Accounting Treatment –
The books of accounts of a partnership firm are closed consequent to the order of dissolution passed by the court or mutual agreement between the partners. When a firm is dissolved it calls for settlement of its accounts.
In this process, assets of the firm are disposed off to meet the obligations of the firm. The profit or loss derived post the settlement of accounts is divided between the partners in their profit sharing ratio.
To ascertain such profit or loss, a Realisation account is prepared. It records both realisation of assets and payment of liabilities. If realisations are in excess of payments it results in profit and if payments are in excess of realisations it generates loss.
How to prepare a Realisation account?
- All asset accounts are closed by transferring their book value to the debit of Realisation account. However, cash, bank and fictitious assets are not transferred to this account. Also, any asset for which a provision is in existence, the gross value of such asset will be posted to the debit of Realisation account and the provision amount is recorded on the credit side of this account. For eg – Sundry debtors and provision for doubtful debts, fixed assets and provision for depreciation etc.
- Similar to assets, all liabilities accounts are closed by transferring them to the credit side of the Realisation account.
- Next, any sale of assets and settlement of liabilities are recorded. These entries are routed through the Bank account.
- Any expenses incurred to carry out the process of realisation of assets and payment of liabilities are also recorded.
- Any other expenses or unrecorded assets or liabilities are also taken into account while preparing the Realisation account.
- The balance after the posting of above entries is either profit or loss on realisation. This is transferred to the partner’s capital accounts in the profit sharing ratio.
Format of Realisation Account –
Thus, to close all accounts of a partnership firm in the event of dissolution, a Realisation account is prepared. All assets and liabilities are posted at the book value and all realisations and settlements are recorded.