ACCOUNTING TREATMENT -  JOURNAL ENTRIES

1. For transferring the assets

Transfer to the debit of realization account at their gross book values of all accounts of assets excluding cash, bank and fictitious assets.

Realization a/c Dr.
To Assets a/c(individually)

It is to be noted that debit balances such as accumulated losses and deferred expenses are not transferred to the realization account. These are transferred to the partners’ capital account in their profit sharing ratio by recording the following entry :

Partners’ capital a/c Dr.
To Fictitious assets a/c


2. For transferring the liabilities

All external liability accounts including provisions, if any, in respect of assets which have been transferred to the realization account are closed by transferring them to the credit of realization account at their book values.

External liabilities a/c(Individually) Dr.
To Realization a/c

Partners’ capital account and loan account of the partner are prepared separately and are not transferred to realization account.


3. For the sale of assets

Bank a/c(realized price) Dr.
To Realization a/c


4. For an asset taken over by a partner

Partner’s capital a/c Dr.
To Realization a/c(Agreed price)


5. For payment to creditors

Any amount paid in cash to creditors, realization account is debited and cash/bank account is credited.

Realization a/c Dr.
To Bank a/c


6. Settlement with the creditors through the transfer of asset 

When a creditor accepts an asset in part payment no entry is recorded. It is because the liability due to the creditors has already been transferred to the credit of realization account and the asset is taken over by the creditor is appearing on the debit side of the realization account. Thus, the debit of the asset cancels the credit of the corresponding liability in the realization account. Sometimes, a creditor may accept part of his payment in cash and part of his payment by taking over an asset. In this case, the entry will be recorded for cash payment only. 

For example, a creditor to whom Rs. 10,000 was due to accepted office equipment worth Rs. 8,000. He will be paid Rs. 2,000 in cash by recording the following entry :

Realization a/c Dr.Rs. 2,000
To Bank a/c Rs. 2,000

Whenever a creditor takes over an asset, there may be two situations :


(a) When a creditor accepts an asset whose value is more than the amount due to him, he will pay cash. It is recorded as :

Bank a/c Dr.
To Realization a/c

(b) When a creditor accepts an asset as a full and final settlement, no journal entry is recorded.

 

7. Expenses of realization

(a) When realization expenses are paid by the firm

Realization a/c Dr.
To Bank a/c


(b) When firm has agreed to pay partner a fixed amount towards realization expenses irrespective of the actual realization expenses

Realization a/c Dr.
To Partners’ capital a/c


(c) When the actual expenses are paid by the firm on behalf of a partner, the following entry will be recorded :

Partners’ capital a/c Dr.
To Bank a/c


(d) However, if a partner himself pays and agreed not to get them reimbursed, no journal entry is recorded.

(e) When the partner agrees to pay the expenses on behalf of the firm, the entry to be recorded :

Realization a/c Dr.
To Partners’ capital a/c


8. When liabilities are paid off

Realization a/c Dr.
To Bank a/c


9. When partner discharges a liability

The liability account is transferred from realization account to partner’s capital account by recording the following entry :

Realization a/c Dr.
Partners’ capital a/c


10. For realization of any unrecorded assets

Bank a/c Dr.
To Realization a/c


11. Unrecorded asset is taken over by a partner

Partners’ capital a/c Dr.

To Realization a/c


12. For settlement of any unrecorded liability

Realization a/c Dr.
To Bank a/c


13. Unrecorded liability is taken over by a partner

Realization a/c Dr.
To Partners’ Capital a/c


14. When the profit (loss) on realization is transferred to partners’ capital account in their respective profit sharing ratio :

(a) In case of profit on realization

Realization a/c Dr.
To Partners’ Capitals a/c(individually)


(b) In case of loss on realization

Partners’ Capitals a/c (individually) Dr.
To Realization a/c


15. For transferring accumulated profits and reserve

All accumulated profits and reserves are transferred to the partners’ capital account in their respective profit-sharing ratios:

Accumulated profit/reserves Dr.
To Partners’ capitals a/c (Individually)


16. Transfer of fictitious assets

All accumulated losses and fictitious assets are debited to the partners’ capital accounts in their profit sharing ratio :

Partners’ capitals a/c (Individually) Dr.
To Accumulated losses/Fictitious Assets a/c


17. Payment of loans

Any loans due to partners are paid off :

Partner’s loan a/c Dr.

