Realisation Account — Meaning, Purpose & Difference from Revaluation Account

Meaning of Realisation Account

A Realisation Account is a special account prepared at the time of the dissolution of a partnership firm. When partners decide to close the firm permanently, all assets are sold, liabilities are paid, and whatever surplus or deficit remains is distributed among the partners. The purpose of the Realisation Account is to record these transactions systematically and to determine the final profit or loss arising from the realization of assets and settlement of liabilities.

It is important to understand that the Realisation Account is prepared only at the time of dissolution of the firm and not during reconstitution of partnership. It acts as a summary account showing how much the firm gains or loses in the process of winding up.

Why Realisation Account is Prepared?

The Realisation Account is prepared for the following reasons:

To record the sale of assets: All assets (except cash, bank and fictitious assets) are transferred to the Realisation Account at book value and later recorded as realised when sold.
To record settlement of liabilities: All outside liabilities are transferred to the Realisation Account and the payment made is recorded.
To compute profit or loss: The difference between the realised value of assets and payment of liabilities results in a realisation profit or loss, which is transferred to partners’ capital accounts.
To simplify dissolution work: Instead of passing multiple entries for every asset and liability, all dissolution-related adjustments are passed through a single account.
To provide transparency: It shows clearly how assets were disposed of and how much was paid to creditors, enabling partners to verify correctness.

In simple terms, Realisation Account ensures that the dissolution process is properly recorded and the gain or loss from winding up the business is distributed fairly among partners.

Preparation of Realisation Account

The Realisation Account is prepared in the following steps:

Step 1: Transfer all assets (except cash and bank) at book values to the debit side of the account.
Step 2: Transfer all outside liabilities (creditors, bills payable, bank overdraft) to the credit side.
Step 3: Record the cash realised from sale of assets on the credit side.
Step 4: Record the payment made to settle liabilities on the debit side.
Step 5: Record dissolution expenses on the debit side.
Step 6: Transfer any unrecorded assets/liabilities appropriately.
Step 7: Balance the account to determine profit or loss and transfer it to partners’ capital accounts.

Thus, the Realisation Account acts as the final step in closing the books of the partnership firm.

How Realisation Account Differs from Revaluation Account

The Realisation Account and Revaluation Account often confuse students, but they differ significantly in purpose and usage. The following table explains the differences clearly:

Basis	Realisation Account	Revaluation Account
1. Occasion of Preparation	Prepared only at the time of dissolution of the firm.	Prepared at the time of reconstitution – admission, retirement or change in ratio.
2. Purpose	To realise assets, settle liabilities and compute profit/loss on dissolution.	To revalue assets and liabilities and adjust partners' capital accounts.
3. Treatment of Assets	Assets are transferred at book value and sold for cash.	Assets are revalued, but not sold.
4. Treatment of Liabilities	Liabilities are settled and closed.	Liabilities are revalued; business continues.
5. Effect on Business	Results in closure of firm.	Business continues with new partner structure.
6. Profit or Loss	Dissolution profit/loss is shared among partners.	Revaluation profit/loss adjusts partners' capital accounts.

Conclusion

The Realisation Account plays a crucial role during the dissolution of a partnership firm as it records the selling of assets, settlement of liabilities, and calculation of realisation profit or loss. On the other hand, the Revaluation Account is prepared only when the firm undergoes a structural change but continues operations. Understanding both accounts helps ensure accurate accounting treatment in partnership firms.