(a) X, Y and Z were partners in a firm sharing profits and losses in the ratio of 3 : 3 : 4. On 31st March, 20

Question

(a) X, Y and Z were partners in a firm sharing profits and losses in the ratio of 3 : 3 : 4. On 31st March, 2022 their Balance Sheet was as follows : Balance Sheet of X, Y and Z as at 31st March, 2022

Liabilities	Amount ₹	Assets	Amount ₹
Sundry Creditors	34,000	Bank	1,74,000
Bills Payable	29,000	Sundry Debtors	2,00,000
General Reserve	2,00,000	Bills Receivable	26,000
Capitals : X 3,00,000; Y 3,00,000; Z 4,00,000	10,00,000	Stock	1,50,000
		Furniture	1,28,000
		Machinery	2,00,000
		Land and Building	3,85,000
	12,63,000		12,63,000

On the above date, Z retired on the following terms :

A provision of 3% on debtors will be created for bad and doubtful debts.
Stock will be reduced by ₹ 5,000 and furniture by ₹ 2,000.
Land and building will be brought up to ₹ 4,00,000 and machinery will be brought down to ₹ 1,80,000. Prepare Revaluation Account and Z's Capital Account, transferring the amount due to his loan account. OR

(b) Sonu, Monu and Ashu were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 31st March, 2022 their Balance Sheet was as follows : Balance Sheet of Sonu, Monu and Ashu as at 31st March, 2022

Liabilities	Amount ₹	Assets	Amount ₹
Creditors	35,000	Bank	22,000
General Reserve	25,000	Stock	25,000
		Debtors 20,000; Less : Provision for bad debts 2,000	18,000
Capitals : Sonu 50,000; Monu 30,000; Ashu 20,000	1,00,000	Furniture	15,000
		Land and Building	80,000
	1,60,000		1,60,000

On the above date, the firm was dissolved on the following terms :

Land and Building realised for ₹ 85,000, Furniture realised for ₹ 6,000 and Debtors realised full amount.
Stock was taken over by Sonu at book value. There was an unrecorded asset which was taken over by Ashu for ₹ 3,000.
Monu agreed to bear all realisation expenses. For his services Monu was paid ₹ 2,000. Actual expenses on realisation amounted to ₹ 2,200.
Creditors were paid at 2% less. Prepare Realisation Account.

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Part (a)Concept understanding — Revaluation Account Effect

The Revaluation Account Effect – A First Look

Imagine you and your friend run a small food stall together. You've been sharing profits equally. Now, your friend wants to bring in a third partner. Before the new person joins, you both decide to get the stall's equipment and stock properly valued. The old mixer you bought for ₹5,000 is now worth only ₹3,000. But the refrigerator you'd written off is actually worth ₹8,000 more than its book value.

These changes in asset values don't belong to the new partner. They happened while only you and your friend were running the business. So, any gain or loss from revaluing assets and liabilities must be shared only between the old partners. That's the entire intuition behind the Revaluation Account.

What It Really Means

The Revaluation Account is a nominal account (like a Profit & Loss account) that is opened only when there is a change in the profit-sharing ratio among partners – typically at the time of admission, retirement, or death of a partner. Its job is to capture the net effect (profit or loss) of revaluing the firm's assets and liabilities to their current market values.

Why does this matter? Because the new partner should not bear the burden of past errors or benefit from hidden gains that existed before they joined. The Revaluation Account ensures that all past adjustments are settled among the old partners only.

Accounting Treatment – The Debit/Credit Logic

The rule is simple:

Increase in asset value → Credit Revaluation Account (it's a gain)
Decrease in asset value → Debit Revaluation Account (it's a loss)
Increase in liability → Debit Revaluation Account (it's a loss – you owe more)
Decrease in liability → Credit Revaluation Account (it's a gain – you owe less)

Once all revaluation entries are passed, the Revaluation Account shows either a profit (credit balance) or a loss (debit balance). This profit or loss is then transferred to the old partners' capital accounts in their old profit-sharing ratio.

Important

The new partner is never affected by the Revaluation Account balance. Only old partners share this gain or loss.

The Proforma (Format) of Revaluation Account

Here is the standard format as per NCERT Class 12 Accountancy:

Dr.		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Decrease in Assets	...	By Increase in Assets	...
To Increase in Liabilities	...	By Decrease in Liabilities	...
To Unrecorded Liabilities	...	By Unrecorded Assets	...
To Loss transferred to Old Partners' Capital A/c (in old ratio)	...	By Profit transferred to Old Partners' Capital A/c (in old ratio)	...
Total	...	Total	...