To Bank a/c


18. Settlement of capital accounts

(a) If the partner’s capital account shows a debit balance, he is to bring in the necessary cash :

Bank a/c Dr.
To Partners’ capital a/c


(b) In the case of partners whose accounts show credit balance, the same is paid off :
Partners’ capitals a/c Dr.
To Bank a/c

It may be noted that the aggregate amount finally payable to the partners must equal to the amount available in the bank and cash accounts. Thus, all accounts of a firm are closed in case of dissolution. At times, the Balance Sheet of the firm may not be available on dissolution of partnership firm. In such a situation, first of all, all the relevant ledger balances are worked out and then the Balance Sheet of the firm on the date of its dissolution is prepared. Thereafter, the process of dissolution is undertaken in the same manner as discussed above.

What happens to goodwill on the dissolution of partnership?

We all know goodwill is an Intangible Asset. When the firm is shut down, It is common practice to sell all the assets. Thus goodwill that appeared in the Balance Sheet is transferred to the Debit side of the Realisation Account to be sold.

Journal Entry of Goodwill in Dissolution of the partnership Firm

Following are the accounting treatment with journal entries of goodwill at the time of dissolution of the partnership firm

When goodwill is transferred to Realisation Account.

Realization A/c Dr.
To Goodwill A/c
(Being goodwill transferred to realization a/c)

When goodwill is sold in cash

Bank (Cash) A/c Dr.
To Realisation A/c
(Being goodwill is sold)

When goodwill is taken over by Partner

Partner’s Capital A/c Dr
To Realisation A/c
(Being goodwill is taken over by partner)

Note:- If Nothing is mentioned about the realization amount of goodwill. It is assumed the market value of goodwill is nil and nothing is realized


(i) For Unrecorded Assets

An unrecorded asset is such an asset whose value is written off from books of accounts, but it is in usable form. It is shown as:
1. If sold in cash

Cash A/c Dr.

To Realisation A/c

(Unrecorded asset sold off for cash)

 

2. If taken over by any partner

Partner’s Capital A/c Dr.

To Realisation A/c

(Partner takes over unrecorded asset)

ii) For unrecorded liabilities

Liabilities that are not recorded in the books of a firm are called unrecorded liabilities. It can be shown in records as

1. When unrecorded liability is paid off

Realization A/c Dr.

To Cash A/c

(Paid in cash the price of unrecorded liability)

2. When undertaken by a partner

Realization A/c Dr.

To Partner’s Capital A/c

(Liability that is unrecorded is taken over by partner)

Difference Between Realisation and Revaluation Account

 

Accounting Treatment

When the firm is dissolved, its books of account are to be closed and the profit or loss arising on realisation of its assets and discharge of liabilities is to be computed. For this purpose, a Realisation Account is prepared to ascertain the net effect (profit or loss) of realisation of assets and payment of liabilities which may be is transferred to partner's capital accounts in their profit sharing ratio. Hence, all assets (other than cash in hand bank balance and fictitious assets, if any), and all external liabilities are transferred to this account. It also records the sale of assets, and payment of liabilities and realisation expenses. The balance in this account is termed as profit or loss on realisation which is transferred to partners' capital accounts in the profit sharing ratio (see figure 5.1).

Realization Account

Fig. 5.1: Format of Realisation Account

Revision 1

Supriya and Monika are partners, who share profit in the ratio of 3:2. Following is the balance sheet as on March 31, 2020.

Balance Sheet of Supriya and Monika as on March 31, 2020

The firm was dissolved on March 31, 2020. Close the books of the firm with the following information:

    1. Debtors realised at a discount of 5%,
    2. Stock realised at Rs.7,000,
    3. Fixed assets realised at Rs.42,000,
    4. Realisation expenses of Rs.1,500,
    5. Creditors are paid in full.

Record necessary journal entries at the time of dissolution of a firm.

Solution

Books of Supriya  and Monika

Realisation Account

Working Notes:

Books of Supriya  and Monika

Realisation Account

                                                                                                                                                    Dr.                                                                   Cr.

