The book value of assets (other than cash and bank) transferred to Realisation Account is Rs. 1,00,000. 50% of

Numerical Questions · Q7

Q. The book value of assets (other than cash and bank) transferred to Realisation Account is Rs. 1,00,000. 50% of the assets are taken over by a partner Atul, at a discount of 20%; 40% of the remaining assets are sold at a profit of 30% on cost; 5% of the balance being obsolete, realised nothing and remaining assets are handed over to a Creditor, in full settlement of his claim. You are required to record the journal entries for realisation of assets.

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Concept understanding — Realisation Expenses Accounting

Realisation Expenses Accounting — A First Look

Think of a partnership firm that has decided to close down. The partners have agreed to sell off everything — land, machinery, stock, debtors — and pay off all liabilities. But selling assets and settling debts costs money: you pay a broker to auction the machinery, a lawyer to draft the sale deed, a transporter to move the stock, and maybe a commission to the person who collects the dues. These out-of-pocket costs incurred only because the firm is being wound up are called realisation expenses.

In everyday life, if you and a friend decide to sell your shared bicycle and split the money, you might spend ₹50 on an advertisement. That ₹50 is a realisation expense — it is not a regular business cost; it is a cost of closing down.

What the NCERT Textbook Says

The NCERT Class-12 Accountancy textbook (Part II, Chapter 5: Dissolution of a Partnership Firm) defines realisation expenses as:

"Expenses incurred on the dissolution of a firm, such as expenses on the sale of assets, payment of liabilities, legal charges, etc."

The key point: these expenses arise only after the decision to dissolve and are directly linked to converting assets into cash and clearing debts. They are not part of normal trading or operating expenses.

Why It Matters

If you ignore realisation expenses, the final amount available for distribution among partners will be overstated. Partners would think they have more money to share than they actually do. The accounting treatment ensures that:

The Realisation Account (which summarises all gains and losses on sale of assets and settlement of liabilities) is charged with these expenses.
The net profit or loss on realisation is correctly computed.
Partners' capital accounts are adjusted only for the true final figure.

Accounting Treatment — The Core Rule

Important

Realisation expenses are always debited to the Realisation Account.

The journal entry is:

Realisation A/c          Dr.   [Amount]
     To Bank A/c (or Cash A/c)   [Amount]
(Being realisation expenses paid)

Why debit Realisation Account?

The Realisation Account is a temporary account that collects all gains and losses from dissolution. Paying an expense reduces the net gain (or increases the net loss) from realisation. So it is debited — just like any expense is debited to a profit-and-loss account.

Why credit Bank/Cash?

Because the firm pays cash out of its bank balance or cash in hand.

What If a Partner Bears the Expenses?

Sometimes the partnership deed says that a particular partner will personally pay the realisation expenses (or the firm pays, but the partner is entitled to a fixed fee for doing the work). Two common variations:

Partner pays from his own pocket

The firm does not record any entry. The partner simply bears the cost. No accounting treatment needed in the firm's books.
Partner is paid a fixed amount for handling dissolution

Example: Partner A is to be paid ₹5,000 for his services in winding up. This is treated as a realisation expense. Entry:
```
Realisation A/c          Dr.   5,000
     To Bank A/c                 5,000
```
(If the amount is to be credited to the partner's capital account instead of paying cash, credit the partner's capital account.)

The Format / Proforma — Where Does It Appear?

In the NCERT textbook, the Realisation Account is prepared in a T‑shape (two-sided account). Realisation expenses appear on the debit side of this account. Here is the standard format:

Realisation Account

Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Assets (transferred)	xxx	By Sundry Liabilities (transferred)	xxx
To Bank (liabilities paid)	xxx	By Bank (assets sold)	xxx
To Bank (realisation expenses)	xxx	By Loss transferred to Partners' Capital A/c (if loss)	xxx
To Profit transferred to Partners' Capital A/c (if profit)	xxx
Total	xxxx	Total	xxxx

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Journal Entries for Realisation of Assets

Step 1 – Calculate the values for each asset disposal

Total book value of assets (excluding cash/bank) transferred to Realisation A/c = ₹1,00,000.

