What is a Realisation Account?
When a company is dissolved, its financial records are closed, its assets are sold, and all of its obligations are paid in full. A realisation account is a nominal account with the name realisation account to record the sale of assets and the discharge of obligations. The realisation account is opened primarily to determine whether a profit or loss was realised owing to the realisation of assets and liabilities. Realisation profit is transferred to the partner's capital account in their profit-sharing ratio if the credit side of the ledger is greater than the debit side. Realisation loss is transferred to the partner's capital account if the debit side of the ledger is greater than the credit side.
Defining the Term Realisation Account
Primary Goals for Realisation Account
The following is a condensed list of the primary goals that should be kept in mind while producing a realisation account for realisation expenses:
The primary objective is to shut the books on all financial transactions.
To keep a record of transactions that pertain to the sale of assets and the satisfaction of obligations.
To ascertain whether or not a profit was made due to the realisation of assets and liabilities.
Also, the dissolution expenses are treated as a liability to be paid.
Format for Realisation Account
The realisation account format is as follows:
Journal Entries Explained With Transactions
The journal entries of realisation account of the following:
To keep track of the sale of different assets and debts.
A company has Rs. xxx in stock. Aziz, a partner, bought xx% of the stock for xx% less than it was worth.
The rest was sold for xx% more than it cost.
A broker sold land and a building with a book value of Rs xxx for Rs xxx. The broker took x% of the sale price as his fee.
The dissolution of partnership firm journal entries are as follows:
Conclusion
Realisation account is a notional account used to close a company's books upon dissolution. It determines a company's final profit or loss. All revenues and spending should be credited to this nominal account. The realisation account debits all firm assets, excluding cash and bank balances, and credits all obligations (excluding the partner's capital and loan accounts).
The proceeds are credited to the realisation account when all business assets are sold. This account is debited for paying business obligations. Net profit or loss is allocated to partners' capital accounts in their profit-sharing ratio. When it closes, the realisation account determines the profit or loss from selling a company's assets and liabilities.
FAQs on Journal Entries of Realisation Account
1. What are the features of the Realisation Account?
The feature of the realisation account are as follows:
The sale of assets at realised value is noted in the realisation account.
Creditors are paid at a settlement value.
After all transactions are recorded, the balance is profit or loss.
There are two scenarios in which a profit may be made.
When an asset's actual worth exceeds the item's book value.
Liabilities resolved below book value.
If the circumstances are reversed, you'll lose.
Net realisation profit or loss is allocated to partners' capital accounts in their profit-sharing ratio.
2. When a partnership dissolves, how is goodwill handled?
No particular consideration for goodwill should be given during dissolution. It has to be managed like any other valuable possession. If it is already recorded, it will be moved to the Realisation Account debit side along with all other assets. There can be no talk of a move if it doesn't seem to be the case. Realised proceeds will be deposited into the Realisation Account, and the Cash Account or Bank will be debited. Suppose one of the partners purchases the company and agrees to make a payment in exchange for the goodwill. In that case, that amount will be deducted from his capital account and deposited into the Realisation Account.
3. What is preparing a memorandum balance sheet to identify miscellaneous assets?
Memorandum balance sheet is generated for computing the missing values of miscellaneous assets. There will be occasions when the whole worth of various assets is not provided. On the other hand, the value realised from the assets is provided, as are the capital contributions from the partners and any additional obligations. In such an instance, the preparation of the previous balance sheet is required to determine the various assets. To this total is added the amount of capital and any additional obligations. The aggregate figure represents the overall value of all of the assets.
