Nayana and Arushi were partners sharing profits equally. Their Balance Sheet as on March 31, 2020 was as follows: **Balance Sheet of Nayana and Arushi as on March 31, 2020** | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Capitals: | | Bank | 30,000 | | Nayana | 1,00,000 | Debtors | 25,000 | | Arushi | 50,000 | Stock | 35,000 | | Creditors | 20,000 | Furniture | 40,000 | | Arushi's Current Account | 10,000 | Machinery | 60,000 | | Workmen Compensation Reserve | 15,000 | Nayana's Current Account | 10,000 | | Bank overdraft | 5,000 | | | | **Total** | **2,00,000** | **Total** | **2,00,000** | The firm was dissolved on the above date: 1. Nayana took over 50% of the stock at 10% less on its book value, and the remaining stock was sold at a gain of 15%. Furniture and Machinery realised ₹30,000 and ₹50,000 respectively; 2. There was an unrecorded investment which was sold for ₹34,000; 3. Debtors realised 90% only and ₹1,200 were recovered for bad debts written off last year; 4. There was an outstanding bill for repairs which had to be paid for ₹2,000. Record necessary journal entries and prepare ledger accounts to close the books of the firm.

Nayana and Arushi were partners sharing profits equally. Their Balance Sheet as on March 31, 2020 was as follo

Illustrations · Illustration 4

Nayana and Arushi were partners sharing profits equally. Their Balance Sheet as on March 31, 2020 was as follows:

Balance Sheet of Nayana and Arushi as on March 31, 2020

Liabilities	Amount (₹)	Assets	Amount (₹)
Capitals:		Bank	30,000
Nayana	1,00,000	Debtors	25,000
Arushi	50,000	Stock	35,000
Creditors	20,000	Furniture	40,000
Arushi's Current Account	10,000	Machinery	60,000
Workmen Compensation Reserve	15,000	Nayana's Current Account	10,000
Bank overdraft	5,000
Total	2,00,000	Total	2,00,000

The firm was dissolved on the above date:

Nayana took over 50% of the stock at 10% less on its book value, and the remaining stock was sold at a gain of 15%. Furniture and Machinery realised ₹30,000 and ₹50,000 respectively;
There was an unrecorded investment which was sold for ₹34,000;
Debtors realised 90% only and ₹1,200 were recovered for bad debts written off last year;
There was an outstanding bill for repairs which had to be paid for ₹2,000.

Record necessary journal entries and prepare ledger 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.

Because this firm keeps fixed capitals with current accounts, every adjustment (stock taken over, realisation profit, the Workmen Compensation Reserve) runs through the current accounts first, whose balances are then transferred to capital. Half the stock (₹17,500) is taken by Nayana at 10% less (₹15,750); the other half sells at a 15% gain (₹20,125). The Realisation Account closes with a profit of ₹11,575 (equal → Nayana ₹5,788, Arushi ₹5,787).

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Debtors A/c	25,000	By Creditors A/c	20,000
To Stock A/c	35,000	By Bank overdraft A/c	5,000
To Furniture A/c	40,000	By Bank A/c (Investment 34,000 + Furniture 30,000 + Machinery 50,000 + Debtors 22,500 + Bad debts 1,200 + Stock 20,125)	1,57,825
To Machinery A/c	60,000	By Nayana's Current A/c (stock taken over)	15,750
To Bank A/c (Creditors 20,000 + Bank overdraft 5,000 + Outstanding bill 2,000)	27,000
To Profit — Nayana 5,788, Arushi 5,787	11,575
Total	1,98,575	Total	1,98,575

✓Final answer

Realisation profit ₹11,575 (Nayana ₹5,788, Arushi ₹5,787). Final payments: Nayana ₹87,538 and Arushi ₹73,287; the Bank Account totals ₹1,87,825.

Fixed-capital firm, so adjustments pass through current accounts. Half the stock is taken by Nayana (₹15,750), half sold at a gain (₹20,125). Realisation profit ₹11,575. After the current accounts (and the ₹15,000 Workmen Compensation Reserve) are settled and transferred to capital, Nayana is paid ₹87,538 and Arushi ₹73,287.

Concept — fixed capitals with current accounts

Here each partner has both a Capital Account (fixed) and a Current Account. On dissolution, items like an asset taken over, the reserve, and the realisation profit are posted to the current accounts; each current account's closing balance is then transferred to the partner's capital account, which is finally settled through the bank.

Working Notes

Stock: 50% (₹17,500) taken by Nayana at 10% less = ₹15,750; remaining 50% (₹17,500) sold at 15% gain = ₹20,125. Debtors: 90% of ₹25,000 = ₹22,500, plus ₹1,200 bad debts recovered. Cash realised = 34,000 + 30,000 + 50,000 + 22,500 + 1,200 + 20,125 = ₹1,57,825. Cash paid = Creditors 20,000 + Bank overdraft 5,000 + Outstanding repair bill 2,000 = ₹27,000.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Debtors A/c	25,000	By Creditors A/c	20,000
To Stock A/c	35,000	By Bank overdraft A/c	5,000
To Furniture A/c	40,000	By Bank A/c (assets realised)	1,57,825
To Machinery A/c	60,000	By Nayana's Current A/c (stock taken over)	15,750
To Bank A/c (liabilities paid)	27,000
To Profit — Nayana 5,788, Arushi 5,787	11,575
Total	1,98,575	Total	1,98,575

Partners' Current Accounts

Particulars	Nayana (₹)	Arushi (₹)	Particulars	Nayana (₹)	Arushi (₹)
To Balance b/d	10,000	—	By Balance b/d	—	10,000
To Realisation A/c (stock)	15,750	—	By Workmen Compensation Reserve	7,500	7,500
To Arushi's Capital A/c	—	23,287	By Realisation A/c (profit)	5,788	5,787
			By Nayana's Capital A/c	12,462	—
Total	25,750	23,287	Total	25,750	23,287

Partners' Capital Accounts

Particulars	Nayana (₹)	Arushi (₹)	Particulars	Nayana (₹)	Arushi (₹)
To Nayana's Current A/c	12,462	—	By Balance b/d	1,00,000	50,000
To Bank A/c	87,538	73,287	By Arushi's Current A/c	—	23,287
Total	1,00,000	73,287	Total	1,00,000	73,287

Bank Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	30,000	By Realisation A/c (liabilities)	27,000
To Realisation A/c (assets realised)	1,57,825	By Nayana's Capital A/c	87,538
		By Arushi's Capital A/c	73,287
Total	1,87,825	Total	1,87,825