Realisation Account and settlement of accounts

The essentials

On dissolution of a firm, a Realisation Account is opened to find the profit or loss on selling assets and paying liabilities. All assets except cash and bank (and fictitious assets) are transferred to its debit side at book value, and all outside liabilities to its credit side. Sales of assets are credited and payments of liabilities and expenses debited. The balance is a profit or loss shared among partners in the profit-sharing ratio.

Key points

• Assets transferred: Realisation A/c Dr; To Sundry Assets.
• Outside liabilities transferred: Sundry Liabilities Dr; To Realisation A/c.
• Asset sold: Cash/Bank A/c Dr; To Realisation A/c.
• Asset taken over by a partner: Partner's Capital A/c Dr; To Realisation A/c.
• Liability paid: Realisation A/c Dr; To Cash/Bank A/c.
• Realisation expenses paid by the firm: Realisation A/c Dr; To Cash/Bank A/c. Paid by a partner on the firm's behalf: Realisation A/c Dr; To Partner's Capital A/c.
• A creditor taking over an asset in full settlement needs no entry.
• Partners' loans are not transferred to the Realisation Account; they are paid separately after outside liabilities.
• Reserves and accumulated profits go to capital accounts in the profit ratio; accumulated losses are debited to them.

Exam tips

Close the accounts in this order: Realisation A/c, partners' loans, Capital A/cs, Cash/Bank A/c. The Cash or Bank Account must balance to nil.

Common mistakes

• Transferring cash balance or partners' loans to the Realisation Account.
• Recording an entry when a creditor accepts an asset in full settlement.