DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : J. Satyanarayana Rao
Designation : Senior Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Polytechnic for Women, Guntur
Year/Semester : IV Semester
Subject : Accountancy – III
Subject Code : CCP402
Topic : Partnership
Duration : 50 Mts
Sub Topic : Difference between Realization &
Profit Loss Adjustment Account
Teaching aids : PPT and Animations
CCP402.65 TO 66 1
Objectives :

On completion of the period, you would be

able to know:
 Realization a/c and its preparation
 Settlement of Accounts
 Solving problems on dissolution by opening
 Realization a/c
 Capital a/c
 Bank a/c

CCP402.65 TO 66 2
Recap :

In the previous class, we discussed the

following:
 Meaning & Definitions of dissolution of a
partnership firm and partnership
 Kinds of dissolution
 Order of payment of Liabilities etc.,

CCP402.65 TO 66 3
Explanation on Realization
Account :
 Realization Account is prepared in order to
realize the assets of the firm
 The amount so realized can be utilized for the
payment of liabilities of firm as per the provision
of the Act
 The expenses incurred for realizing the Assets of
the firm (known as Realization expenses)
should be debited to this account
 It is a Nominal Account

CCP402.65 TO 66 4
Realization Account :
 All the accounts of assets and liabilities are to be
closed by transferring then to realization all
except Cash / Bank a/c (s)
 All the assets are to be sold out and the amounts
to be realized
 Expenses if any on realization to be paid
 The amount so realized should be utilized in
payment of liabilities

CCP402.65 TO 66 5
 Once, Realization and settlement are over, the
difference, being gain or loss will be transferred
to partner’s Capital Accounts in their Profit
sharing ratio
 Cash/ Bank Account is opened to record all cash
transactions
 When the purpose is over, the Cash Account
shows a balance ,which is equal to the amounts
due to partners

CCP402.65 TO 66 6
 Difference between Realization Account and Revaluation
Account (Profit & Loss Adjustment Account
Basis of Realization A/c Revaluation A/c
Distinction
Time of prepared at the time of prepared at the time of
Preparation dissolution of firm admission Retirement ,
Death of the partner
etc.,

Purpose main purpose is to It is prepared to

realize the assets of
the firm and utilize this
amount in payments of
liabilities of the firm
and distribute the
profit or loss among all
the partners
revalue the assets and
liabilities of the firm on
admission retirement
or death of partner. No
partner benefits or
suffers change in value
of assets. The profits
or losses are
distributed among the
partners in their profit
sharing ratio

CCP402.65 TO 66 7
Basis of Realization A/c
Distinction
Expenses It records an entry for
the expenses on
dissolution
It records the effects
of realization of
various Assets any
Payments of various
liabilities. After
opening this account
all the accounts in the
ledger, are close i.e.,
there is winding
CCP402.65 TO 66
Revaluation A/c
It does not record any
entry of the expenses
incurred on
Revaluation of Assets
& Liabilities
It records the effect of
revaluation of assets
and liabilities. The firm
continues after
opening this account
8
Entries on Dissolution :
 When assets are transferred to Realization account
at Book values.

Realization Account Dr
To Sundry Assets
(Being the Assets transferred to Realization A/c at
Book value)

Note:- Cash in hand, Cash at Bank, Accumulated

losses, Partner’s Drawings accounts and Debit
balances of partner’s Capital Accounts should not be
transferred to realization Account.
CCP402.65 TO 66 9
The various assets against which provision i.e.,
Provision For doubtful debts, provision for
depreciation, joint life policy Reserve Etc) exist
should be closed by transfer to the Realization A/c
at gross figures

CCP402.65 TO 66 10
The provision should be transferred separately to the
Realization A/c.
Provision for doubtful debts A/c Dr.
Provision for Discounts A/c Dr.
Provision for Depreciation A/c Dr.
Joint Life policy Reserve Dr.
Contingency reserve Dr.
Contingency Reserve Dr.
Investment fluctuation Dr
To Realization A/c
(Being transfer of various provision to the
Realization A/c)
CCP402.65 TO 66 11
 When Liabilities are transferred to Realization
Account at their book value.

Sundry Liabilities A/c Dr.

