Q.Unrecorded liabilities when paid are shown in:
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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 |
On dissolution, unrecorded liabilities are those that never appeared in the firm's books (e.g. a claim settled informally), yet the firm still has to pay them in cash when winding up. Since this is a real cash payment connected with winding up the firm …
When an unrecorded liability is actually paid in cash on dissolution, the payment is debited to the Realisation Account.
The Realisation Account is opened on dissolution to record the disposal of all assets and the settlement of all outside liabilities (whether they were recorded in the books or not), so as to determine the overall profit or loss on realisation.
An unrecorded liability is a genuine obligation of the firm that was never entered in the books (for example, an old claim or an informally-acknowledged debt). When the firm actually pays off this liability in cash during dissolution, the entry is:
Realisation A/c Dr.
To Bank/Cash A/c
…
Showing the 12 most recent of 40 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.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 … - CBSE 2026Set MARCH1 markQ.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 …
- CBSE 2026Set MARCH1 markMCQQ.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 …
- CBSE 2026Set ANNUAL1 markMCQQ.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 …
- CBSE 2026Set ANNUAL1 markMCQQ.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 …
- CBSE 2026Set ANNUAL1 markMCQQ.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 …
- CBSE 2026Set ANNUAL1 markQ.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 …
- CBSE 2025Set MARCH1 markMCQQ.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. …
- CBSE 2025Set MARCH1 markQ.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. …
- CBSE 2025Set MARCH1 markMCQQ.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.(c) Statement I is true & II is false.(d) Statement I is false & II is true.
›Reveal solutionSolution
Statement I is false, Statement II is true. Correct option: (d).
…
- CBSE 2025Set MARCH1 markQ.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 Partn …
- CBSE 2025Set ANNUAL1 markMCQQ.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) …
- 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:
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