Sita, Rita and Meeta are partners sharing profit and losses in the ratio of 2:2:1. Their balance sheet as on March 31, 2017 is as follows: **Balance Sheet of Sita, Rita and Meeta as on March 31, 2017** | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | General Reserve | 2,500 | Cash at bank | 2,500 | | Creditors | 2,000 | Stock | 2,500 | | Capitals: | | Furniture | 1,000 | | Sita | 5,000 | Debtors | 2,000 | | Rita | 2,000 | Plant and Machinery | 4,500 | | Meeta | 1,000 | | | | **Total** | **12,500** | **Total** | **12,500** | They decided to dissolve the business. The following amounts were realised: Plant and Machinery ₹4,250, Stock ₹3,500, Debtors ₹1,850, Furniture ₹750. Sita agreed to bear all realisation expenses paid by the firm; for the service Sita is paid ₹60. Actual expenses on realisation paid by the firm amounted to ₹450. Creditors paid 2% less. There was an unrecorded asset of ₹250, which was taken over by Rita at ₹200. Prepare the necessary accounts to close the books of the firm.

Sita, Rita and Meeta are partners sharing profit and losses in the ratio of 2:2:1. Their balance sheet as on M

Illustrations · Illustration 2

Sita, Rita and Meeta are partners sharing profit and losses in the ratio of 2:2:1. Their balance sheet as on March 31, 2017 is as follows:

Balance Sheet of Sita, Rita and Meeta as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
General Reserve	2,500	Cash at bank	2,500
Creditors	2,000	Stock	2,500
Capitals:		Furniture	1,000
Sita	5,000	Debtors	2,000
Rita	2,000	Plant and Machinery	4,500
Meeta	1,000
Total	12,500	Total	12,500

They decided to dissolve the business. The following amounts were realised: Plant and Machinery ₹4,250, Stock ₹3,500, Debtors ₹1,850, Furniture ₹750. Sita agreed to bear all realisation expenses paid by the firm; for the service Sita is paid ₹60. Actual expenses on realisation paid by the firm amounted to ₹450. Creditors paid 2% less. There was an unrecorded asset of ₹250, which was taken over by Rita at ₹200. Prepare the necessary accounts to close the books of the firm.

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Concept understanding — Realisation Account

The Realisation Account: Winding Up the Business Books

Think of a business as a box of ingredients you bought to make and sell biryani. Normally, you use the rice, spices, and chicken, sell the biryani, and keep buying fresh stock. But what if you decide to close the shop for good? You don't just throw away the leftover ingredients — you sell them off. The stove, the pots, the delivery scooter — everything goes. You collect whatever cash you can from selling these items, pay off any outstanding bills (like the vegetable vendor you still owe), and then see what's left. That leftover amount is what you, the owner, finally take home.

That entire process of selling off everything and settling all dues is what the Realisation Account captures in accounting. It's the final scorecard of a partnership firm that is being dissolved.

What the Realisation Account Actually Is

The Realisation Account is a nominal account (like a Profit & Loss account) that is opened only when a partnership firm is dissolved. Its single purpose is to calculate the profit or loss on realisation — that is, the net gain or loss from converting all non-cash assets into cash and paying off all liabilities.

Important

The Realisation Account is not the same as the Revaluation Account. Revaluation is done when a firm is continuing (e.g., on admission of a partner). Realisation is done when the firm is closing down.

Why It Matters (The "Why")

Without the Realisation Account, you cannot fairly divide the final cash among the partners. Here's why:

Assets are sold at market price, not book value. A machine bought for ₹1,00,000 might sell for only ₹60,000. That ₹40,000 loss must be recorded.
Liabilities are settled for actual amounts. A creditor of ₹50,000 might agree to accept ₹48,000 in full settlement. That ₹2,000 gain must be recorded.
There are dissolution expenses. Legal fees, brokerage, auctioneer's commission — these costs eat into the cash available.

The Realisation Account collects all these gains and losses in one place. The net result (profit or loss) is then transferred to the Partners' Capital Accounts in their profit-sharing ratio. Only after that can you determine exactly how much cash each partner is entitled to.

Accounting Treatment: The Debit and Credit Rules

The logic is straightforward. Think of the Realisation Account as a temporary "melting pot" where:

Debit side: Everything that reduces the cash available to partners (assets being taken out, expenses being paid).
Credit side: Everything that increases the cash available to partners (liabilities being settled cheaply, assets being sold for more than book value).

