receive that ₹ 17,000. What the firm does receive is the remaining ₹ 58,000 (₹ 75,000 – ₹ 17,000) plus interest of ₹ 2,000 for delayed payment — total cash received = ₹ 60,000.
The ₹ 17,000 expenses are not debited to Realisation Account because the firm never paid them; the debtor paid them. Instead, the debtor's liability is reduced by that amount. The net effect on Realisation Account is a credit of ₹ 60,000 (the cash actually received). The interest of ₹ 2,000 is not a realisation item — it is a separate income (credited to Realisation Account or to a separate Interest Account, but in standard dissolution accounting, it is credited to Realisation Account as part of the amount realised from the debtor).
Watch outA common mistake is to debit Realisation Account with ₹ 17,000 (thinking "expenses must be debited") and credit it with ₹ 75,000 (the full debt). That would double-count the expense — the firm never paid ₹ 17,000, so it should not be debited. The correct approach: only the net cash received is credited.
The Journal Entry
Date Particulars L.F. Debit (₹) Credit (₹) Bank A/c Dr. 60,000 To Realisation A/c 60,000 (Being amount received from debtor after adjusting realisation expenses of ₹ 17,000 paid by him and interest ₹ 2,000) Working Notes
1. Amount due from debtor: ₹ 75,000
2. Realisation expenses paid by debtor on behalf of firm: ₹ 17,000 …
- CBSE 2025Set ANNUAL1 markMCQQ.Legal expenses are recorded in which side of Realisation A/c ? (A) Debit (B) Credit (C) Liabilities (D) Assets
›Reveal solutionSolution
Legal expenses paid at dissolution are realisation expenses (a cost of closing the firm), which are recorded on the debit side of the Realisation Account. Hence the answer is (A) Debit.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the Realisation Account records the closing of all assets and liabilities on dissolution:
- Debit side: book value of assets transferred, and all expenses of realisation (such as legal expenses, brokerage, dissolution costs) and liabilities paid. …
- CBSE 2025Set ANNUAL1 markQ.In case of dissolution of the firm, how will you treat realization expenses if paid by a partner?
›Reveal solutionSolution
Realisation expenses are always an expense of the firm; if a partner pays them personally, the firm reimburses that partner through their Capital Account.
On dissolution, expenses incurred in realising assets and settling liabilities (legal fees, auctioneer's commission, etc.) are called realisation expenses, and they are normally charged to the firm via the Realisation Account. The treatment depends on who actually pays:
- If paid by the firm (out of Bank), it is simply:
Realisation A/c Dr. To Bank A/c. - If paid by a partner personally (out of their own pocket, on the firm's behalf), the firm must reimburse that partner, so the entry is:
Realisation A/c Dr. To Partner's Capital A/c ``` … - If paid by the firm (out of Bank), it is simply:
- CBSE 2024Set 67/1/11 markMCQQ.Aavya, Mitansh and Praveen were partners in a firm. On 31st March, 2023, the firm was dissolved. Creditors took over furniture of book value of ₹50,000 at ₹45,000 in part settlement of their amount of ₹60,000. The balance amount was paid to them through cheque. The amount paid through cheque will be : (A) ₹10,000 (B) ₹50,000 (C) ₹45,000 (D) ₹15,000
›Reveal solutionSolution
The amount paid to creditors through cheque is ₹15,000 — the balance after adjusting the agreed value of furniture taken over against the total claim.
Concept and Accounting Treatment
When a firm is dissolved, creditors are paid off in settlement of their claims. If creditors accept an asset (like furniture) in part payment, the key rule is: the asset is taken at its agreed value, not its book value. The agreed value is what both parties have accepted as the settlement amount for that asset.
Here, the creditors have a total claim of ₹60,000. They take over furniture with a book value of ₹50,000, but the agreed value is only ₹45,000. This ₹45,000 is the amount that reduces their claim — not the book value. The remaining unpaid balance must be paid in cash (through cheque).
The journal entry for this transaction would be:
Date Particulars L.F. Debit (₹) Credit (₹) 2023
Mar 31Creditors A/c Dr. 60,000 To Furniture A/c 45,000 To Bank A/c 15,000 (Being settlement of creditors' claim — furniture taken over at agreed value of ₹45,000 and balance paid by cheque) Notice that the furniture account is credited with ₹45,000 (the agreed value), not ₹50,000. The loss on realisation of ₹5,000 (₹50,000 − ₹45,000) will be transferred to the Realisation Account as part of the overall dissolution process.
Working Note
Calculation of amount paid through cheque:
Particulars Amount (₹) Total amount due to creditors 60,000 Less: Agreed value of furniture taken over (45,000) Balance paid through cheque 15,000 - CBSE 2024Set MARCH1 markQ.Who has to bear dissolution expense, at the time of dissolution of a firm?
›Reveal solutionSolution
Ordinarily the firm bears dissolution (realisation) expenses, debited to the Realisation Account.
In this GSEB Class-12 Commerce dissolution topic, expenses incurred to wind up the firm and realise its assets are called realisation/dissolution expenses. Normally the firm pays them:
Realisation A/c ... Dr; To Cash/Bank A/c.
…
- CBSE 2023Set 67/4/11 markMCQQ.On dissolution of the firm of Ramesh, Suresh and Naresh, Naresh had agreed to bear all realisation expenses for which he was paid ₹ 14,500. Actual expenses on realisation amounted to ₹ 11,000 which were paid by Naresh. The amount to be credited to Naresh’s capital account will be : (A) ₹ 11,000 (B) ₹ 3,500 (C) ₹ 14,500 (D) ₹ 25,500
›Reveal solutionSolution
The firm credits Naresh's Capital Account with the agreed remuneration of ₹ 14,500 for bearing the realisation expenses.