Partners Capital  Accounts

                                                                                                                                                 Dr.                                                                                Cr.

Journal Entries

1.  For trnasfer of assets
All asset accounts excluding cash, bank and the fictitious assets, if any are closed by transfer to the debit of Realisation Account at their book values. It may be noted that sundry debtors are transferred at gross value and the provision for doubtful debts is transferred to the credit side of Realisation Account along with liabilities. The same thing will apply to fixed assets, if provision for depreciation account is maintained.

Realisation A/c                                            Dr. To Assets (Individually) A/c
2.  For transfer of liabilities
All external liability accounts including provisions, if any, are closed by transferring them to the credit of Realisation account.
Liabilities (individually)                                Dr. To Realisation A/c
3.  For sale of assets
Bank A/c                                                      Dr.  (with the same value)
To Realisation A/c                                                (with the same value)
4.  For an asset taken over by a partner
Partner's Capital A/c                                    Dr. (with the amount assets are taken over)
To Realisation A/c                                               (with the amount assets are taken over)
5.  For payment of liabilities
Realisation A/c                                            Dr. (with the amount at which settled)
 To Bank A/c                                                        (with the amount at which settled)
6.  For a liability which a partner takes responsibility to discharge
Ralisation A/c                                              Dr. To Partner's Capital A/c
7.  For settlement with the creditor through transfer of assets when a creditor accepts an asset in full and final settlement of his account, no journal entry needs to be recorded. But, if the creditor accepts an asset only as part payment of his/her dues, the entry will be made for cash payment only. For example, a creditor to whom Rs. 10,000 was due accepts office equipment worth Rs. 8,000 and is paid Rs. 2,000 in cash, the following entry shall be made for the payment of Rs. 2,000 only.
Realisation A/c                                            Dr. To Bank A/c
However, when a creditor accepts an asset whose value is more than the due amount he/she pay cash to the firm for the difference for which the entry will be:
Bank A/c                                                      Dr. To Realisation A/c
8.  For paynent of realisation expenses
(a) When some expenses are incurred and paid by the firm in the process of realisation of assets and payment of liabilities:
Realisation A/c                                            Dr. To Bank A/c
(b) When realisation expenses are paid by a partner on behalf of the firm:
Realisation A/c                                            Dr. To Partner's Capital A/c
(c) When a partner has agreed to bear the realisation expenses:
(i) if payment of realisation expenses is made by the firm
Partner's Capital A/c                                    Dr. To Bank A/c
(ii) if the partner himself pays the realisation expenses, no entry is required
Note: In the absence of information about who is paying the expenses, it is implied that expenses are paid by the partner who has agreed to bear expenses.
9.  For agreed remuneration to such partner who agrees to undertake the dissolution work.
Realisation A/c                                            Dr. To Partner's Capital A/c
10. For realisation of any unrecorded assets including goodwill, if any
Bank A/c                                                      Dr. To Realisation A/c
11. For settlement of any unrecorded liability
Realisation A/c                                            Dr. To Bank A/c
12. For transfer of profit and loss on realisation          (Cr. Blance) (a) In case of profit on realisation
Realisation A/c                                            Dr.
To Partners' Capital A/c (individually) A/c
(b) In case of loss on realisation
Partners' Capital A/c (individually)              Dr.   (Dr. Blance) To Realisation A/c
13. For settlement of loan by a firm to a partner:
Bank A/c                                                      Dr. To loan to partners A/c
14. For transfer of accumulated profits in the form of general reserve to partners' capital accounts in their profit sharing ratio:
General Reserve A/c                                     Dr. To Partners' Capital A/c (individually)
15. For transfer of fictitious assets, if any, to partners' capital accounts in their profit sharing ratio:
Partners' Capital A/c (individually)              Dr. To Fictitious Asset A/c
16. For payment of loans due to partners
Partner's Loan A/c                                       Dr. To Bank A/c
17. For settlement of partners' accounts
If the partner's capital account shows a debit balance after posting of rebount entries firms. He brings in the necessary cash for which the entry will be:
Bank A/c                                                      Dr. To Partner's Capital A/c
The balance is paid to partners whose capital accounts show a credit balance and the following entry is recorded.
Partners' Capitals A/cs (individually)           Dr. To Bank A/c
It may be noted that the aggregate amount finally payable to the partners must equal to the amount available in bank and cash accounts. Thus, all accounts of a firm are closed in case of dissolution.

