The Realisation Account — Meaning and Preparation

The Realisation Account is the central working account of this chapter — it is how the winding-up process required by Section 48 is actually carried out in the firm's books.

Meaning. The Realisation Account is a nominal account opened in the firm's books at the time of dissolution to record the entire process of converting assets into cash and discharging liabilities, and to work out the profit or loss arising purely from this process of closing down the business (separate from the firm's ordinary trading profit or loss, which has already been accounted for earlier).

Why it is needed. Without a separate account, it would be very difficult to see, at a glance, whether winding up the business made money or lost money for the partners, or to correctly compute the final amount payable to, or receivable from, each partner. The Realisation Account isolates exactly this one figure.

How it is prepared — step by step:

1. Transfer all assets (other than Cash/Bank, and, conventionally, any fictitious assets or accumulated losses which are written off directly against the partners' capital accounts) to the debit of the Realisation Account, at their existing book values.
2. Transfer all outside liabilities (other than partners' loan and capital, which are not routed through this account) to the credit of the Realisation Account, at their book values.
3. Record the actual realisation (sale/collection) of assets: debit Bank/Cash, credit Realisation Account, with the amount actually received.
4. Record the actual payment of liabilities: debit Realisation Account, credit Bank/Cash, with the amount actually paid.
5. Record realisation expenses (costs of the winding-up process itself, e.g. advertising the sale, legal charges) by debiting the Realisation Account. …