In the Dissolution of the Firm firstly we will prepare the realisation account to close down the books of accounts of partnership firms and get to know the gains or losses on the dissolution of the partnership firm.
What is realisation Account: –
The realisation account is prepared at the time of the dissolution of the firm to know the profit or loss on realizing assets and repay the liabilities of the firms. This amount of profit or loss will be transferred to the partners’ capital or current account. In the case of capital fixed in nature, we will transfer the amount of profit/loss to the partners’ current account or in the case of the capital account is fluctuating in nature then transfer to the partners’ capital account.
Steps involved in the preparation of the Realisation account: –
In the accounting Treatment on Dissolution of the Firm when we are preparing a Realisation account. we can be prepared in the six steps shown as following: –
- First of all, we have to transfer all assets (except fictitious assets, loan to partners, and cash or a bank account) with the full amount in the debit side of the realisation account.
- and then we have to transfer all liabilities(including provisions but except Partners’ Loan and capital account) with the full amount in the Credit side of the realisation account.
- The transfer of the amount realized on the sale of assets on the credit side of the realisation account.
- The transfer of the amount paid to settle the amount of all liabilities on the Debit side of the realisation account.
- Any expense incurred on the dissolution of the partnership Firm.
- In last now we have to calculate the balance of the realisation account. So if left credit balance then it means there is the gain on the dissolution of the firm and if left debit balance it means there is a loss on the dissolution of the firm.
Accounting Journal Entries for Closing of books of account: –
We have already discussed all journal entries in the following article so please check this out.
Accounting Treatment on Dissolution of the Firm
Specimen of Realisation Account: –
The Specimen of Realisation Account is shown as follows: –
| Dr. | Realisation Account | Cr. | |
| Particulars | Amount | Particulars | Amount |
| To Vehicle A/c | *** | By Creditors A/c | *** |
| To Plant and Machinery A/c | *** | By Bank Loan’s A/c | *** |
| To Computer A/c | *** | By Bills Payable A/c | *** |
| To Furniture A/c | *** | By Prov. for D/debts A/c | *** |
| To Building A/c | *** | By Investment Fluctuation Reserve A/c | *** |
| To Land A/c | *** | By Bank A/c (Assets Realized value) | *** |
| To Investment A/c | *** | – Vehicle A/c | |
| To Goodwill | *** | – Plant and Machinery A/c | |
| To Bank A/c (payment of Liabilities ) | – Computer A/c | ||
| – Creditors A/c | – Furniture A/c | ||
| – Bank Loan’s A/c | – Building A/c | ||
| – Bills Payable A/c | – Land A/c | ||
| To Partner’s Capital A/c (if any Liability taken by him) | *** | – Investment A/c | |
| To Cash/Bank a/c (expenses of realisation) | *** | By Partner’s Capital A/c (if any assets taken by him) | *** |
| To Partner’s Capital A/c (if expenses paid by him) | *** | By Partner’s Capital A/c (if the loss on realisation) | *** |
| To Partner’s Capital A/c (if the profit on realisation) | *** | – 1st Partner | |
| – 1st Partner | – 2nd Partner | ||
| – 2nd Partner | – 3rd Partner | ||
| – 3rd Partner | |||
| **** | **** | ||
Illustration of Realisation Account: –
A and B were partners in the AB ltd. sharing profit in ratio 1:1. On the 31st of March 2020, their balance sheet is shown as follows: –
| Balance Sheet | |||
| Particulars | Amount | Particulars | Amount |
| Creditors A/c | 2,000 | Vehicle A/c | 10,000 |
| Bank Loan’s A/c | 7,000 | Plant and Machinery A/c | 25,000 |
| Capital | 1,41,000 | Computer A/c | 15,000 |
| A = 70,500 | Furniture A/c | 5,000 | |
| B = 70,500 | Building A/c | 40,000 | |
| Land A/c | 50,000 | ||
| Cash A/c | 5,000 | ||
| 1,50,000 | 1,50,000 | ||
All assets realized as following –
| – Vehicle A/c | 12,000 |
| – Plant and Machinery A/c | 22,500 |
| – Computer A/c | 10,000 |
| – Furniture A/c | 6,000 |
| – Building A/c | 60,000 |
| – Land A/c | 90,000 |
All Liabilities are settled as following –
– Creditors A/c 1,800
– Bank Loan’s A/c 6,500
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Expenses for dissolution paid for Rs. 200
Prepared the realisation account.
Solution: –
| Dr. | Realisation Account | Cr. | |
| Particulars | Amount | Particulars | Amount |
| To Vehicle A/c | 10,000 | By Creditors A/c | 2,000 |
| To Plant and Machinery A/c | 25,000 | By Bank Loan’s A/c | 7,000 |
| To Computer A/c | 15,000 | ||
| To Furniture A/c | 5,000 | By Bank A/c (Assets Realized value) | |
| To Building A/c | 40,000 | – Vehicle A/c | 12,000 |
| To Land A/c | 50,000 | – Plant and Machinery A/c | 22,500 |
| – Computer A/c | 10,000 | ||
| To Bank A/c (payment of Liabilities ) | – Furniture A/c | 6,000 | |
| – Creditors A/c | 1,800 | – Building A/c | 60,000 |
| – Bank Loan’s A/c | 6,500 | – Land A/c | 90,000 |
| To Cash/Bank a/c (expenses of realisation) | 200 | ||
| To Partner’s Capital A/c (if the profit on realisation) | 56,000 | ||
| – A Capital A/c 28,000 | |||
| – B Capital A/c 28,000 | |||
| 2,09,500 | 2,09,500 | ||
This is all about this article, we will prepare a capital account. which we will discuss in the next article.
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