A realisation account is opened in order to ascertain whether a profit or a loss has been resulted upon the dissolution.
(1) Dr. Realisation Transfer the book values of assets except cash and bank balance
(2) Dr. Realisation With realisation expenses paid
(3) Dr. Capital With agreed values of any assets taken over by a partner
(4) Dr. Cash With amounts realized for the assets
(5) Dr. Creditors With discount received on cash paid to settle balance sheet liabilities
(6) Dr. Capital With balance of realisation transferred to capital accounts in profit sharing ratio
Cr. Realisation (if loss incurred)
(7) Dr. Capital With balance due to partners as shown by capital accounts
Debit Side: Item (1) Each asset is individually transferred at book value i.e. The value appearing in the balance sheet. However, cash, bank, profit & loss account and partner's current accounts are not transferred. Item (2) Payment made by the firm for settlement of liabilities is recorded at the actual amount paid. Item (3) payment may have to be made for unrecorded liabilities, contingent liabilities. Actual amount paid is recorded here. Item (4) In the process of dissolution of firm expenses incurred is known as dissolution expenses. Actual expenditure is recorded. Item (5) Any partner may agree to assume any liability of the firm i.e. He undertakes to discharge the liability of the firm. With the agreed value the capital account is credited. Item (6) Difference in dissolution account when credit side is bigger than debit side represents profit on realization is credited to partners' capital accounts in their profit sharing ratio. Credit Side: Item (1) Liabilities like creditors, bills payable, bank overdraft etc. Are transferred at book value. Item (2) Reserve or provision for bad and doubtful debts against sundry debtors or bills receivable appearing in the balance sheet are transferred at book value. Item (3) Joint life policy reserve is maintained against joint life policy, it is credited to realization account. Item (4) Provision for depreciation maintained against assets is credited to realization account. Item (5) This fund is maintained to meet the loss arising due to decrease in the value of investment. It is also closed through realization account. However, it may be noted that item number 2 and 5 does not represent any liability so no payment shall be made against these items. Item (6) Actual amount realized from the sale of assets is recorded here. Item (7) Any asset taken over by any partner is recorded here at the value agreed. Item (8) Excess of debit over credit side of the realization account representing loss on realization is debited to capital accounts of the partners in their profit sharing ratio.
Real account;debit-what's comes in and credit-what goes out.