Realisation Account in Dissolution of Partnership Firm: Format and Entries

Realisation Account is one of the most important accounts in dissolution of a partnership firm. It is also one of the easiest accounts to get wrong if you try to memorise entries without understanding the purpose.

At the time of dissolution, the firm is closing down. Assets are sold, liabilities are paid, some assets may be taken over by partners, some liabilities may be settled by partners, and the remaining profit or loss has to be shared between the partners.

Realisation Account brings all of this into one place.

Think of it as the final settlement room of the firm. Everything that belongs to outsiders is settled. Everything that belongs to the firm is converted into cash or taken over. Then the final gain or loss is transferred to the partners.

Once this purpose is clear, the format and journal entries become much more logical.

What Realisation Account Means

Realisation Account is a nominal account prepared when a partnership firm is dissolved.

It records:

• transfer of assets, except cash and bank balance
• transfer of external liabilities
• money received from sale of assets
• assets taken over by partners
• payment of external liabilities
• liabilities taken over by partners
• realisation expenses
• unrecorded assets and unrecorded liabilities
• profit or loss on realisation

The final balance of Realisation Account is transferred to the partners’ capital accounts in their profit-sharing ratio.

If Realisation Account shows profit, partners’ capital accounts are credited.

If Realisation Account shows loss, partners’ capital accounts are debited.

Realisation Account vs Revaluation Account

Students often mix up Realisation Account and Revaluation Account because both deal with assets and liabilities. But they are used in different situations.

Basis	Revaluation Account	Realisation Account
When prepared	At admission, retirement, or death of a partner	At dissolution of the firm
Main purpose	To record change in asset and liability values	To close assets and liabilities
Firm continues?	Yes	No
Assets are sold?	Usually no	Usually yes
Liabilities are paid?	Usually no	Yes
Final result	Revaluation profit or loss	Realisation profit or loss

Revaluation Account adjusts values because the firm is changing.

Realisation Account closes values because the firm is ending.

This one difference protects you from many wrong entries.

The Basic Logic of Realisation Account

Realisation Account works on a simple idea:

The firm transfers assets to Realisation Account, sells them or gives them to partners, transfers external liabilities to Realisation Account, pays them or lets partners take them over, and then finds the profit or loss.

Here is the core movement:

Transaction	Realisation Account side
Assets transferred	Debit
External liabilities transferred	Credit
Assets sold for cash	Credit
Asset taken over by partner	Credit
Liabilities paid	Debit
Liability taken over by partner	Debit
Realisation expenses paid by firm	Debit
Realisation profit transferred to partners	Debit
Realisation loss transferred to partners	Credit

The debit side begins with assets because assets are being closed.

The credit side begins with liabilities because liabilities are being closed.

After that, cash received from assets is credited, cash paid for liabilities is debited, and the balancing figure becomes profit or loss.

Items Not Transferred to Realisation Account

Before learning entries, remember what not to transfer.

Do not transfer these to Realisation Account:

• cash balance
• bank balance
• partners’ capital accounts
• partners’ current accounts
• partner’s loan
• reserves and accumulated profits
• accumulated losses
• fictitious assets such as debit balance of profit and loss account

Cash and bank are not transferred because they are used to receive and pay money during dissolution.

Partners’ capital accounts are not transferred because they are settled separately.

Reserves, accumulated profits, accumulated losses, and fictitious assets are transferred directly to partners’ capital accounts.

There is one important exception. If the balance sheet shows bank overdraft, it is a liability to the bank. So bank overdraft is transferred to Realisation Account like an external liability.

Realisation Account Format

A clear format makes the chapter much easier.

Realisation Account	Amount	Realisation Account	Amount
To Sundry Assets A/c		By Sundry Liabilities A/c
To Bank A/c, liabilities paid		By Bank A/c, assets realised
To Partner’s Capital A/c, liability taken over		By Partner’s Capital A/c, asset taken over
To Bank A/c, realisation expenses paid		By Bank A/c, unrecorded asset realised
To Partner’s Capital A/c, expenses paid by partner on behalf of firm		By Partner’s Capital A/c, unrecorded asset taken over
To Partners’ Capital A/cs, profit transferred		By Partners’ Capital A/cs, loss transferred

This is the skeleton. A question may not have every item. But if you know where each item goes, the account becomes predictable.

Journal Entries for Realisation Account

Now let us build the entries step by step.

1. Transfer of Assets

All assets, except cash and bank balance, are transferred to Realisation Account.

