Meena and Tina are partners in a firm sharing profit as 3:2. They decided to dissolve their firm on March 31, 2017 when their Balance Sheet was as follows: **Balance Sheet of Meena and Tina as on March 31, 2017** | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Capital: | | Machinery | 70,000 | | Meena | 90,000 | Investments | 50,000 | | Tina | 80,000 | Stock | 22,000 | | Sundry creditors | 60,000 | Sundry Debtors | 1,03,000 | | Bills payable | 20,000 | Cash at bank | 5,000 | | **Total** | **2,50,000** | **Total** | **2,50,000** | The assets and liabilities were disposed off as follows: (a) Machinery was given to creditors in full settlement of their account, and Stock was given to bills payable in full settlement. (b) Investments were taken over by Tina at book value. Sundry debtors of book value ₹50,000 were taken over by Meena at 10% less, and the remaining debtors realised ₹51,000. (c) Realisation expenses amounted to ₹2,000. Prepare necessary ledger accounts to close the books of the firm.

Meena and Tina are partners in a firm sharing profit as 3:2. They decided to dissolve their firm on March 31,

Illustrations · Illustration 11

Meena and Tina are partners in a firm sharing profit as 3:2. They decided to dissolve their firm on March 31, 2017 when their Balance Sheet was as follows:

Balance Sheet of Meena and Tina as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital:		Machinery	70,000
Meena	90,000	Investments	50,000
Tina	80,000	Stock	22,000
Sundry creditors	60,000	Sundry Debtors	1,03,000
Bills payable	20,000	Cash at bank	5,000
Total	2,50,000	Total	2,50,000

The assets and liabilities were disposed off as follows:

Machinery was given to creditors in full settlement of their account, and Stock was given to bills payable in full settlement.
Investments were taken over by Tina at book value. Sundry debtors of book value ₹50,000 were taken over by Meena at 10% less, and the remaining debtors realised ₹51,000.
Realisation expenses amounted to ₹2,000. Prepare necessary 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

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Two liabilities are settled by handing over assets in full settlement (Machinery to creditors, Stock to bills payable) — neither needs a journal entry, and both net off inside the Realisation Account. Tina takes the investments at book value (₹50,000); Meena takes ₹50,000 of debtors at 10% less (₹45,000); the remaining ₹53,000 of debtors realise ₹51,000. The Realisation Account closes with a loss of ₹21,000 (3:2 → Meena ₹12,600, Tina ₹8,400).

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Machinery A/c	70,000	By Sundry creditors A/c	60,000
To Investments A/c	50,000	By Bills payable A/c	20,000
To Stock A/c	22,000	By Tina's Capital A/c (investment)	50,000

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Machinery settles the creditors and Stock settles the bills payable (both in full settlement, no entry). Tina takes investments at book value; Meena takes ₹50,000 of debtors at 10% less. Realisation loss ₹21,000 (3:2). Final payments: Meena ₹32,400, Tina ₹21,600; Bank total ₹56,000.

Concept — settling a liability by handing over an asset in full settlement

When an asset is given to a creditor (or to bills payable) in full settlement, no journal entry is required: the asset sits on the debit of the Realisation Account and the liability on its credit, so handing one over to clear the other is captured automatically when the account is balanced.

Working Notes

Debtors taken by Meena = ₹50,000 × 90% = ₹45,000. Remaining debtors = ₹1,03,000 − ₹50,000 = ₹53,000, realised ₹51,000.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Machinery A/c	70,000	By Sundry creditors A/c	60,000
To Investments A/c	50,000	By Bills payable A/c	20,000
To Stock A/c	22,000	By Tina's Capital A/c (investment)	50,000
To Sundry Debtors A/c	1,03,000	By Meena's Capital A/c (debtors)	45,000
To Bank A/c (realisation expenses)	2,000	By Bank A/c (remaining debtors)	51,000
		By Loss — Meena 12,600, Tina 8,400	21,000
Total	2,47,000	Total	2,47,000

Partners' Capital Accounts

Particulars	Meena (₹)	Tina (₹)	Particulars	Meena (₹)	Tina (₹)
To Realisation A/c (investment)	—	50,000	By Balance b/d	90,000	80,000

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Concept — settling a liability by handing over an asset in full settlement

Working Notes

Realisation Account

Partners' Capital Accounts

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