On dissolution of a firm, all the books of account are closed, all assets are sold and all liabilities are paid off. In order to record the sale of assets and discharge of liabilities, a nominal account is opened named realisation account. The main purpose to open realisation account is to ascertain the profit or loss due to the realisation of assets and liabilities. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the partner’s capital account in their profit sharing ratio.
Concisely, following are the important objectives of preparing realisation account
(i) To close all the books of account.
(ii) To record transactions relating to the sale of assets and discharge of liabilities.
(iii) To determine profit or loss due to the realisation of assets and liabilities.
Features of Realisation Account
(i) In realisation account, sale of assets is recorded at their realised value.
(ii) Payment to liabilities (creditors) is recorded at their settlement value.
(iii) After all the transactions have been recorded, there will be balance, which may be profit or loss.
(iv) Profit arises in two situations
(a) When assets are realised at more than their book value.
(b) When liabilities are settled at less than their book value.
(v) If the two conditions are vice versa, the net result will be loss.
(vi) The net profit or loss on realisation is to be transferred to the partner’s capital accounts in their profit sharing ratio.
The format for realisation account is as follows