Particulars	Debit	Credit
Realisation A/c Dr.
To Assets A/c

If there are many assets, the entry can be written as:

Particulars	Debit	Credit
Realisation A/c Dr.
To Land and Building A/c
To Machinery A/c
To Stock A/c
To Debtors A/c

This entry closes the asset accounts.

If debtors are shown along with provision for doubtful debts, debtors are usually transferred at gross value and the provision is transferred with liabilities to the credit side of Realisation Account.

2. Transfer of External Liabilities

External liabilities are transferred to Realisation Account.

Particulars	Debit	Credit
Liabilities A/c Dr.
To Realisation A/c

Examples of external liabilities include creditors, bills payable, outstanding expenses, bank loan, and bank overdraft.

Partner’s loan is not an external liability. It is settled separately after outside liabilities are paid.

3. Assets Sold for Cash

When an asset is sold, the firm receives money.

Particulars	Debit	Credit
Bank A/c Dr.
To Realisation A/c

For example, if stock is sold for Rs. 32,000:

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 32,000
To Realisation A/c		Rs. 32,000

The amount credited is the actual amount realised, not the book value.

4. Asset Taken Over by a Partner

Sometimes a partner takes over an asset instead of the firm selling it outside.

Particulars	Debit	Credit
Partner’s Capital A/c Dr.
To Realisation A/c

For example, if A takes over furniture at Rs. 28,000:

Particulars	Debit	Credit
A’s Capital A/c Dr.	Rs. 28,000
To Realisation A/c		Rs. 28,000

The partner is receiving an asset, so the partner’s capital account is debited.

5. Payment of External Liabilities

When the firm pays an external liability:

Particulars	Debit	Credit
Realisation A/c Dr.
To Bank A/c

For example, if creditors of Rs. 40,000 are settled at Rs. 38,000:

Particulars	Debit	Credit
Realisation A/c Dr.	Rs. 38,000
To Bank A/c		Rs. 38,000

The full liability was already transferred to the credit side. The actual payment is recorded on the debit side.

The difference will automatically affect realisation profit or loss.

6. Liability Taken Over by a Partner

If a partner agrees to take over an external liability:

Particulars	Debit	Credit
Realisation A/c Dr.
To Partner’s Capital A/c

For example, if B takes over creditors of Rs. 15,000:

Particulars	Debit	Credit
Realisation A/c Dr.	Rs. 15,000
To B’s Capital A/c		Rs. 15,000

The partner is saving the firm from paying that liability, so the partner’s capital account is credited.

Treatment of Realisation Expenses

Realisation expenses are expenses incurred to close the firm, sell assets, and settle liabilities.

Examples include legal charges, auction expenses, brokerage, and closing expenses.

The entry depends on who pays the expenses and who has to bear them.

Expenses Paid by the Firm

Particulars	Debit	Credit
Realisation A/c Dr.
To Bank A/c

Expenses Paid by a Partner on Behalf of the Firm

Particulars	Debit	Credit
Realisation A/c Dr.
To Partner’s Capital A/c

The firm owes the partner because the partner paid the firm’s expense.

Expenses Borne by a Partner and Paid by the Firm

Sometimes the question says a partner will bear realisation expenses, but the firm pays them.

In that case:

Particulars	Debit	Credit
Partner’s Capital A/c Dr.
To Bank A/c

Realisation Account is not debited because the expense is not borne by the firm.

Expenses Borne and Paid by the Same Partner

If a partner both bears and pays the expense personally, no entry is required in the firm’s books.

Partner Gets Remuneration for Completing Dissolution

If a partner is allowed remuneration for carrying out dissolution work:

Particulars	Debit	Credit
Realisation A/c Dr.
To Partner’s Capital A/c

This remuneration is a cost of realisation for the firm.

If the same partner also pays actual expenses, read the wording carefully. The question may expect both remuneration and reimbursement, or only the agreed remuneration.

Unrecorded Assets and Unrecorded Liabilities

Dissolution questions often include assets or liabilities that were not recorded in the balance sheet.

Unrecorded Asset Sold

If an unrecorded asset is sold, the entry is:

Particulars	Debit	Credit
Bank A/c Dr.
To Realisation A/c

For example, if an old typewriter not recorded in the books is sold for Rs. 3,000:

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 3,000
To Realisation A/c		Rs. 3,000

Unrecorded Asset Taken Over by Partner

Particulars	Debit	Credit
Partner’s Capital A/c Dr.
To Realisation A/c

Unrecorded Liability Paid

If an unrecorded liability is paid:

Particulars	Debit	Credit
Realisation A/c Dr.
To Bank A/c

Unrecorded Liability Taken Over by Partner

Particulars	Debit	Credit
Realisation A/c Dr.
To Partner’s Capital A/c

The logic is simple. Unrecorded asset gives benefit to the firm, so Realisation Account is credited. Unrecorded liability creates a cost for the firm, so Realisation Account is debited.