Here is the precise treatment as per NCERT:

Transaction	Debit	Credit
Transfer of all assets (except cash/bank)	Realisation A/c	Respective Asset A/c
Transfer of all external liabilities	Respective Liability A/c	Realisation A/c
Sale of an asset	Bank A/c (cash received)	Realisation A/c
Payment of a liability	Realisation A/c	Bank A/c (cash paid)
Payment of dissolution expenses	Realisation A/c	Bank A/c
When a partner takes over an asset	Partner's Capital A/c	Realisation A/c
When a partner takes over a liability	Realisation A/c	Partner's Capital A/c
Profit on realisation (transferred)	Realisation A/c	Partners' Capital A/c (in PSR)
Loss on realisation (transferred)	Partners' Capital A/c (in PSR)	Realisation A/c

Note

Cash and bank balances are not transferred to the Realisation Account. They remain as they are and are finally distributed to the partners.

The Proforma (Format) of the Realisation Account

This is the standard format you will use in your exam. Notice that the total of both sides must match before you can find the profit or loss.

Dr.	Realisation Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Assets (all transferred)	xxx	By Sundry Liabilities (all transferred)	xxx
To Bank (liabilities paid)	xxx	By Bank (assets sold)	xxx
To Bank (dissolution expenses)	xxx	By Partner's Capital A/c (asset taken over)	xxx
To Partner's Capital A/c (liability taken over)	xxx

To Profit transferred to Partners' Capital A/c		By Loss transferred to Partners' Capital A/c
(in profit-sharing ratio)	xxx	(in profit-sharing ratio)	xxx
Total	xxx	Total	xxx

Watch out

A common mistake is to put the book value of an asset on the credit side when it is sold. You do not write the book value. You write only the actual sale proceeds received. The book value was already transferred to the debit side at the start.

A Simple Illustration (No Invented Data)

Suppose a firm has a machine (book value ₹1,00,000) and a creditor (₹20,000). The machine is sold for ₹1,20,000. The creditor is paid ₹19,000 in full settlement. Dissolution expenses are ₹1,000.

Step 1: Transfer assets and liabilities

Debit Realisation A/c with ₹1,00,000 (machine)
Credit Realisation A/c with ₹20,000 (creditor)

Step 2: Record actual transactions

Debit Bank A/c with ₹1,20,000; Credit Realisation A/c with ₹1,20,000 (sale)
Debit Realisation A/c with ₹19,000; Credit Bank A/c with ₹19,000 (payment)
Debit Realisation A/c with ₹1,000; Credit Bank A/c with ₹1,000 (expenses)

Step 3: Find the balance

Debit side total: ₹1,00,000 + ₹19,000 + ₹1,000 = ₹1,20,000
Credit side total: ₹20,000 + ₹1,20,000 = ₹1,40,000
Credit side is higher by ₹20,000 → Profit on Realisation = ₹20,000

This ₹20,000 is then credited to the Partners' Capital Accounts in their profit-sharing ratio.

The Final Takeaway

The Realisation Account is the bridge between the firm's old book values and the actual cash that finally reaches the partners. It ensures that every gain and loss from the winding-up process is properly accounted for before the final distribution. Master this, and dissolution problems become a matter of following the rules step by step.

Two treatments need care here. Sita agreed to bear the realisation expenses, so the ₹450 the firm actually paid is debited to her capital (not to Realisation); separately, she is paid ₹60 as remuneration for the service, which is a Realisation charge. Creditors ₹2,000 are paid 2% less (₹1,960), and the unrecorded asset is taken by Rita at ₹200. The Realisation Account closes with a profit of ₹530 (2:2:1 → Sita ₹212, Rita ₹212, Meeta ₹106).

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c	2,500	By Creditors A/c	2,000
To Furniture A/c	1,000	By Rita's Capital A/c (unrecorded asset)	200
To Debtors A/c	2,000	By Bank A/c (P&M 4,250 + Debtors 1,850 + Stock 3,500 + Furniture 750)	10,350
To Plant and Machinery A/c	4,500
To Bank A/c (creditors)	1,960
To Sita's Capital A/c (remuneration)	60
To Profit — Sita 212, Rita 212, Meeta 106	530
Total	12,550	Total	12,550

✓Final answer

Profit on realisation ₹530 (Sita ₹212, Rita ₹212, Meeta ₹106). Final payments: Sita ₹5,822, Rita ₹3,012, Meeta ₹1,606; the Bank Account totals ₹12,850.

