What is Realisation Account?

At the time of dissolution of the Partnership firm, Assets are realised, outside liabilities are paid, loan by partner is repaid and the balance, if any, is distributed among the partners. Realisation account is prepared to close the books of accounts by realising assets (i.e. selling off ) and payment of liabilities. Realisation Account is a type of Nominal account.  The primary purpose of preparing Realisation A/c is to realise the value of assets and to settle liabilities of the firm. Thereby, closing the books of accounts. The gain (profit) or loss of the dissolved firm is determined by the realisation of assets and payment of liabilities.

Following are the steps involved in the preparation of Realisation A/c: 

1. All assets (except fictitious assets, loans to partners, and Cash or Bank A/c) are transferred to the debit side of the Realisation A/c. 

2. All liabilities except Loan by Partners and Partner’s Capital A/cs) are transferred to the credit side of the Realisation A/c. 

3. Amount realised from the sale of assets is transferred to the credit side of the Realisation Account. 

4. Payment of all the liabilities is recorded on the debit side of the Realisation Account.

5. Expenses incurred in the realisation by the firm are debited in the Realisation Account.

Balance of Realisation A/c is either gain (when the Credit side is more than the Debit side) or loss (when the Debit side is more than the Credit side) is transferred to the Capital A/c of all the partners in their profit-sharing ratio.