What Happens When a Creditor Accepts an Asset

This is a common tricky point.

Suppose a creditor accepts furniture in full settlement of the amount due.

The asset has already been transferred to Realisation Account. The liability has also been transferred to Realisation Account. If the creditor accepts the asset directly in full settlement, no separate entry is needed.

Why?

Because both the asset and liability are already inside Realisation Account. The settlement is happening inside the same account.

If the creditor accepts the asset and the firm pays extra cash, record only the cash paid:

Particulars	Debit	Credit
Realisation A/c Dr.
To Bank A/c

If the creditor accepts the asset and pays cash to the firm for the difference, record only the cash received:

Particulars	Debit	Credit
Bank A/c Dr.
To Realisation A/c

Transfer of Profit or Loss on Realisation

After all assets, liabilities, expenses, and settlements are recorded, Realisation Account is balanced.

If the credit side is bigger, there is realisation profit.

Entry for profit:

Particulars	Debit	Credit
Realisation A/c Dr.
To Partners’ Capital A/cs

If the debit side is bigger, there is realisation loss.

Entry for loss:

Particulars	Debit	Credit
Partners’ Capital A/cs Dr.
To Realisation A/c

The profit or loss is shared in the profit-sharing ratio unless the question gives a different agreement.

Items Transferred Directly to Partners’ Capital Accounts

Not every closing item enters Realisation Account.

These are transferred directly to partners’ capital accounts:

Item	Treatment
General reserve	Credit partners’ capital accounts
Profit and loss credit balance	Credit partners’ capital accounts
Workmen compensation reserve, if no liability exists	Credit partners’ capital accounts
Profit and loss debit balance	Debit partners’ capital accounts
Advertisement suspense	Debit partners’ capital accounts
Deferred revenue expenditure	Debit partners’ capital accounts

If a reserve is linked to an actual liability, treat the liability part carefully. For example, if workmen compensation reserve exists and a workmen compensation claim is payable, the claim is settled through Realisation Account and only the remaining reserve belongs directly to the partners.

This is a useful distinction.

Realisation Account is for assets realised and liabilities settled.

Accumulated profits and losses belong directly to the partners.

Order of Final Settlement

After Realisation Account is closed, the firm uses available cash and bank balance to settle accounts.

The usual order is:

1. Pay outside liabilities.
2. Repay loans and advances from partners.
3. Return partners’ capital.
4. Distribute any remaining surplus in the profit-sharing ratio.

If a partner’s capital account has a debit balance, that partner has to bring cash into the firm.

If a partner’s capital account has a credit balance, the firm pays that partner.

Solved Flow of Realisation Account

Let us take a compact example.

A and B share profits in the ratio 3:2. Their balance sheet on dissolution shows:

Liabilities	Amount	Assets	Amount
A’s Capital	Rs. 90,000	Bank	Rs. 10,000
B’s Capital	Rs. 60,000	Debtors	Rs. 50,000
General Reserve	Rs. 20,000	Stock	Rs. 30,000
Creditors	Rs. 40,000	Furniture	Rs. 40,000
		Machinery	Rs. 80,000
Total	Rs. 2,10,000	Total	Rs. 2,10,000

Additional information:

• Debtors realised Rs. 44,000.
• Stock realised Rs. 32,000.
• Furniture was taken over by A at Rs. 28,000.
• Machinery was sold for Rs. 70,000.
• Creditors were settled at Rs. 38,000.
• Realisation expenses of Rs. 4,000 were paid by the firm.

First, prepare Realisation Account.

Realisation Account	Amount	Realisation Account	Amount
To Debtors A/c	Rs. 50,000	By Creditors A/c	Rs. 40,000
To Stock A/c	Rs. 30,000	By Bank A/c, debtors	Rs. 44,000
To Furniture A/c	Rs. 40,000	By Bank A/c, stock	Rs. 32,000
To Machinery A/c	Rs. 80,000	By A’s Capital A/c, furniture	Rs. 28,000
To Bank A/c, creditors paid	Rs. 38,000	By Bank A/c, machinery	Rs. 70,000
To Bank A/c, expenses	Rs. 4,000	By A’s Capital A/c, loss	Rs. 16,800
		By B’s Capital A/c, loss	Rs. 11,200
Total	Rs. 2,42,000	Total	Rs. 2,42,000

There is a realisation loss of Rs. 28,000.