Atul takes over 50% of assets at 20% discount

Book value taken = 50% of ₹1,00,000 = ₹50,000

Discount = 20% of ₹50,000 = ₹10,000

Amount realised = ₹50,000 – ₹10,000 = ₹40,000
40% of remaining assets sold at 30% profit on cost

Remaining after Atul = ₹1,00,000 – ₹50,000 = ₹50,000

40% of remaining = 40% of ₹50,000 = ₹20,000

Profit on cost = 30% of ₹20,000 = ₹6,000

Amount realised = ₹20,000 + ₹6,000 = ₹26,000
5% of balance obsolete – realised nothing

Balance after above = ₹50,000 – ₹20,000 = ₹30,000

5% of balance = 5% of ₹30,000 = ₹1,500

Realised = ₹0
Remaining assets handed over to creditor in full settlement

Remaining = ₹30,000 – ₹1,500 = ₹28,500

Creditor’s claim settled = ₹28,500 (no cash entry)

Step 2 – Record the journal entries

Particulars	Debit (₹)	Credit (₹)
Atul’s Capital A/c Dr.	40,000
To Realisation A/c		40,000
(Being 50% of assets taken over by Atul at 20% discount)
Bank A/c Dr.	26,000
To Realisation A/c		26,000
(Being 40% of remaining assets sold at 30% profit on cost)
Realisation A/c Dr.	1,500

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The journal entries record the transfer of assets to the Realisation Account, Atul taking over assets at a discount, sale of assets at a profit, writing off obsolete assets, and handing over remaining assets to a creditor in full settlement.

Concept and Accounting Treatment

When a partnership firm is dissolved, the Realisation Account is the central account used to record the sale or disposal of all non-cash assets and the payment of all liabilities. The fundamental rule is:

Debit the Realisation Account with the book value of all assets (other than cash and bank) being transferred.
Credit the Realisation Account with the amount realised from the sale or disposal of those assets.

The difference between the total debits (book values) and total credits (realised amounts) in the Realisation Account represents either a profit (credit balance) or a loss (debit balance) on realisation, which is then transferred to the partners' capital accounts in their profit-sharing ratio.

For each specific disposal:

Asset taken over by a partner: The partner's capital account is debited (as they owe the firm for the asset), and the Realisation Account is credited with the agreed value (not the book value).
Asset sold to an outsider: The cash/bank account is debited, and the Realisation Account is credited with the sale proceeds.
Asset becoming obsolete: No entry is needed for the asset itself (its book value is already in the Realisation Account's debit side). The fact that it realises nothing simply means no credit entry is made for it.
Asset handed over to a creditor: The creditor's account is debited (settling the liability), and the Realisation Account is credited with the agreed value (which is the book value of the asset handed over, as it settles the claim in full).

Solution: Journal Entries for Realisation of Assets

Working Notes

Step 1: Calculate the book value of assets transferred.

Given: Book value of assets (other than cash and bank) = ₹1,00,000.

Step 2: Calculate the value of assets taken over by Atul.

Percentage taken over: 50%
Book value of assets taken over = 50% of ₹1,00,000 = ₹50,000
Discount allowed to Atul: 20% on book value
Discount amount = 20% of ₹50,000 = ₹10,000
Agreed value (amount Atul pays) = ₹50,000 - ₹10,000 = ₹40,000

Step 3: Calculate the value of assets sold.

Remaining assets after Atul's takeover = ₹1,00,000 - ₹50,000 = ₹50,000
Percentage sold: 40% of the remaining assets
Book value of assets sold = 40% of ₹50,000 = ₹20,000
Profit on sale: 30% on cost (book value)
Profit amount = 30% of ₹20,000 = ₹6,000
Sale proceeds = ₹20,000 + ₹6,000 = ₹26,000

Step 4: Calculate the value of obsolete assets.

Remaining assets after sale = ₹50,000 - ₹20,000 = ₹30,000
Percentage obsolete: 5% of the balance
Book value of obsolete assets = 5% of ₹30,000 = ₹1,500
Amount realised from obsolete assets = ₹0

Step 5: Calculate the value of assets handed over to the creditor.

Remaining assets after writing off obsolete = ₹30,000 - ₹1,500 = ₹28,500
These assets are handed over to a creditor in full settlement of his claim.
Agreed value (amount of claim settled) = Book value of assets handed over = ₹28,500

Journal Entries

Particulars	Debit (₹)	Credit (₹)
Realisation A/c Dr.	1,00,000
To Assets A/c (other than cash and bank)		1,00,000
(Being the book value of assets transferred to Realisation Account)

Atul's Capital A/c Dr.	40,000
To Realisation A/c		40,000

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Concept and Accounting Treatment

Solution: Journal Entries for Realisation of Assets

Working Notes

Journal Entries

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