In this topic
Learning outcomes
- Explain the relevant accounting rule and terminology.
- Prepare a correctly classified calculation or statement.
- Show working notes and verify the debit-credit or balance check.
Key vocabulary
Concepts to know
Termination of the partnership business and settlement of its affairs.
A nominal account that records transfer and sale of assets, settlement of liabilities, dissolution expenses and resulting profit/loss.
A liability paid separately from capital; do not transfer it as a firm liability to Realisation Account.
Core notes
Realisation process
Transfer assets (excluding cash/bank and fictitious assets) to Realisation Account at book values. Transfer external liabilities (excluding partners’ loans and capitals) to Realisation. Record sale proceeds, assets taken over by partners, liabilities paid, liabilities taken over and dissolution expenses. Profit/loss on realisation is transferred to partners’ capital accounts in the profit-sharing ratio.
Cash and bank are not transferred to Realisation; they are used to settle liabilities and distribute the remainder. Fictitious assets are written off to partners’ capital accounts. A partner’s loan is paid after external liabilities but before partners’ capital balances, subject to the facts and applicable order.
Core notes
Common journal patterns
When assets transfer: Realisation Dr. To individual assets. For sale: Bank Dr. To Realisation. For a liability transferred: liability Dr. To Realisation; when paid: Realisation Dr. To Bank. For an asset taken over by a partner: Partner’s Capital Dr. To Realisation. For a liability taken over by a partner: Realisation Dr. To Partner’s Capital.
Record unrecorded assets realised as Bank Dr. to Realisation, and unrecorded liabilities paid as Realisation Dr. to Bank. Realisation expenses paid by the firm are debited to Realisation and credited to Bank; if a partner personally bears them, follow the stated agreement and avoid recording a firm cash payment. Maintain the Realisation Account until all assets, liabilities, expenses and partner takeovers have been recorded, then transfer its profit or loss to partners’ capital accounts in the profit-sharing ratio.
Core notes
Final settlement and checks
After realisation profit/loss, settle partner loans, then capital balances. If a partner is insolvent, apply the treatment prescribed by the problem (including Garner v Murray only when explicitly required by the course/question). Do not assume a firm is dissolved merely because the partnership changes; distinguish reconstitution from dissolution.
Record unrecorded assets realised as Bank Dr. to Realisation, and unrecorded liabilities paid as Realisation Dr. to Bank. Realisation expenses paid by the firm are debited to Realisation and credited to Bank; if a partner personally bears them, follow the stated agreement and avoid recording a firm cash payment. Maintain the Realisation Account until all assets, liabilities, expenses and partner takeovers have been recorded, then transfer its profit or loss to partners’ capital accounts in the profit-sharing ratio.
Worked example
Step-by-step illustration
Assets at book values ₹1,20,000 are transferred; liabilities ₹30,000; assets are sold for ₹1,05,000; liabilities are paid ₹28,000; dissolution expenses ₹2,000 are paid by the firm. Realisation loss = assets transferred 1,20,000 + liability settlement 28,000 + expenses 2,000 − liabilities transferred 30,000 − sale proceeds 1,05,000 = ₹15,000.
| Journal entry | Dr (₹) | Cr (₹) |
|---|---|---|
| Realisation A/c Dr. To Assets A/c | 1,20,000 | 1,20,000 |
| Bank A/c Dr. To Realisation A/c | 1,05,000 | 1,05,000 |
| Liabilities A/c Dr. To Bank A/c | 28,000 | 28,000 |
| Realisation A/c Dr. To Bank A/c (expenses) | 2,000 | 2,000 |
| Partners’ Capital A/cs Dr. (ratio) To Realisation A/c (loss) | 15,000 | 15,000 |
Board preparation
Original practice questions
- Distinguish dissolution of partnership from dissolution of firm.
- Pass entries for an unrecorded asset sold for cash and an unrecorded liability paid.
- Explain the order for settling outside liabilities, partner loans and capitals.
Use a Realisation checklist and post every item once. Reconcile the Realisation Account and verify final bank cash equals total payments and partner distributions.
These are original practice questions, not claimed previous-year questions. Follow the exact method and rounding instructions in your prescribed text and school guidance.
Current syllabus
How this topic fits the course
Accounting for Partnership Firms is part of the CBSE Class XII Accountancy course structure. Computerised Accounting is an alternative to Financial Statement Analysis, not an additional compulsory unit.
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