Part (b)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

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Part (a)

Revaluation Account (Z's retirement; X:Y:Z = 3:3:4)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Provision for Doubtful Debts (3% × 2,00,000)	6,000	By Land and Building A/c	15,000
To Stock A/c	5,000	By Loss — X 5,400; Y 5,400; Z 7,200	18,000
To Furniture A/c	2,000
To Machinery A/c	20,000
Total	33,000	Total	33,000

Z's Capital Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Revaluation A/c (loss)	7,200	By Balance b/d	4,00,000
To Z's Loan A/c	4,72,800	By General Reserve A/c (2,00,000 × 4/10)	80,000
Total	4,80,000	Total	4,80,000

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(a) Z's retirement: Revaluation loss ₹18,000 (X 5,400, Y 5,400, Z 7,200); amount due to Z ₹4,72,800 to his Loan A/c.

(b) Dissolution: Realisation Account shows a loss of ₹300 (Sonu 150, Monu 90, Ashu 60).

Part (a)

On retirement, revaluation profit/loss is shared by all partners in the old ratio (3:3:4). The retiring partner is credited with reserves and the amount due is moved to his Loan Account.

Revaluation changes: Provision on debtors 3% × 2,00,000 = ₹6,000 (loss); Stock −₹5,000; Furniture −₹2,000; Land & Building 4,00,000 − 3,85,000 = +₹15,000 (gain); Machinery 2,00,000 − 1,80,000 = −₹20,000 (loss).

Net loss = (6,000 + 5,000 + 2,000 + 20,000) − 15,000 = ₹18,000 ⇒ X 5,400, Y 5,400, Z 7,200.

Revaluation Account	Amount (₹)		Amount (₹)
To Provision for Doubtful Debts	6,000	By Land and Building	15,000
To Stock	5,000	By Loss (X 5,400; Y 5,400; Z 7,200)	18,000
To Furniture	2,000
To Machinery	20,000
Total	33,000	Total	33,000

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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 104 on this concept.

CBSE 2026Set MARCH1 markMCQ
$Q. At the time of the reconstruction of a partnership firm _____ is prepared.$
(a) Trading account
(b) Revaluation account
(c) Realisation account
(d) Profit and loss appropriation account
›Reveal solutionSolution

A Revaluation Account is prepared at reconstitution of a partnership firm, so the answer is (b).

When a partnership is reconstituted (admission, retirement, death or change in ratio) the firm keeps running; only the values of its assets and liabilities are re-stated to their fair values. These changes are recorded in the Revaluation Account, and its profit or loss is shared among the old partners in the old r …

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CBSE 2026Set MARCH1 markMCQ
$Q. Profit or loss of revaluation account is transferred to _____ account in _____ ratio.$
(a) Old partner, equal
(b) All partners, new profit-loss sharing ratio
(c) Old partners, sacrificing ratio
(d) Old partners, old ratio
›Reveal solutionSolution

Profit or loss of the Revaluation Account is transferred to the old partners in the old ratio, so the answer is (d).

The revaluation of assets and liabilities reflects value changes that accrued while only the old partners were carrying on the business. Therefore the balancing profit or loss of the Revaluation Account is credited or debited t …

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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
…

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CBSE 2026Set MARCH1 mark
$Q. Unrecorded asset is ______ to revaluation account.$
›Reveal solutionSolution

An unrecorded asset is credited to the Revaluation Account.

The Revaluation (Profit and Loss Adjustment) Account records the effect of re-valuing assets and liabilities when a firm is reconstituted (admission, retirement or death). By convention:

Item Treatment in Revaluation A/c
Increase in asset / decrease in liability / unrecorded asset Credit (gain)
Decrease in asset / increase in liability / unrecorded liability Debit (loss)
…

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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), i …

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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 R …

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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 rea …

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CBSE 2026Set ANNUAL1 mark
$Q. At the time of admission of a new partner, where is the value of the unrecorded liabilities transferred?$
›Reveal solutionSolution

The value of unrecorded liabilities is transferred to the debit side of the Revaluation Account.

At admission, assets and liabilities are revalued. Bringing an unrecorded (previously omitted) liability into the books increases the firm's liabilities, which is a loss; therefore it is debited to the Revaluation Account. The net result of the Revaluation Account (profit or loss) i …

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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 …

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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 …

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CBSE 2026Set ANNUAL1 mark
$Q. State whether True or False: Revaluation account is a real account.$
›Reveal solutionSolution

The statement is False.

The Revaluation Account records increases and decreases in the values of assets and liabilities at the time of reconstitution and its balance (profit or loss) is transferred to the partners' capital accounts. Since it deals wit …

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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 transfe …

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

Item	Treatment in Revaluation A/c
Increase in asset / decrease in liability / unrecorded asset	Credit (gain)
Decrease in asset / increase in liability / unrecorded liability	Debit (loss)
…

Part (a)

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