Sumit, Amit and Vinit are partners sharing profit in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2

Illustrations · Illustration 10

Sumit, Amit and Vinit are partners sharing profit in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2017 was as follows:

Balance Sheet of Sumit, Amit and Vinit as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Capitals:		Machinery	80,000
Sumit	40,000	Investments	1,50,000
Amit	50,000	Stock	10,000
Vinit	60,000	Debtors	35,000
Profit and Loss	10,000	Cash at bank	15,000
Mrs. Amit's loan	40,000
Sundry creditors	90,000
Total	2,90,000	Total	2,90,000

The firm was dissolved on that date. Amit took over his wife's loan. One of the Creditors for ₹2,600 did not claim the amount. Assets realised as follows:

Machinery was sold for ₹70,000.
Investments with book value of ₹1,00,000 were given to Creditors in full settlement of their account. The remaining Investments were taken over by Vinit at an agreed value of ₹45,000.
Stock was sold for ₹11,000 and Debtors for ₹3,000 proved to be bad.
Realisation expenses were ₹1,500.

Prepare 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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Amit takes over his wife's loan (₹40,000, credited to his capital). Debtors realise ₹35,000 − ₹3,000 bad = ₹32,000. The accumulated Profit and Loss (₹10,000, a credit balance) is distributed to the partners. The Realisation Account closes with a loss of ₹28,500, shared in the ratio the book applies (Amit 5 : Sumit 3 : Vinit 2 → ₹14,250, ₹8,550, ₹5,700).

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Machinery A/c	80,000	By Sundry creditors A/c	90,000
To Investments A/c	1,50,000	By Mrs. Amit's loan A/c	40,000
To Stock A/c	10,000	By Bank A/c (Machinery 70,000 + Stock 11,000 + Debtors 32,000)	1,13,000
To Debtors A/c	35,000	By Vinit's Capital A/c (investment)	45,000
To Amit's Capital A/c (wife's loan)	40,000	By Loss — Amit 14,250, Sumit 8,550, Vinit 5,700	28,500
To Bank A/c (realisation expenses)	1,500
Total	3,16,500	Total	3,16,500

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Amit takes over his wife's loan; ₹1,00,000 investments go to creditors in full settlement (no entry). Realisation loss ₹28,500. After the ₹10,000 accumulated profit is distributed, final payments are Amit ₹70,750, Sumit ₹44,450, Vinit ₹11,300; Bank total ₹1,28,000.

Concept — a creditor accepting an asset in full settlement

When a creditor accepts an asset in full and final settlement of their dues, no journal entry is recorded: both the creditor and the asset are already inside the Realisation Account, and the account simply absorbs the net effect. The ₹2,600 that one creditor did not claim is likewise a gain absorbed within Realisation.

Working Notes

Debtors realised = ₹35,000 − ₹3,000 bad = ₹32,000. Cash realised = Machinery 70,000 + Stock 11,000 + Debtors 32,000 = ₹1,13,000. Accumulated Profit and Loss (₹10,000, a credit balance) distributed as Amit ₹5,000, Sumit ₹3,000, Vinit ₹2,000.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Machinery A/c	80,000	By Sundry creditors A/c	90,000
To Investments A/c	1,50,000	By Mrs. Amit's loan A/c	40,000
To Stock A/c	10,000	By Bank A/c (assets realised)	1,13,000
To Debtors A/c	35,000	By Vinit's Capital A/c (investment)	45,000
To Amit's Capital A/c (wife's loan)	40,000	By Loss — Amit 14,250, Sumit 8,550, Vinit 5,700	28,500
To Bank A/c (realisation expenses)	1,500
Total	3,16,500	Total	3,16,500

Partners' Capital Accounts

Particulars	Amit (₹)	Sumit (₹)	Vinit (₹)	Particulars	Amit (₹)	Sumit (₹)	Vinit (₹)
To Realisation A/c (investment)	—	—	45,000	By Balance b/d	40,000	50,000	60,000
To Realisation A/c (loss)	14,250	8,550	5,700	By Realisation A/c (Mrs. Amit's loan)	40,000	—	—
To Bank A/c	70,750	44,450	11,300	By Profit and Loss A/c	5,000	3,000	2,000
Total	85,000	53,000	62,000	Total	85,000	53,000	62,000

Bank Account …

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Concept — a creditor accepting an asset in full settlement

Working Notes

Realisation Account

Partners' Capital Accounts

Bank Account …

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