To Realization A/c
(Being sundry Liabilities transferred to Realization
A/c)

CCP402.65 TO 66 12
Note:- Capital Accounts, Accumulated Profits,
Reserve Funds and other funds should not be
transferred to Realization Accounts).
When the assets are sold.
Bank A/c Dr.
To Realization A/c
(Being the amount of Realization on sale of assets)

CCP402.65 TO 66 13
 When any expenses paid in connection with the
Realization.

Realization A/c Dr.

To Bank A/c
(Being the expenses paid)

When any partner takes an asset at agreed valuation

Partner’s Capital A/c Dr.

To Realization A/c
( Being the asset taken over by the partner)

CCP402.65 TO 66 14
 When Liabilities are paid

Realization A/c Dr.

To Bank A/c
(Being the liabilities discharged)

When any partner accepts to assume responsibility

On any liabilities.
Realization A/c Dr
To Partners’ Capital A/c
(Being the liability agreed to be discharged by a
partner)
CCP402.65 TO 66 15
If the result of realization is loss.
Partners’ Capital account
To Realization Account
(Being the loss transferred to partners’ capital Account)

To close the accumulated profits like Reserve fund,

Profit & Loss Account.
Reserve Fund Account Dr.
Profit & Loss Account Dr.
To Partners’ Capital A/c
(Being the accounts of accumulated profits closed by
transferring to capital accounts)

CCP402.65 TO 66 16
 To close the accumulated losses like profit and
loss Account (Debit balance)

 Partners’ capital Account Dr.

To Profit & Loss account
(Being the accumulated loss transferred to
partners’
capital Account)

When loan of any partner is discharged

Partners’ Loan A/c Dr.
To Bank A/c
(Being the balance due to partners’ paid)

CCP402.65 TO 66 17
 When a partner brings in any amount from his
private Estate
Bank A/c Dr
To Partners’ Capital A/c
(Being the amount brought in by the partner)

Treatment of goodwill on Dissolution

No special treatment is given to goodwill, it is
treated as like other assets,
If it appears in the books on the dissolution date,
it is closed by transferring it to the debit side of the
Realization Account

CCP402.65 TO 66 18
If it does not appear in the books on the
dissolution date and some amount is realized for
Goodwill

 The entry is
Cash/Bank A/c Dr.
To Realization A/c
(Being amount Realized for Goodwill)

Treatment of unrecorded Assets and Liabilities.

 It is quite possible that on the dissolution date,
there may be some Assets and Liabilities which
may not be appearing in the books
CCP402.65 TO 66 19
 Such Assets and Liabilities have not been
recorded in the books, so question of their
transfer to Realization Account does not arise.

 Such assets or liabilities are realized, the entries

are recorded as;
When an unrecorded Asset is realized

Cash/Bank A/c Dr
To Realization A/c

(Being Realization of unrecorded, asset being

income credited to the Realization Account)

CCP402.65 TO 66 20
When an unrecorded liability is paid.

Realization A/c Dr
To Cash/Bank
(being payment of unrecorded liability being loss
debited to the Realization A/c)

Eg-1 Ajay and Vijay were equal partners in a

manufacturing business. On June, 30th , 2006, they
dissolved the firm on which date their Balance Sheet
was as follows;

CCP402.65 TO 66 21
Example 1: Balance Sheet as on..
Liabilities Amount Assets Amount
Creditors 28,000 Cash at bank 2,500
Less: Reserve for
discounts
1,000 27,000
Reserve for 5,000 Debtors 42,000
contingencies Less: provision
for Doubtful
debts 2,000 40,000
Mrs. Vijay’s Loan 10,000 Stock 32,000
Reserve Fund 15,000 Furniture 3,500
Ajay’s Loan 8,000 Plant & 25,000
Machinery
Ajay’s Capital A/c 21,000 Prepaid 1,000
Expense
Vijay’s Capital A/c 18,000
1,04,000 1,04,000
CCP402.65 TO 66 22
 Stock, Debtors, Plant & Machinery and Goodwill
realized Rs.27,000,Rs.38,000,Rs.20,000 and
Rs.5,000 respectively. Furniture did not realize
any value. An amount of Rs.6,000 was paid on
account of contingent liabilities. The expenses of
realization were Rs.1,000.

CCP402.65 TO 66 23
The firm had previously made some investments
in shares of a joint Stock Company and had
written off.
This investment on finding is useless. The
investment now realized Rs.1,500.

Close the books of the firm and show the

necessary journal entries and ledger accounts.