 Revision  2

Sita, Rita and Meeta are partners sharing profit and losses in the ratio of 2:2:1
Their balance sheet as on March 31, 2017 is as follows:

Balance Sheet  of Sita, Rita and Meeta as on March 31, 2017

They decided to dissolve the business. The following amounts were realised: Plant and Machinery Rs.4,250, Stock Rs.3,500, Debtors Rs.1850, Furniture 750.

Sita agreed to bear all realisation paid by the firm expenses. For the service Sita is paid Rs.60.

Actual expenses on realisation paid by the firm amounted to Rs.450.Creditors paid 2% less. There was an unrecorded assets of Rs.250, which was taken over by Rita at Rs.200.

Prepare the necessary accounts to close the books of the firm.

Solution

Books of Sita, Rita and Meeta

Realisation Account 

                                                                                                                                                                 Dr.                                                      Cr.

Partner's  Capital Accounts

                                                                                                                                          Dr.                                                                                   Cr.

Bank Account 

                                                                                                                                             Dr.                                                                                     Cr.

Revision  3

Record journal entries at the time of dissolution of a partnership firm of Vibha, Shobha and Anubha in the following cases:

  1. Dissolution expenses amounted to Rs. 6,500.
  2. Dissolution expenses Rs. 7,800 were paid by Anubha.
  3. Vibha was appointed to look after the dissolution process for which she was given a remuneration of Rs. 12,000
  4. Shobha was appointed to look after the dissolution work for which she was allowed a remuneration of Rs.15,000. She agreed to bear dissolution expenses. Actual dissolution expenses paid by her amounted to Rs.11,800.
  5. Anubha was to look after the dissolution process for which she was allowed a remuneration of Rs. 12,000 she also agreed to bear dissolution expenses. Actual expenses Rs. 9,500 were paid by the firm.
  6. Anubha looked after the dissolution work for remuneration of Rs. 8,500 and agreed to bear dissolution expenses upto Rs. 6,000. Actual expenses paid by her were Rs. 7,600.
  7. Vibha was appointed to look after the dissolution work for which she was allowed a remuneration of Rs. 14,000. She agreed to take over investment of the book value of Rs. 13,000 towards payment of her remuneration. Investments have already been transferred to realisation Account.

Book of Vibha, Shobha and Anubha

Revision 4

Nayana and Arushi were partners sharing profits equally Their Balance Sheet as on March 31, 2020 was as follows:

Balance  Sheet  of  Nayana  and Arushi  as on  March  31,  2017

The firm was dissolved on the above date:

  1. Nayana took over 50% of the stock at 10% less on its book value, and the remaining stock was sold at a gain of 15%. Furniture and Machinery realised for Rs.30,000 and Rs.50,000 respectively.
  2. There was an unrecorded investment which was sold for Rs. 34,000.
  3.  Debtors realised 90% only and Rs.1,200 were recovered for bad debts written-off last year.
  4. There was an outstanding bill for repairs which had to be paid for Rs.2,000.

Record necessary journal entries and prepare ledger accounts to close the books of the firm.

Solution

Books of Nayana and Arushi

Journal

 

Realisation Account

                                                                                                                                 Dr.                                                                                        Cr.

Partners'  Current   Accounts

                                                                                                                                                Dr.                                                                                Cr.

Partner's  Capital   Accounts

                                                                                                                                                     Dr.                                                                       Cr.

Bank Account

                                                                                                                                                             Dr.                                                                    Cr.

Revision 5

Following is the Balance Sheet of Ashwani and Bharat on March 31, 2017.

