Vision classes
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
