Realisation Account (Cambridge International A-Level Accounting)

Spec point — how to prepare a realisation account

Realisation account

What is a realisation account?

• A realisation account is used when a business (usually a partnership) is being dissolved, sold, or acquired by another business

• It is a temporary account

  • It is opened only when the business is closing

• It is used to close the accounting books of the old partnership and calculate the final profit or loss on realisation

  • This is the overall net gain or loss made from selling off or dissolving the business

• The resulting profit or loss is then transferred to the partners' capital accounts in their profit-sharing ratio

  • The realisation account is then closed

• It is very similar to a revaluation account

How do I prepare a realisation account?

• STEP 1 Enter the non-current assets into the realisation account

  • Non-The current net book value is entered on the debit side

  • The proceeds from the sale of the assets is entered on the credit side

    • This includes an agreed amount if a partner takes an asset for their personal use

• STEP 2 Enter the current assets(apart from the bank balance) into the realisation account

  • The current amount owed by customers is entered on the debit side
  • The actual amount received is entered on the **credit **side

• STEP 3 Enter the liabilities (apart from the bank overdraft)**** into the realisation account

  • The current amount owed to suppliers is entered on the credit side
  • The actual amount paid is entered on the debit side

• STEP 4 Enter any additional amounts such as discounts or realisation costs

  • Expenses are entered on the debit side

    • Such as discount allowed, realisation costs

  • Incomes are entered on the credit side

    • Such as discount received

• STEP 5 Find the balancing figure

  • It is a net profit on realisation if it is on the debit side
  • It is a net loss on realisation if it is on the credit side

• STEP 6 Share the net profit or loss on realisation between the partners' capital accounts using the profit-sharing ratio

Layout of a realisation account

Exam Hint Remember, the bank balance or the bank overdraft is not entered into the realisation account.

If you struggle to remember what goes on which side, then consider the other side of the transaction.

For example, to remove a loan, a debit entry is made in its account. Therefore, the entry in the realisation account is on the credit side.

Worked Example Clark and Lois were in partnership sharing profits and losses in the ratio 3:2 respectively.

The statement of financial position at 31 December 2025 was as follows:

	$	$	$
Assets
Non-current assets			125 000
Current assets
Inventory		37 000
Trade receivables		23 000	60 000
Total assets			185 000
Capital and liabilities
Capital	Clark	Lois	Total
Capital accounts	80 000	60 000	140 000
Current accounts	(1 000)	5 000	4 000
	79 000	65 000	144 000
Non-current liabilities
Bank loan			20 000
Current liabilities
Bank overdraft		8 000
Trade payables		13 000	21 000
Total capital and liabilities			185 000

The partners agreed to dissolve the partnership on 31 December 2025.

The following transactions took place as part of the dissolution process.

1. As part of his settlement, Clark took a vehicle with a net book value of $20 000.
2. As part of her settlement, Lois took a vehicle with a net book value of $25 000.
3. All remaining non-current assets were sold for $75 000.
4. Inventory was sold for $29 000.
5. Irrecoverable debts of $500 were written off and the remaining credit customer paid their balances in full.
6. $22 500 was paid to clear the bank loan including early repayment charges.
7. Trade payables were paid in full.
8. Dissolution costs of $3 000 were paid.

Prepare the realisation account to record the dissolution of the partnership.

Answer:

Calculate the amount received from trade receivables

$23 000 - $500 = $22 500

Enter the amounts into the realisation account

• Find the balancing figure

$223 500 - $204 500 = $19 000

• Share the figure between Clark and Lois

$19 000 ÷ (3 + 2) = $3 800

Clark: 3 × $3 800 = $11 400

Lois: 2 × $3 800 = $7 600

	$		$
Non-current assets	125 000	Capital - Clark (Vehicle)	20 000
Inventory	37 000	Capital - Lois (Vehicle)	25 000
Trade receivables	23 000	Bank (Non-current assets)	75 000
Bank (Bank loan)	22 500	Bank (Inventory)	29 000
Bank (Trade payables)	13 000	Bank (Trade receivables)	22 500
Dissolution costs	3 000	Bank loan	20 000
		Trade payables	13 000
		Capital - Clark (Loss on realisation)	11 400
		Capital - Lois (Loss on realisation)	7 600
	223 500		223 500