Q.Lata, Mehu and Namita were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. They decided to dissolve the firm on 31st March, 2023. Creditors took over stock of book value of ₹80,000 at 80%, in part settlement of their amount of ₹90,000. The balance amount was paid to the creditors by cheque. The amount paid by cheque to the creditors will be : (A) ₹26,000 (B) ₹64,000 (C) ₹80,000 (D) ₹1,44,000
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.
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 |
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 |
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.
Part (a): Stock worth ₹64,000 settles part of the ₹90,000 due to creditors; balance paid by cheque = ₹26,000, option (A).
Part (b): After ₹20,000 bad debts, remaining ₹2,80,000 realise 90% = ₹2,52,000, option (D).
Concept
On dissolution, assets are realised and liabilities settled. When a creditor takes over an asset in part settlement, only the balance is paid in cash. For debtors, actual bad debts reduce the collectible amount; the provision for doubtful debts is a separate credit to the Realisation Account and does not change the cash actually collected.
| Particulars | Amount (₹) |
|---|---|
| Amount due to creditors | 90,000 |
| Less: Stock taken over (80,000 × 80%) | 64,000 |
| Balance paid by cheque | 26,000 |
Amount paid by cheque to creditors = ₹26,000 — option (A).
Part (a): Stock worth ₹64,000 settles part of the ₹90,000 due to creditors; balance paid by cheque = ₹26,000, option (A).
Part (b): After ₹20,000 bad debts, remaining ₹2,80,000 realise 90% = ₹2,52,000, option (D).
Concept
On dissolution, assets are realised and liabilities settled. When a creditor takes over an asset in part settlement, only the balance is paid in cash. For debtors, actual bad debts reduce the collectible amount; the provision for doubtful debts is a separate credit to the Realisation Account and does not change the cash actually collected.
| Particulars | Amount (₹) |
|---|---|
| Gross debtors | 3,00,000 |
| Less: Bad debts | 20,000 |
| Remaining debtors | 2,80,000 |
| Realised @ 90% | 2,52,000 |
The provision of ₹30,000 and the 4 : 3 : 1 ratio are not used to compute cash realised — the provision is transferred to the credit of the Realisation Account separately.
Amount realised from debtors = ₹2,52,000 — option (D).
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