Dissolution of partnership Firm

Dissolution of partnership Firm means the complete end of the partnership business.

Condition of preparing Realization account:

The main condition of preparing realization account is the availability of complete Balance sheet of the firm. If it is not available, it must be prepared from the given information and finding out some missing information. Such balance sheet is called Memorandum Balance Sheet.

Realization Account is a nominal account prepared for the purpose of calculating and distributing the profit/loss arising out of realization of assets and repayment of liabilities, at the time of dissolution of a partnership firm.

Realization Account is always accompanied by Capital accounts of the partners and Bank account, cash account is merged into bank account for the sake of convenience. Sometimes, it is also accompanied by partners’ loan account.

All items appearing on assets side of the firm’s balance sheet, other than cash, bank balance, provision for asset, accumulated losses, deferred expenses, loan to a partner, current account (debit) are transferred to the debit side of realization account, at book values.

All items appearing on liabilities side of the firm’s balance sheet, other than accumulated profits, partner’s loan and capital accounts and current accounts are transferred to the credit side of realization account, at book values.

Items left from transfer to realization account should be transferred to the accounts shown as under:

  Capital Accounts Separate Capital Accounts opened for this purpose
  Current accounts(credit) Capital accounts
  Drawings Accounts Capital accounts
  Accumulated Profits Capital Accounts(credit side)
  Accumulated Losses (deferred expenses) Capital Accounts(debit side)
  Partner’s loan account Separate loan account opened(credit side)
  Loan to partner Capital account (debit side)
  Cash /Bank balance Bank Account (debit side)

Assets transferred to the debit side of realization account can be

a) sold off,

b) taken over by a partner or

c) can be used to pay off a liability.

Liability transferred to the credit side of realization account can be

a) paid off,

b) assumed by a partner or

c) can be set off against an asset.

If asset is used to pay off a liability, there is no corresponding treatment except for the net payment paid/received in cash/bank which must be shown in realization account.

* Investment Fluctuation Fund, Workmen Compensation Fund, should be transferred to the credit side of Realization account if the concerned assets/liability exists in the balance sheet of the firm. Otherwise these can be directly transferred to the credit side of Partners capital accounts in their profit sharing ratio.

** Employees Provident Fund must be transferred to the credit side of realization account as it seems to be a fund/reserve but it is for definite liability to be paid to the employees.

*** Loss on realization is shown on the credit side.

Accounts relating to Dissolution

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