What is a Realisation Account?

By BYJU'S Exam Prep

Updated on: September 25th, 2023

In the record of the assets sale and liabilities discharge, a nominal account is opened in the name of realisation account. The reason to open realisation account is to get the profit or loss because of the realisation of liabilities and assets.

When a business dissolves, all the books of accounts are closed, all the assets are sold, and all the debts are settled. A fictitious account called the realisation account is formed in order to reflect the sale of assets and discharge of liabilities. To determine the profit or loss resulting from the realisation of assets and liabilities is the primary goal of opening a realisation account. If the credit side exceeds the debit side, the realisation profit or loss is transferred to the capital account of the partner according to their profit-sharing ratio. Briefly stated, the following are the major aims of creating a realisation account:

(i) To close all of the accounting books.

(ii) To document transactions involving the sale of assets and satisfaction of debts.

(iii) To calculate the gain or loss resulting from the realisation of assets and liabilities

Table of content

1. What is a Realisation Account?

Features of Realisation Account

(i) Asset sales are documented in the realisation account at their realised value.

(ii) The settlement value of payments made to liabilities (creditors) is noted.

(iii) There will be a balance, which may be a profit or loss, once all transactions have been recorded.

(iv) Two circumstances result in profit.

(A) When assets are sold for more money than they are worth on paper.

Liabilities that are settled for less than their book value are referred to as (b).

(v) The outcome will be a loss if the two conditions are the opposite of one another.

(vi) The net gain or loss on realisation is to be added to the capital accounts of the partners according to their profit-sharing ratio.

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