Sita bears the ₹450 actual expenses (debited to her capital, firm pays from bank) and earns ₹60 remuneration (a Realisation charge). Realisation profit is ₹530 (2:2:1). Final payments: Sita ₹5,822, Rita ₹3,012, Meeta ₹1,606.

Concept — expenses borne by a partner vs. remuneration

When a partner agrees to bear the realisation expenses but the firm actually pays them, the payment is charged to that partner's capital account (Partner's Capital A/c Dr., Bank A/c Cr.), so the firm is left neutral. That is separate from any remuneration the partner is paid for handling the dissolution, which is a genuine cost to the firm and is debited to the Realisation Account.

Working Notes

Creditors paid = ₹2,000 − 2% = ₹1,960. Unrecorded asset (book value ₹250) taken by Rita at ₹200. Assets realised in cash = 4,250 + 1,850 + 3,500 + 750 = ₹10,350.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c	2,500	By Creditors A/c	2,000
To Furniture A/c	1,000	By Rita's Capital A/c (unrecorded asset)	200
To Debtors A/c	2,000	By Bank A/c (assets realised)	10,350
To Plant and Machinery A/c	4,500
To Bank A/c (creditors)	1,960
To Sita's Capital A/c (remuneration)	60
To Profit — Sita 212, Rita 212, Meeta 106	530
Total	12,550	Total	12,550

Partners' Capital Accounts

Particulars	Sita (₹)	Rita (₹)	Meeta (₹)	Particulars	Sita (₹)	Rita (₹)	Meeta (₹)
To Realisation A/c (asset)	—	200	—	By Balance b/d	5,000	2,000	1,000
To Bank A/c (expenses)	450	—	—	By Reserve Fund	1,000	1,000	500
To Bank A/c (final)	5,822	3,012	1,606	By Realisation A/c (remuneration)	60	—	—
				By Realisation A/c (profit)	212	212	106
Total	6,272	3,212	1,606	Total	6,272	3,212	1,606

Bank Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	2,500	By Realisation A/c (creditors)	1,960
To Realisation A/c (assets realised)	10,350	By Sita's Capital A/c (expenses)	450
		By Sita's Capital A/c	5,822
		By Rita's Capital A/c	3,012
		By Meeta's Capital A/c	1,606
Total	12,850	Total	12,850

✓Final answer

Realisation profit ₹530 (Sita ₹212, Rita ₹212, Meeta ₹106). Final payments: Sita ₹5,822, Rita ₹3,012, Meeta ₹1,606; Bank Account total ₹12,850.

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 40 on this concept.

CBSE 2026Set MARCH1 markMCQ
$Q. Which of the following amounts will be written at the credit side of realisation account, when there is balance of debtors ₹ 24,500 and bad debt reserve ₹ 2,500 in the balance sheet at the time of the dissolution of a firm?$
(a) ₹ 24,500
(b) ₹ 2,500
(c) ₹ 22,000
(d) ₹ 27,000
›Reveal solutionSolution

The bad debt reserve of 2,500 is credited to the Realisation A/c, so the answer is (b).

When assets and their related provisions are transferred to the Realisation Account:

Item Amount Side of Realisation A/c
Debtors (gross) 24,500 Debit
Bad debt reserve (provision) 2,500 Credit

All reserves/provisions created against assets are closed by transferring them to the credit side of the Realisation Account; the asset itself is transferred to the debit side at its gross book value. So the amount written on the credit side here is 2,500.

✓Final answer
$(b) 2,500.$
CBSE 2026Set MARCH1 mark
$Q. Realisation account is ______ account.$
›Reveal solutionSolution

The Realisation Account is a Nominal Account.

On the dissolution of a firm, a Realisation Account is prepared to record the sale of all assets and the settlement of all liabilities so that the profit or loss on realisation can be ascertained and shared among the partners in their profit-sharing ratio. Because its purpose is to determine a gain or loss (an income/expense result) rather than to track a person (personal account) or a property (real account), it is classified as a nominal account, and it follows the nominal-account rule "debit all expenses and losses, credit all incomes and gains."

✓Final answer
$Realisation account is a nominal account.$
CBSE 2026Set MARCH1 markMCQ
$Q. Unrecorded liabilities, when paid are shown in$
(a) a) Debit side of Realisation A/c
(b) b) Debit side of Bank A/c
(c) c) Credit side of Realisation A/c
(d) d) Debit side of Cash A/c
›Reveal solutionSolution

Payment of an unrecorded liability on dissolution is shown on the debit side of the Realisation Account - option (a).