A’s share of loss = Rs. 28,000 x 3/5 = Rs. 16,800.

B’s share of loss = Rs. 28,000 x 2/5 = Rs. 11,200.

Now transfer General Reserve directly to partners’ capital accounts:

A gets Rs. 12,000.

B gets Rs. 8,000.

Then settle the capital accounts:

Partner	Capital balance	Add reserve	Less realisation loss	Less asset taken over	Final amount payable
A	Rs. 90,000	Rs. 12,000	Rs. 16,800	Rs. 28,000	Rs. 57,200
B	Rs. 60,000	Rs. 8,000	Rs. 11,200	Nil	Rs. 56,800

Check the bank position:

Bank movement	Amount
Opening bank balance	Rs. 10,000
Add amount realised from assets	Rs. 1,46,000
Less creditors paid	Rs. 38,000
Less expenses paid	Rs. 4,000
Cash available for partners	Rs. 1,14,000

Final payment to A and B is Rs. 57,200 + Rs. 56,800 = Rs. 1,14,000.

The account balances perfectly.

Common Mistakes in Realisation Account

Here are the errors that cost students marks most often.

Transferring Cash or Bank Balance to Realisation Account

Cash and bank are not transferred. They are used for receipts and payments.

Only bank overdraft is transferred because it is a liability.

Treating Partner’s Loan Like an External Liability

Partner’s loan is not transferred to Realisation Account. It is paid separately after external liabilities.

Passing an Entry When Creditor Accepts an Asset in Full Settlement

If no cash difference is involved, no extra entry is passed.

Forgetting Realisation Expenses

Expenses paid by the firm reduce the realisation result, so they are debited to Realisation Account.

Sharing Profit or Loss in the Wrong Ratio

Realisation profit or loss is shared in the profit-sharing ratio unless the question says otherwise.

Putting Reserves in Realisation Account

General reserve, accumulated profits, accumulated losses, and fictitious assets go directly to partners’ capital accounts.

Quick Revision Checklist

Use this checklist before finalising your answer:

• Have you transferred all assets except cash and bank balance?
• Have you transferred all external liabilities?
• Have you kept partner’s loan outside Realisation Account?
• Have you credited Realisation Account with actual asset sale proceeds?
• Have you debited the partner’s capital account for assets taken over?
• Have you debited Realisation Account for liabilities paid by the firm?
• Have you credited the partner’s capital account for liabilities taken over?
• Have you treated realisation expenses according to who pays and who bears them?
• Have you moved reserves and accumulated losses directly to partners’ capital accounts?
• Have you shared realisation profit or loss in the correct ratio?

If all answers are yes, your Realisation Account is likely on the right track.

Frequently Asked Questions

What is Realisation Account in dissolution of partnership firm?

Realisation Account is an account prepared at the time of dissolution to close assets and external liabilities, record sale proceeds, liability payments, dissolution expenses, and calculate the final profit or loss on realisation.

Which assets are transferred to Realisation Account?

All assets except cash and bank balance are transferred to Realisation Account. Fictitious assets and accumulated losses are not transferred. They are debited directly to partners’ capital accounts.

Are cash and bank transferred to Realisation Account?

No. Cash and bank balances are not transferred to Realisation Account because they are used for receipts and payments during dissolution. Bank overdraft is different because it is a liability, so it is transferred.

Is partner’s loan transferred to Realisation Account?

No. Partner’s loan is not transferred to Realisation Account. It is settled separately after outside liabilities are paid.

What is the entry for assets sold during dissolution?

The entry is Bank A/c Dr. to Realisation A/c. The amount recorded is the actual amount received from the sale.

What is the entry when a partner takes over an asset?

The entry is Partner’s Capital A/c Dr. to Realisation A/c. The partner receives the asset, so the partner’s capital account is debited.

What is the entry when a liability is paid?

The entry is Realisation A/c Dr. to Bank A/c. The payment is recorded at the actual amount paid.

What happens if a partner takes over a liability?

The entry is Realisation A/c Dr. to Partner’s Capital A/c. The partner is taking responsibility for the liability, so the partner’s capital account is credited.

How are realisation expenses treated?

If the firm pays and bears the expenses, Realisation Account is debited and Bank Account is credited. If a partner pays expenses on behalf of the firm, Realisation Account is debited and the partner’s capital account is credited.

How is profit or loss on realisation transferred?

Realisation profit is transferred by debiting Realisation Account and crediting partners’ capital accounts. Realisation loss is transferred by debiting partners’ capital accounts and crediting Realisation Account.