Balance Sheet  Ashwani and Bharat as on March 31, 2017

The firm was dissolved on that date. The following was agreed transactions took place.
(i)   Aswhani promised to pay Mrs. Ashwani's loan and took away stock for Rs.8,000.
(ii)  Bharat took away half of the investment at 10% less. Debtors realised for Rs.38,000. Creditor's were paid at less of Rs.380. Buildings realised for Rs.1,30,000, Goodwill Rs.12,000 and the remaining Investment were sold at Rs.9,000. An old typewriter not recorded in the books was taken over by Bharat for Rs. 600. Realisation expenses amounted to Rs. 2,000.
Prepare Realisation Account, Partner's Capital Account and Bank Account.

Solution

Books of Ashwani and Bharat

Realisation Account 

                                                                                                                                                           Dr.                                                                               Cr.

Partner's  Capital  Accounts

                                                                                                                                         Dr.                                                                                      Cr.

Bank Account

 

Revision  6

Sonia, Rohit and Udit are partners sharing profits in the ratio of 5:3:2. Their

Balance Sheet as on March 31, 2017 was as follows:

Balance Sheet  of Sonia, Rohit  and Udit as on March 31, 2017

The firm was dissolved on that date. Close the books of the firm with following information:

  1. Buildings realised for Rs.1,90,000, Bills receivable realised for Rs.1,10,000; Stock realised Rs.1,50,000; and Machinery sold for Rs.48,000 and furniture for Rs. 75,000.
  2. Bank loan was settled for Rs.1,30,000. Creditors and Bills payable were settled at 10% discount.
  3. Rohit paid the realisation expenses of Rs.10,000 for which he paid Rs.12,000 for completing the dissolution process. Prepare necessary ledger accounts.

Solution

Books of Sonia, Rohit  and Udit

Realisation Account                                                                                                                                                                                                                             Cr.                                                                         Dr.   

Partner's  Capital  Accounts

                                                                                                                                                  Dr                                                                          Cr

Bank Account

                                                                                                                                                     Dr                                                                          Cr

Note:  No entry has been recorded in firm's books for the actual realisation expenses

incurred by Rohit because he gets Rs. 12,000 as his remuneration which has been duly accounted for. 

 

Revision 7

Romesh and Bhawan were in partnership sharing profit and losses as 3:2.
Their Balance Sheet as on March 31, 2017, was as follows:

Balance Sheet  of Romesh  and Bhawan as on March 31, 2014

They decided to dissolve the firm. The following information is available:

  1. Debtors were recovered 5% less. Stock was realised at books value and building was sold for Rs.51,000.
  2. It is found that investment not recorded in the books amounted to Rs.10,000. The same were accepted by one creditor for this amount and other Creditors were paid at a discount of 10%. Bills payable were paid full.
  3. Romesh took over some of the Investments at Rs.8,100 (book value less 10%). The remaining investment were taken over by Bhawan at 90% of the book value less Rs.900 discount.
  4. Bhawan paid bank loan along with one year interest at 6% p.a, An unrecorded liability of Rs.5,000 was paid.

Close the books of the firm by preparing necessary ledger accounts.

Solution

Books of Romesh  and Bhawan

Realisation Account

                                                                                                                                                                  Dr                                                                           Cr

Partner's    Capital   Accounts

                                                                                                                                                                      Dr.                                                                                Cr.

Bank Account

                                                                                                                                                                  Dr.                                                                                   Cr.

Note:  No entry has been made for acceptance of unrecorded investments by a creditor as part payment of his dues as per rules.

Revision  8

Sonu and Ashu sharing profits as 3:1 and  they agree upon dissolution. The
Balance Sheet as on March 31, 2017 is as under:
Balance Sheet  of Sonu and Ashu as on March 31, 2017

Sonu took over plant and machinery at an agreed value of  Rs.60,000.  Stock and Furniture were sold for Rs.42,000 and Rs.13,900 respectively. Debtors were taken over by Ashu at Rs.69,000.  Creditors were paid subject to discount of Rs.900. Sonu agrees to pay the loans. Realisation expenses were Rs.1,600.

Prepare Realisation Account, Bank Account and Capital Accounts of the Partners.

Solution

Books of Sonu and Ashu

Realisation Account

                                                                                                                                                                    Dr.                                                                 Cr.

Partners  Capital  Accounts

                                                                                                                                                               Dr.                                                                                      Cr.

Bank Account

                                                                                                                                                                   Dr.                                                                                     Cr.

