Realisation account is an important part of partnership accounting especially in the dissolution of a firm. The account contains all transactions regarding the sale of assets and repayments of liability in dissolution, capturing the final state of the firm’s financial position and the amount payable to or payable by every partner. This paper provides an overview of the meaning and preparation steps and purpose of a realization account, an explanation of its elements, form, and difference from a revaluation account.
What is Realisation Account?
A realization account in accounting is opened during the dissolution of a partnership so that the dissolution transactions can be recorded systematically. Under this head, it includes proceeds of the sale of assets, repayment of external liabilities, and costs of dissolution. Thus determining the gain or loss arising on dissolution, which is then shared by the partners according to their profit-sharing ratio. It brings transparency in treating assets and liabilities at the end.
How to Prepare Realisation Account?
The process of preparing a realization account involves structured steps to ensure all relevant financial activities are accounted for. Below is a breakdown of these steps to simplify the preparation process.
Steps in Preparing a Realisation Account
- List Assets at Book Value: All assets, excluding cash and bank balances, transfer from the balance sheet to the debit side of the realisation account at book values.
- Record Liabilities: All liabilities except partners’ capital and reserves to the credit side of the realisation account at the book values.
- Document Sales of Assets: List the amount realized from the sale of assets under the credit column. All unsold assets that have been assumed by partners should be indicated.
- Settle Liabilities: All liabilities that exist outside the business should be cleared. All such payments should be noted in the debit column of the realisation account.
- Expense Tracking: This account debits all the expenses regarding the dissolution of the partnership, possibly legal or administration costs.
- Calculate and distribute the profit or loss: Find the overall closing balance on the realization account. If in credit, that means profit. If in debt, it means loss. This amount is then calculated and distributed among the partners as per the profit-sharing ratio agreed amongst them.
Purpose of Realisation Account
The primary purpose of creating a realisation account is to simplify the dissolution process by systematically recording all relevant transactions. This account provides the following benefits:
- Centralized Record-Keeping: All asset and liability transactions are compiled. Therefore, the realization account could be considered as bringing out the total financial position at the time of dissolution.
- Accurate Profi or Loss Computation: From all payments, proceeds, and expenses, the account provides the means for an actual calculation of gain or loss on dissolution.
- Transparency Among Partners: The account brings out transparency so that each partner knows the computation of the residual share and thereby reduces the propensity to dispute it.
Components of Realisation Account
A realization account includes specific components on both the debit and credit sides, all of which contribute to its final balance.
Debit Side Components
- Assets at Book Value: All assets (except cash and bank balances) are recorded at their book values.
- Dissolution Expenses: Any expenses associated with dissolving the partnership are recorded here.
- Payments for Liabilities: Payments made to settle external liabilities are listed on the debit side.
Credit Side Components
- Liabilities at Book Value: All the external liabilities are retained here at their book values.
- Receipt from sale of asset: The sale receipt from the asset will be on the credit side
- Asset taken over by partners: If partners accept certain assets, they are credited to the realization account.
Realisation Account Format
Here’s a simplified format for a realization account, capturing all essential items on both debit and credit sides:
| Debit Side | Credit Side |
|---|---|
| Assets at Book Value (except cash/bank) | Liabilities at Book Value |
| Dissolution Expenses | Proceeds from Sale of Assets |
| Payments for External Liabilities | Assets Taken Over by Partners |
| Loss on Realisation (if any) | Profit on Realisation (if any) |
Difference Between Revaluation Account and Realisation Account
While both revaluation and realisation accounts involve asset and liability adjustments, they are used in distinct scenarios and have different objectives.
| Criteria | Revaluation Account | Realisation Account |
|---|---|---|
| Purpose | Adjust asset and liability values during admission or retirement | Record transactions related to firm dissolution |
| When Used | When changes occur within the partnership | Solely during firm dissolution |
| Record of Sale of Assets | Not recorded | Yes, proceeds from asset sales are included |
| Liabilities Payment Record | Not included | All external liabilities payments are recorded |
| Profit/Loss Calculation | Only adjusts asset/liability values | Determines overall gain or loss upon dissolution |
Realisation Account Example
Here’s an example to further clarify how a realisation account is typically prepared:
Suppose XYZ Partnership decides to dissolve. Below is a simple realisation account format filled with hypothetical figures to show how assets, liabilities, and dissolution costs are recorded.
| Realisation Account | |
|---|---|
| Debit Side | Amount ($) |
| Assets: Inventory, Plant & Machinery | 50,000 |
| Dissolution Expenses | 2,000 |
| Liabilities Payment | 10,000 |
| Total | 62,000 |
| Credit Side | Amount ($) |
|---|---|
| Sale Proceeds of Inventory, Machinery | 58,000 |
| Liabilities | 10,000 |
| Profit on Realisation (Distributed to Partners) | 6,000 |
| Total | 74,000 |
In this example, after recording all necessary transactions, XYZ Partnership would recognize a profit of $6,000 on dissolution, which would be divided among the partners.
Conclusion
Realisation account forms an indispensable tool for partnerships in the dissolution process because it ensures proper and accurate accounting for all aspects of finance relating to the termination of the firm. Coming with asset sales and liability payments, such as dissolution costs, realisation account provides a simple and organized winding-up process whereby a firm’s situation regarding its ultimate financial position is understood by all partners. Properly organizing the realization account allows partnerships to avoid potential disagreements and ensures that the remaining amount is distributed among partners fairly and properly.
Realisation Account FAQs
What is the role of realisation account in partnership dissolution?
The realisation account tracks all asset sales, liability payments, and dissolution expenses, determining the profit or loss on dissolution, which is then divided among partners.
Can realisation account format vary between firms?
While the basic structure remains consistent, firms might adjust specific entries based on their unique dissolution circumstances, but the primary format should adhere to standard accounting principles.
How is a revaluation account different from a realisation account?
A revaluation account is used to adjust asset and liability values during internal changes (like partner admission or retirement), while a realisation account is used to close the firm during dissolution.
Is it possible to have a profit on dissolution?
Yes, if the total proceeds from asset sales and other credits exceed the liabilities and expenses, the realisation account will reflect a profit on dissolution.
Why are cash and bank balances not included in the realisation account?
Cash and bank balances are retained separately to facilitate direct payments during dissolution, simplifying the accounting process and maintaining liquidity.