In Karnataka 2nd PUC Accountancy, at dissolution the Realisation Account is prepared to close all assets and liabilities. When a liability that was never recorded in the books is discovered and paid, the payment represents a cash outflow of realisation; the entry is Realisation A/c Dr, To Bank A/c. Hence it appears on the debit side of the Realisation Account.

✓Final answer
$Correct option: (a) Debit side of Realisation A/c. The Bank/Cash account is credited (money going out), and the corresponding debit is to the Realisation Account.$
CBSE 2026Set ANNUAL1 markMCQ
$Q. At the time of dissolution of a firm, where is the amount of provision for bad debts on debtor is transferred? A) In Realisation A/c B) In Partners' Capital A/c C) In Partners' Loan A/c D) In Bank A/c$
›Reveal solutionSolution

The provision for bad debts is transferred to the Realisation Account on dissolution — option (A).

When a firm is dissolved, a Realisation Account is opened to close all assets (at book value, debit side) and all outside liabilities and provisions against assets (credit side). The provision for bad debts is a provision created against debtors, so it is transferred to the credit side of the Realisation Account. Debtors themselves are shown on the debit side at gross book value, and the amount actually realised from debtors is credited when received.

It is never carried to Partners' Capital, Partners' Loan or Bank A/c directly.

✓Final answer
$The provision for bad debts is transferred to the Realisation A/c — option (A).$
CBSE 2026Set ANNUAL1 markMCQ
$Q. On dissolution of a partnership firm, profit or loss on realisation is distributed among the partners:$
(a) In Capital ratio
(b) In profit sharing ratio
(c) In sacrificing ratio
(d) Equally
›Reveal solutionSolution

Realisation profit/loss is shared in the profit-sharing ratio - option (b).

On dissolution, the Realisation Account is prepared to record the sale of assets and payment of liabilities; its balance is the profit or loss on realisation. Being a profit or loss of the firm, it is transferred to the partners' capital accounts in their profit-sharing ratio (not capital ratio, sacrificing ratio or equally, unless that is the profit-sharing ratio).

✓Final answer
$(b) In profit sharing ratio.$
CBSE 2026Set ANNUAL1 markMCQ
$Q. Which account is prepared for the sale of Assets?$
(a) Realization account
(b) Revaluation account
(c) Profit and Loss appropriation account
(d) Partner's capital account
›Reveal solutionSolution

Correct option: (a) Realisation account.

On dissolution of a firm, a Realisation Account is opened to record the sale/realisation of all assets and the payment of all liabilities. (A Revaluation Account is prepared only on reconstitution - admission/retirement/death - when the firm continues, not when it is dissolved.) So the account for sale of assets on dissolution is the Realisation Account.

✓Final answer
$(a) Realisation account.$
CBSE 2026Set ANNUAL1 mark
$Q. Answer in one word/sentence: On dissolution, Bank overdraft is transferred to which account?$
›Reveal solutionSolution

Answer: Realisation Account.

A bank overdraft is an external liability of the firm. On dissolution all outside liabilities are transferred to the Realisation Account, so a bank overdraft is also transferred to the Realisation Account (not to a Bank Account).

✓Final answer
$Realisation Account.$
CBSE 2025Set MARCH1 markMCQ
$Q. Which of the following amounts will be written at the credit side of realisation account, when there is balance of debtors ₹ 49,000 and bad-debt reserve of ₹ 5,000 in the balance sheet at the time of dissolution of a firm.$
(a) ₹ 49,000
(b) ₹ 5,000
(c) ₹ 44,000
(d) ₹ 54,000
›Reveal solutionSolution
Debtors ₹49,000 go to the debit side (gross); the bad-debt reserve ₹5,000 is a provision transferred to the credit side of the realisation account. Correct option: (b) ₹5,000.

In GSEB Class-12 Commerce Accountancy (dissolution):

All assets are transferred to the debit of the Realisation Account at book value — so Debtors ₹49,000 are debited.

Any provision/reserve created against an asset (here the bad-debt reserve ₹5,000) is transferred to the credit side of the Realisation Account.

Therefore the amount written on the credit side (relating to debtors) is the bad-debt reserve ₹5,000.