During the dissolution of a partnership firm, realisation expenses are typically borne by the firm. However, it is common for a partner to agree to undertake the responsibility of bearing these expenses. In such cases, the firm often pays a fixed remuneration or commission to that partner for this service.
Concept and Accounting Treatment of Realisation Expenses
When a partner agrees to bear realisation expenses and is paid a remuneration by the firm for doing so, the accounting treatment in the firm's books is as follows:
-
Remuneration paid by the firm to the partner: The amount of remuneration agreed upon and paid by the firm to the partner is considered an expense for the firm related to the dissolution process. This expense is debited to the Realisation Account, as all expenses incurred during the dissolution are ultimately charged to this account to determine the net profit or loss on realisation. The corresponding credit is given to the partner's Capital Account, as the partner is entitled to receive this amount from the firm.
- Rule: The Realisation Account is a Nominal Account, and expenses are debited to it. The Partner's Capital Account is a Personal Account, and when the partner is a receiver of funds from the firm, their account is credited.
-
Actual realisation expenses paid by the partner: Since the partner has agreed to bear the expenses, any actual expenses subsequently paid by that partner are their personal responsibility. The firm is not concerned with the actual amount spent by the partner, only with the fixed remuneration it agreed to pay. Therefore, these actual expenses are not recorded in the firm's books. The firm's obligation is limited to the remuneration it promised to the partner.
In this question, Naresh agreed to bear all realisation expenses, and the firm paid him ₹ 14,500 for this. This ₹ 14,500 is the remuneration from the firm to Naresh. The actual expenses of ₹ 11,000, which Naresh paid, are his personal expenditure because he had agreed to bear them. The firm's books will only record the remuneration paid to Naresh.
Solution
The journal entry to record the remuneration paid by the firm to Naresh for bearing the realisation expenses is: …
-
- CBSE 2023Set 67/4/11 markMCQQ.On dissolution of a partnership firm, furniture appearing in the Balance Sheet was ₹ 2,00,000. 50% of the furniture was taken over by a partner at ₹ 65,000 and balance 50% was sold at 20% less than the book value. The amount debited to bank account was : (A) ₹ 1,45,000 (B) ₹ 80,000 (C) ₹ 65,000 (D) ₹ 1,85,000
›Reveal solutionSolution
The amount debited to the Bank Account is ₹ 80,000 — this is the cash received from the sale of the remaining 50% of furniture at 20% below book value.
Concept First: Realisation Expenses and Asset Disposal
When a partnership firm dissolves, all assets (except cash/bank) are transferred to the Realisation Account at their book values. The Realisation Account is then credited when assets are sold or taken over, and the cash received is debited to the Bank Account.
The key rule: Only cash inflows from asset disposal go to the Bank Account. If a partner takes over an asset, the partner's Capital Account is debited (not Bank), because no cash changes hands. The Bank Account only records actual cash receipts.
Here, the furniture is disposed of in two parts:
- 50% taken over by a partner — no cash involved, so Bank is not affected.
- 50% sold to an outsider — cash is received, so Bank is debited.
Step-by-Step Solution
1. Calculate the Book Value of Each Half
Total furniture book value = ₹ 2,00,000
Each 50% portion = ₹ 2,00,000 × 50% = ₹ 1,00,000
2. Partner's Takeover (50%)
The partner takes over furniture worth ₹ 1,00,000 (book value) at an agreed value of ₹ 65,000.
Since this is a takeover (not a cash sale), the entry is:
- Debit Partner's Capital Account ₹ 65,000
- Credit Realisation Account ₹ 65,000
No entry in Bank Account for this transaction.
3. Sale to Outsider (Remaining 50%)
Book value of this portion = ₹ 1,00,000
Sold at 20% less than book value:
- Discount = 20% of ₹ 1,00,000 = ₹ 20,000
- Sale price = ₹ 1,00,000 − ₹ 20,000 = ₹ 80,000
This is a cash sale, so the entry is:
- Debit Bank Account ₹ 80,000
- Credit Realisation Account ₹ 80,000
4. The Journal Entry for the Sale
Date Particulars L.F. Debit (₹) Credit (₹) Bank A/c Dr. 80,000 To Realisation A/c 80,000 (Being 50% furniture sold at 20% below book value) 5. The Realisation Account (Furniture portion only)
Particulars Amount (₹) Particulars Amount (₹) To Furniture A/c (transfer) 2,00,000 By Partner's Capital A/c (takeover) 65,000 - CBSE 2023Set ANNUAL1 markMCQQ.Legal expenses are recorded in which side of Realisation A/c ? (A) Liability (B) Asset (C) Debit (D) Credit
›Reveal solutionSolution
Realisation expenses such as legal charges are costs of dissolution; expenses go on the debit side of the Realisation Account.
In a Realisation Account the debit side carries the book value of assets transferred and all expenses/payments made on dissolution (including realisation expenses like legal fees, brokerage and commission), while the credit side carries liabilities transferred and the amounts actually realised from assets. Legal expenses are a payment made to wind up the firm, so the entry is Realisation A/c Dr., To Ba …
- CBSE 2022Set MARCH1 markQ.Who has to bear dissolution expense, at the time of dissolution of a firm?
›Reveal solutionSolution
Dissolution (realisation) expenses are borne by the firm and charged to the Realisation Account; if any partner agrees to bear them, that partner bears them.
Normally: Realisation A/c Dr., To Cash/Bank A/c. If a partner has agreed to bear the expenses (with or without a fixed remuneration), the expenses are borne by that partner and no separate charge is made to the firm beyond the agreed …
🎓Unlock everything free for 14 days
- ✓Full step-by-step solutions
- ✓Concept-first explanations
- ✓Methods, shortcuts & mistakes
- ✓PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.