Explain realisation account

Realisation Account:

This account is prepared at the time of dissolution of a firm to know the profit/loss at the time of dissolution of the firm. All the assets except cash/bank are transferred to the debit side of realisation account.  In case any asset has a corresponding provision or reserve that is transferred to the credit side of realisation account.  Similarly all outside liabilities like creditors and loans etc. are transferred to the credit side of realisation account.  After this money received on sale of assets are recorded on the credit side of realisation account and all payments made to outside parties are recorded on the debit side of realisation account.  If total of credit side exceeds the total of debit side, it indicates profit and vice versa.  The profit is credited to partners' capital accounts and realisation account is closed.  Journal entries made at the time of preparation of Realisation A/c are:

For transferring all Assets (except cash/bank) to the debit side of Realisation A/c.

1. Realisation A/c        Dr.

       To All Assets

For transferring any Reserve or Provision related to the assets transferred to Realisation Account. For example Provision for Bad Debts, Provision for Depreciation A/c and Investment Fluctuation Fund.)

2. Provision/Reserve A/c   Dr.

        To Realisation A/c

For transferring outside liabilities to Realisation Account.

3. Liabilities A/c    Dr.

         To Realisation A/c

For Sale of Assets or taking over of assets by a partner.

4.         Cash/Bank /Partner’s Capital A/c  Dr.

              To Realisation A/c

 For payment of outside liabilities or taking over of liabilities by a partner.  Same entry is passed for payment of Realisation Expenses.

5.         Realisation A/c  Dr.

              To Cash/Bank/Partner’s Capital A/c

For transferring profit to the partners (reverse entry for loss).

6.   Realisation A/c   Dr.

              To All Partners