Hello! Welcome back to our lessons on the dissolution of a partnership firm.
In the last few lessons, we've built the Realisation Account piece by piece. You learned how to transfer assets and liabilities to it, record the cash received from selling assets, and account for the payment of liabilities and various dissolution expenses. Now, it's time to complete the picture.
Today's lesson focuses on the final step in preparing the Realisation Account: how to calculate and distribute the final profit or loss on realization among all partners. By the end of this lesson, you will be able to balance the Realisation Account, determine the net outcome of the dissolution, and correctly transfer this result to the partners.
1. Finalizing the Realisation Account
The Realisation Account is a nominal account, just like the Profit and Loss Account. Its sole purpose is to determine the net profit or loss that arises from the process of selling assets and settling liabilities.
After all assets have been sold (or taken over by partners) and all liabilities and expenses have been paid, we balance the account. The logic is simple:
- The credit side records all inflows and liability transfers (e.g., assets realized, liabilities transferred).
- The debit side records all outflows and asset transfers (e.g., assets transferred, liabilities paid, expenses paid).
To find the final result:
- If the Total of the Credit Side > Total of the Debit Side, the firm has made a Profit on Realization.
- If the Total of the Debit Side > Total of the Credit Side, the firm has incurred a Loss on Realization.
The balancing figure—the profit or loss—is entered on the side with the lower total to make both sides equal.
- Profit is shown as the balancing figure on the debit side.
- Loss is shown as the balancing figure on the credit side.
2. The Process in Action
Let's watch a short video segment that clearly demonstrates these final steps of closing the Realisation Account.
Dissolution of a Partnership firm | Chapter 6 | Accountancy Class 12 | Part 1
In this video, Rajat Arora walks through the final steps of preparing a Realisation Account. Pay close attention to how he balances the account after all other entries are made.
Please watch from 16:29 to 19:01. Focus on what the instructor calls 'step no. 3': after recording expenses, he explains how to total the account, find the difference, and identify it as either profit (on the debit side) or loss (on the credit side).
As you saw, once all transactions are recorded, the final step is to balance the account and find the net result. This profit or loss belongs to the owners of the firm—the partners.
3. Distributing the Profit or Loss
The profit or loss on realization is the collective result of winding up the business. Therefore, it must be shared by all partners in their agreed profit-sharing ratio (PSR). This is the same ratio used for distributing profits and losses during the normal course of business.
Journal Entries for Distribution
The journal entries to transfer the profit or loss from the Realisation Account to the Partners' Capital Accounts are as follows:
A. For a Profit on Realization:
The profit increases the partners' capital. To increase capital, we credit the Partners' Capital Accounts.
- Journal Entry:
Realisation A/c Dr.
To Partner A's Capital A/c
To Partner B's Capital A/c
To Partner C's Capital A/c
(Being profit on realization transferred to partners' capital accounts in their PSR)
B. For a Loss on Realization:
A loss decreases the partners' capital. To decrease capital, we debit the Partners' Capital Accounts.
- Journal Entry:
Partner A's Capital A/c Dr.
Partner B's Capital A/c Dr.
Partner C's Capital A/c Dr.
To Realisation A/c
(Being loss on realization transferred to partners' capital accounts in their PSR)
Dissolution of Partnership Firm
This PDF document provides a concise list of all the main journal entries for dissolution. It's a useful reference to confirm the entries for distributing profit and loss.
Please scroll to the section titled 'Main Journal entries'. Review entry #13, 'When realization profit is transferred to the partners', and the subsequent entry for a loss on realization. This will reinforce the entries we just discussed.
4. A Practical Demonstration
Now let's see how this works within a complete problem. The following video solves a full dissolution question. We will focus only on the part where the Realisation Account is balanced.
Dissolution of Partnership Firm | Problem Solving 1 | Class 12 | Letstute
The team at Let'stute Accountancy solves a comprehensive problem here. We'll jump to the end to see how they calculate and distribute the realization profit.
Watch the segment from 21:19 to 23:12. Observe how the instructor first totals the credit and debit sides of the Realisation Account, calculates the profit of ₹9,400, and then distributes this amount among partners A, B, and C in their 5:3:2 ratio.
This practical example shows you exactly where this calculation fits into the overall process. The profit calculated (or loss) is then posted to the credit (or debit) side of the Partners' Capital Accounts, which is the crucial next step in closing the firm's books.
Test your understanding!
The following is a summary of the Realisation Account for the firm of X and Y, who share profits and losses in the ratio of 3:2.
Realisation Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Sundry Assets | 5,30,000 | By Sundry Liabilities | 1,20,000 |
| To Bank A/c (Liabilities Paid) | 1,10,000 | By Bank A/c (Assets Realised) | 6,00,000 |
| To Bank A/c (Expenses) | 10,000 | ||
| To Profit transferred to: | |||
| X's Capital A/c | ? | ||
| Y's Capital A/c | ? | ||
| Total | ? | Total | ? |
Calculate the profit or loss on realization and pass the necessary journal entry to distribute it.
Show answer
-
Calculate Totals:
- Credit Side Total = ₹1,20,000 + ₹6,00,000 = ₹7,20,000
- Debit Side Total (before profit) = ₹5,30,000 + ₹1,10,000 + ₹10,000 = ₹6,50,000
-
Calculate Profit:
- Profit = Credit Total - Debit Total
- Profit = ₹7,20,000 - ₹6,50,000 = ₹70,000
-
Distribute Profit (Ratio 3:2):
- X's Share = ₹70,000 * (3/5) = ₹42,000
- Y's Share = ₹70,000 * (2/5) = ₹28,000
-
Journal Entry:
Realisation A/c Dr. 70,000
To X's Capital A/c 42,000
To Y's Capital A/c 28,000
(Being profit on realization transferred to partners' capital accounts)
Conclusion
Well done! You have now learned how to complete the Realisation Account, a central component in the dissolution process.
Key Takeaways:
- The Realisation Account is balanced after all asset realizations and liability payments are recorded.
- If the credit side total is greater, the result is a profit. If the debit side total is greater, it's a loss.
- The final profit or loss is transferred to the Partners' Capital Accounts in their profit-sharing ratio.
- A profit is debited to Realisation A/c and credited to Capital A/cs. A loss is credited to Realisation A/c and debited to Capital A/cs.
Preview of the Next Lesson:
In our next lesson, we will "Prepare Partners' Capital Accounts to ascertain the final settlement." The profit or loss you just learned to distribute is a key piece of information we'll need. We will combine it with the partners' opening capital, any reserves, and assets or liabilities taken over to find out the final amount of cash each partner will receive from the firm (or in some cases, have to pay into the firm). This will bring us one step closer to fully closing the books.