Revision 9

Anju, Manju and Sanju sharing profit in the ratio of 3:1:1 decided to dissolve their firm. On March 31, 2014 their position was as follows:

Balance  Sheet  Anju,  Manju and Sanju as on  March  31,  2017

It is agreed that:

  1. Anju takes over the Furniture at Rs.10,000 and Debtors amounting to Rs.2,00,000 at Rs.1,85,000. Anju also agrees to pay the creditors,
  2. Manju is to take over Stock at book value and Buildings at book value less 10%,
  3. Sanju is to take over remaining Debtors at 80% of book value and responsibility for the discharge of the loan,
  4. The expenses of dissolution amounted to Rs.2,200. Prepare Realisation Account, Bank Account and Capital Accounts of the partners.

Solution

Books of Anju, Manju and Sanju

Realisation Account

                                                                                                                                                       Dr.                                                                                       Cr.

Partner's  Capital Accounts

                                                                                                                                                       Dr.                                                                                                  Cr.

Alternatively, Manju's loan may be first paid through bank account then the amount payable by Manju on account of debit balance in her capital account. Rs. 16,0,120 can be corrected form her.

Bank Account

                                                                                                                                                                        Dr.                                                                              Cr.

Revision 10

Sumit, Amit and Vinit are partners sharing profit in the ratio of 5:3:2.
Their Balance Sheet as on March 31, 2017 was as follows:

Balance Sheet  of Sunit, Amit  and Vinit  as on March 31, 2017

The firm was dissolved on that date. Amit took over his wife's loan.

One of the Creditors for Rs.2,600 was not claim the amount. Assets realised as follows:

  1. Machinery was sold for Rs.70,000,
  2. Investments with book value of Rs.1,00,000 were given to Creditors in full settlement of their account. The remaining Investments were taken over by Vinit at an agreed value of Rs.45,000,
  3. Stock was sold for Rs.11,000 and Debtors for Rs.3,000 proved to be bad,
  4. Realisation expenses were Rs.1,500.

Prepare ledger accounts to close the books of the firm.

Solution

Books of Amit,  Sumit and Vinit

Realisation Account

                                                                                                                                                                       Dr.                                                                     Cr.

Partners  Capital  Accounts

                                                                                                                                                            Dr.                                                                                            Cr.

Bank Account

                                                                                                                                                      Dr.                                                                                                     Cr.

Note:  No entry has been made for the investments taken over by the creditors as per rules.

Revision  11

Meena and Tina are partners in a firm and sharing profit as 3:2. They decided to dissolve their firm on March 31, 2017 when their Balance Sheet was a follows:

Balance Sheet  Meena and Tina as on March 31, 2017

The assets and liabilities were disposed off as follows :

  1. Machinery were given to creditors in full settlement of their account and Stock were given to bills payable in full settlement.
  2. Investment were taken over by Tina at book value. Sundry debtors of book value Rs. 50,000 took over by Meena at 10% less and remaining debtors realised Rs. 51,000.
  3. Realisation expenses amount to Rs. 2,000.

Prepare necessary ledger accounts to close the book of the firm.

Solution

Books of Meena and Tina - Realisation Account

Partner's  Capital  Accounts

                                                                                                                                                           Dr.                                                                                                     Cr.

Bank Account

                                                                                                                                                                 Dr.                                                                           Cr.

Summary

1.   Dissolution of Partnership Firm: The dissolution of a firm implies the discontinuance of partnership business and termination of economic relations between the partners. In the case of a dissolution of a firm, the firm closes its business altogether and realises all its assets and pays all its liabilities. The payment is made to the creditors first out of the assets realised and, if necessary, next out of the contributions made by the partners in their profit sharing ratio. When all accounts are settled and the final payment is made to the partners for the amounts due to them, the books of the firm are closed.

2.   Dissolution of Partnership: A partnership gets terminated in case of admission, retirement death, etc. of a partner. This does not necessarily involve dissolution of the firm.

3.   Realisation Account: The Realisation Account is prepared to record the transactions relating to sale and realisation of assets and settlement of creditors. Any profit or loss arising act of this process is shared by partners' in their profit sharing ratio. Partners' accounts are also settled and the Cash or Bank account is closed.