Q.Give journal entries for the following transactions:
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Start your 14-day free trial to unlock the full solution →The solution records the realisation of assets and settlement of liabilities through journal entries in the Realisation Account, with each transaction showing the correct debit/credit treatment as per the accounting rule for dissolution of a partnership firm.
Concept: Realisation Expenses Accounting
When a partnership firm dissolves, we open a Realisation Account to record the sale of assets and payment of liabilities. The fundamental rule is:
- Debit the Realisation Account with the book value of all assets (except cash/bank) and all expenses of realisation.
- Credit the Realisation Account with the book value of all liabilities (except partner's capital/loan accounts) and the amount realised from assets.
The difference in the Realisation Account represents profit or loss on realisation, which is transferred to the partners' capital accounts in their profit-sharing ratio.
For each transaction, we must carefully identify:
- What is being transferred (asset/liability)
- Whether it's being taken over by a partner, sold to an outsider, or handed over to a creditor
- The valuation agreed upon
Solution: Journal Entries
Entry 1: To record the realisation of various assets and liabilities
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Realisation A/c Dr. | 3,84,000 | |||
| To Stock A/c | 1,60,000 | |||
| To Land and Building A/c | 1,60,000 | |||
| To Plant and Machinery A/c | 60,000 | |||
| To Investments A/c | 4,000 | |||
| (Being the book value of assets transferred to Realisation Account) |
Working Note 1: Total book value of assets transferred = ₹1,60,000 + ₹1,60,000 + ₹60,000 + ₹4,000 = ₹3,84,000
Entry 2: Aziz takes over 50% of Stock at 20% discount
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Aziz's Capital A/c Dr. | 64,000 | |||
| To Realisation A/c | 64,000 | |||
| (Being 50% of stock taken over by Aziz at 20% discount on book value) |
Working Note 2:
- Stock taken over = 50% of ₹1,60,000 = ₹80,000
- Discount = 20% of ₹80,000 = ₹16,000
- Amount charged to Aziz = ₹80,000 - ₹16,000 = ₹64,000
A common mistake is to debit Realisation A/c and credit Aziz's Capital A/c. Remember: when a partner takes over an asset, the partner's capital account is debited (reducing their claim) and Realisation A/c is credited (as the asset is now realised).
Entry 3: Remaining Stock sold at 30% profit on cost
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 1,04,000 | |||
| To Realisation A/c | 1,04,000 | |||
| (Being remaining 50% of stock sold at 30% profit on cost) |
Working Note 3:
- Remaining stock = 50% of ₹1,60,000 = ₹80,000
- Profit on cost = 30% of ₹80,000 = ₹24,000
- Sale proceeds = ₹80,000 + ₹24,000 = ₹1,04,000
Entry 4: Land and Building sold through broker
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 2,94,000 | |||
| Realisation A/c Dr. (Brokerage) | 6,000 | |||
| To Realisation A/c (Sale) | 3,00,000 | |||
| (Being Land and Building sold for ₹3,00,000, broker's commission 2% charged to Realisation A/c) |
Working Note 4:
- Sale price = ₹3,00,000
- Broker's commission = 2% of ₹3,00,000 = ₹6,000
- Net amount received = ₹3,00,000 - ₹6,000 = ₹2,94,000
Brokerage/commission on sale is a realisation expense. It is debited to Realisation A/c separately, not netted off from the sale proceeds in the same entry. This keeps the gross sale and expense transparent.
Entry 5: Plant and Machinery handed over to Creditor
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Creditor's A/c Dr. | 54,000 | |||
| To Realisation A/c | 54,000 | |||
| (Being Plant and Machinery handed over to a creditor at 10% less than book value in full settlement) |
Working Note 5:
- Book value of Plant and Machinery = ₹60,000
- Agreed valuation = 10% less = ₹60,000 - ₹6,000 = ₹54,000
- The creditor's account is settled at ₹54,000
Entry 6: Investment realised at 50%
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 2,000 | |||
| Realisation A/c Dr. (Loss) | 2,000 | |||
| To Realisation A/c (Investment) | 4,000 | |||
| (Being Investment with face value ₹4,000 realised at 50%) |
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