Sonu and Ashu are sharing profits as 3:1 and they agree upon dissolution. The Balance Sheet as on March 31, 2017 is as under: **Balance Sheet of Sonu and Ashu as on March 31, 2017** | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Loan | 12,000 | Cash at bank | 15,000 | | Creditors | 18,000 | Stock | 45,000 | | Capital: | | Furniture | 16,000 | | Sonu | 1,10,000 | Debtors | 70,000 | | Ashu | 68,000 | Plant and Machinery | 52,000 | | | | Loan to Ashu | 10,000 | | **Total** | **2,08,000** | **Total** | **2,08,000** | Sonu took over plant and machinery at an agreed value of ₹60,000. Stock and Furniture were sold for ₹42,000 and ₹13,900 respectively. Debtors were taken over by Ashu at ₹69,000. Creditors were paid subject to a discount of ₹900. Sonu agrees to pay the loan. Realisation expenses were ₹1,600. Prepare Realisation Account, Bank Account and Capital Accounts of the partners.

Sonu and Ashu are sharing profits as 3:1 and they agree upon dissolution. The Balance Sheet as on March 31, 20

Illustrations · Illustration 8

Sonu and Ashu are sharing profits as 3:1 and they agree upon dissolution. The Balance Sheet as on March 31, 2017 is as under:

Balance Sheet of Sonu and Ashu as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Loan	12,000	Cash at bank	15,000
Creditors	18,000	Stock	45,000
Capital:		Furniture	16,000
Sonu	1,10,000	Debtors	70,000
Ashu	68,000	Plant and Machinery	52,000
		Loan to Ashu	10,000
Total	2,08,000	Total	2,08,000

Sonu took over plant and machinery at an agreed value of ₹60,000. Stock and Furniture were sold for ₹42,000 and ₹13,900 respectively. Debtors were taken over by Ashu at ₹69,000. Creditors were paid subject to a discount of ₹900. Sonu agrees to pay the loan. Realisation expenses were ₹1,600. Prepare Realisation Account, Bank Account and Capital Accounts of the partners.

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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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Note the two loans pulling in opposite directions: the ₹12,000 Loan (an outside liability) is taken over by Sonu — credited to his capital — while the ₹10,000 Loan to Ashu (an asset, money the firm lent Ashu) is recovered from him and never goes to Realisation. Creditors are paid ₹18,000 − ₹900 = ₹17,100. The Realisation Account closes with a profit of ₹1,200 (3:1 → Sonu ₹900, Ashu ₹300).

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c	45,000	By Loan A/c	12,000
To Furniture A/c	16,000	By Creditors A/c	18,000
To Debtors A/c	70,000	By Sonu's Capital A/c (plant and machinery)	60,000
To Plant and Machinery A/c	52,000	By Ashu's Capital A/c (debtors)	69,000
To Bank A/c (creditors)	17,100	By Bank A/c (Stock 42,000 + Furniture 13,900)	55,900

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The ₹12,000 outside Loan is taken over by Sonu (credited to his capital); the ₹10,000 Loan to Ashu is an asset recovered in cash, not routed through Realisation. Realisation profit ₹1,200 (3:1). Sonu is paid ₹62,900; Ashu brings ₹700 for his capital and repays ₹10,000; Bank total ₹81,600.

Concept — a loan TO a partner vs. a loan taken over BY a partner

A Loan to Ashu is an asset (the firm's receivable) — like cash, it is not transferred to Realisation; it is simply collected from the partner. The separate ₹12,000 Loan is an outside liability that Sonu agrees to pay, so it is credited to his capital (Realisation A/c Dr.).

Working Note

Creditors paid = ₹18,000 − ₹900 = ₹17,100. Cash realised from assets = Stock 42,000 + Furniture 13,900 = ₹55,900.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c	45,000	By Loan A/c	12,000
To Furniture A/c	16,000	By Creditors A/c	18,000
To Debtors A/c	70,000	By Sonu's Capital A/c (plant and machinery)	60,000
To Plant and Machinery A/c	52,000	By Ashu's Capital A/c (debtors)	69,000
To Bank A/c (creditors)	17,100	By Bank A/c (assets realised)	55,900
To Sonu's Capital A/c (loan)	12,000
To Bank A/c (realisation expenses)	1,600
To Profit — Sonu 900, Ashu 300	1,200
Total	2,14,900	Total	2,14,900

Partners' Capital Accounts

Particulars	Sonu (₹)	Ashu (₹)	Particulars	Sonu (₹)	Ashu (₹)
To Realisation A/c (plant and machinery)	60,000	—	By Balance b/d	1,10,000	68,000
To Realisation A/c (debtors)	—	69,000	By Realisation A/c (loan)	12,000	—

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Concept — a loan TO a partner vs. a loan taken over BY a partner

Working Note

Realisation Account

Partners' Capital Accounts

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