— Kishore V, SME and ACW at Edumarz
All books of account are closed, all assets are sold, and all liabilities are paid off when a business is dissolved.
A notional account called the realisation account is created to document the sale of assets and the discharge of liabilities.
The primary goal of opening a realisation account is to determine the profit or loss resulting from the sale of assets and liabilities.
In their profit sharing ratio, realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) is transferred to the partner’s capital account.
The following are the main goals of developing a realisation account in a nutshell.
(i) To shut all of the accounting books.
(ii) To keep track of transactions such as asset sales and liability discharges.
(iii) To assess profit or loss as a result of asset and liability realisation.
Characteristics of a Realisation Account
(i)The sale of assets is documented in the realisation account at their realised value.
(ii) Liabilities (creditors) receive payment at their settlement value.
(iii) There will be a balance when all of the transactions have been recorded, which might be profit or loss.
(iv) Profit can be made in two ways.
(a) When assets are sold for a higher price than they were purchased for. When obligations are paid at a lower value than their book value.
(v) The net result will be lost if the two criteria are the opposite.
(vi) In their profit sharing ratio, the net profit or loss on realisation is transferred to the partners’ capital accounts.