✓Final answer
$(b) ₹ 5,000.$
CBSE 2025Set MARCH1 mark
$Q. Explain the meaning of realisation account.$
›Reveal solutionSolution
The realisation account is prepared at the dissolution of a firm to close all assets and liabilities, record their realisation and payment, and ascertain the net profit or loss on realisation, which is then shared among partners in their profit-sharing ratio.

In GSEB Class-12 Commerce Accountancy (Dissolution of a Firm):

On dissolution, all assets (except cash/bank) are transferred to the debit side and all outside liabilities to the credit side of the realisation account at book value.

Amounts actually realised from assets are credited, and amounts paid to settle liabilities and realisation expenses are debited.

The balancing figure is the profit or loss on realisation, distributed among partners in their profit-sharing ratio.

✓Final answer
$A realisation account is the nominal account opened when a firm is dissolved, to record the sale of all assets and the payment of all liabilities and to find out the profit or loss on realisation.$

Item	Amount	Side of Realisation A/c
Debtors (gross)	24,500	Debit
Bad debt reserve (provision)	2,500	Credit

CBSE 2025Set MARCH1 markMCQ

Q. Choose the correct option after considering the given statements (I & II) : Statement I : The amount realized from the sale of assets on dissolution of firm is divided among the partners in the profit sharing ratio. Statement II : The profit or loss on realization is shared among the partners in their profit sharing ratio. Options :

(a) Statements I & II are true.

(b) Statements I & II are false.

(d) Statement I is false & II is true.

›Reveal solution

Statement I is false, Statement II is true. Correct option: (d).

✓Final answer

Analysing the two statements: Statement Verdict Reason I: Amount realised from sale of assets is divided among partners in PSR FALSE The realised cash is first applied to pay realisation expenses, external liabilities and partners' loans; it is not directly divided among partners II: Profit or loss on realisation is shared among partners in PSR TRUE The balance of the Realisation Account (gain or loss) is transferred to partners' capital accounts in the profit-sharing ratio The distinction is important: the gross amount realised pays creditors first, whereas only the NET result (profit/loss on realisation, computed in the Realisation Account) is distributed in the profit-sharing ratio. Since I is false and II is true, option (d) is correct.

CBSE 2025Set MARCH1 mark
$Q. Partner's loan is ______ to the realisation account.$
›Reveal solutionSolution

A partner's loan is NOT transferred to the Realisation Account; it is paid through a separate Partner's Loan Account.

When a firm is dissolved, all external assets (except cash/bank) and all outside (third-party) liabilities are transferred to the Realisation Account to find the profit or loss on realisation. A loan given by a partner to the firm is different from his capital and different from an outside creditor; it is therefore kept out of the Realisation Account and discharged through its own Partner's Loan Account. In the order of payment it is settled after outside liabilities but before repayment of partners' capital.

✓Final answer
$Not transferred (a partner's loan is not transferred to the Realisation Account).$
CBSE 2025Set ANNUAL1 markMCQ
$Q. At the time of dissolution of firm, book value of assets is recorded in which side of Realisation Account ? (A) Debit (B) Credit (C) Liability (D) None of these$
›Reveal solutionSolution
On dissolution, all assets (except cash/bank and fictitious assets) are closed by transferring them at book value to the debit side of the Realisation Account. Hence the answer is (A) Debit.

For Bihar Class-12 (BSEB Inter) commerce candidates, when a firm is dissolved the Realisation Account is opened to record the disposal of assets and settlement of liabilities:

Assets have a debit balance in the books, so to close them they are credited in their own accounts and debited to the Realisation Account:

Realisation A/c Dr. (book value of assets)

To Sundry Assets A/c

(Cash/Bank is not transferred, and fictitious assets are written off against capital accounts.)

Thus the book value of assets appears on the debit side of the Realisation Account. Hence option (A).

✓Final answer
$(A) Debit.$

Statement	Verdict	Reason
I: Amount realised from sale of assets is divided among partners in PSR	FALSE	The realised cash is first applied to pay realisation expenses, external liabilities and partners' loans; it is not directly divided among partners
II: Profit or loss on realisation is shared among partners in PSR	TRUE	The balance of the Realisation Account (gain or loss) is transferred to partners' capital accounts in the profit-sharing ratio

←Previous section · 4.4.1Journal Entries →Next question · 4.4.1Illustration 3 — Record journal entries at the time of dissolution of a partnership fir…

Concept — expenses borne by a partner vs. remuneration

Working Notes

Realisation Account

Partners' Capital Accounts

Bank Account

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