CCP402.65 TO 66 24
Solution to Eg-1 :
Journal Entries.

2006, June, 30th.

1. Realization A/c Dr. 1,03,500
To Debtors 42,000
Stock 32,000
Furniture 3,500
Plant & Machinery 25,000
Pre-paid expenses 1,000
(Being transfer of assets at book value on
dissolution of the firm)

CCP402.65 TO 66 25
2. Creditors A/c Dr. 28,000
Reserve for Contingence 5,000
Mrs. Vijay’s loan 10,000
Provision for doubtful debts 2,000
To Realization A/c 45,000
(Being transfer of liabilities to third parties and provision
For doubtful debts on the dissolution of the firm)

3. Realization A/c Dr. 1,000

To Reserve for discount 1,000
on creditors
(Being transfer of Reserve for discounts on creditors on
the dissolution)

CCP402.65 TO 66 26
4. Reserve Fund Dr. 15,000
To Ajay’s capital A/c 7,500
Vijay’s Capital A/c 7,500
(Being transfer of Reserve Fund to Capital A/c s in
the
Profit sharing ratio)

5. Bank A/c Dr. 91,000

To Realization A/c
91,500
(Being Assets realized)

CCP402.65 TO 66 27
Stock 27,000
Debtors 38,000
Plant & Machinery 20,000
Goodwill 5,000
Investment in shares 1,500

91,500

6. Realization A/c Dr 43,000

To Bank A/c 43,000
(Being payment of liabilities as follows)
Creditors 27,000
Contingent }
Liabilities } 6,000
Mrs. Vijay’s loan 10,000
43,000

CCP402.65 TO 66 28
7. Realization A/c Dr 1,000
To Bank A/c
1,000
(Being payment of Realization expenses)

8. Ajay’s Capital A/c Dr. 6,000

Vijay’s Capital A/c Dr. 6,000
To Realization A/c
12,000
(Being transfer of loss on realization)

9. Ajay’s Loan A/c Dr. 8,000

To Bank A/c
8,000
CCP402.65 TO 66 29

(Being payment of Ajay’s Loan)

10. Ajay’s Capital A/c Dr. 22,500
Vijay's capital A/c Dr. 19,500
To Bank A/c 42,000
(Being payment of the amount due to partners)

CCP402.65 TO 66 30
 Ledger Accounts
Realization Accounts
Dr. Cr.
To Debtors 42,000 By Creditors 28,000
Stock 32,000 Provision for 2,000
Doubtful debts
Furniture 3,500 Reserve for 5,000
Contingencies
Plant & machi. 25,000 Mr. Vijay’s Loan 10,000
Prepaid Exp. 1,000 Bank (Assets 91,000
realized)
Reserve for 1,000 Loss on
Discount on Realization
Creditors transferred to
Bank (Liabilities 43,000 By Capital A/c s
paid) Ajay’s 6,000
Vijay’s 6,000 21,000
To Bank 1,000
(realization
Expenses)
Total 1,48,500 Total 1,48,500
CCP402.65 TO 66 31
 Capital Account
Dr. Cr.
Ajay Vijay Ajay Vijay

To Realization 6,000 6,000 By Balance 21,000 18,000

(Loan) b/d

To Bank a/c 22,500 19,500 By Reserve 7,500 7,500

Fund

Total 28,500 28,500 Total 28,500 28,500

CCP402.65 TO 66 32
 Bank Account
Dr. Cr.
To Balance b/d 2,500 By Realization 43,000
a/c [liabilities
paid]
To Realization 91,500 By Realization 1,000
a/c [Assets A/c [Expenses]
realized]
Ajay’s loan A/c 8,000

Ajay’s Capital 22,500

A/c
Vijay’s Capital 19,500
A/c
Total 94,000 Total 94,000

CCP402.65 TO 66 33
Summary :
We have discussed about:
 Realization a/c
 Preparation of Realization a/c
 Settlement of accounts
And solved a practical problem on dissolution by
opening
 Realization a/c
 Capital a/c & Bank a/c

CCP402.65 TO 66 34
Frequently Asked Questions :

1. What is Realization a/c ?

2. What are the differences between Realization &
Revaluation a/c s ?

CCP402.65 TO 66 35
Assignment :

1. List out the differences between Realization a/c

and Revaluation a/c.
2. What do you know about realization a/c.

CCP402.65 TO 66 36