Prompt Title: Example of Real Account in Dissolution of firm

A Realisation Account is a ledger account used in the dissolution of a partnership firm to record the sale of assets, payment of liabilities, and the distribution of any surplus or deficit among the partners. It helps in the orderly winding up of the partnership's affairs and ensures that assets are liquidated and liabilities settled properly. Let's go through an example to illustrate how a Realisation Account works in the dissolution of a partnership firm.

Example of a Realisation Account:

Suppose there's a partnership firm with two partners, A and B, who decide to dissolve the partnership. The firm's balance sheet just before dissolution looks like this:

Now, let's assume that the partners decide to sell all the assets and pay off the liabilities. Here's a step-by-step breakdown of how the Realisation Account would be prepared:

1. Sale of Assets:

   • The partnership firm sells its assets, which include cash, accounts receivable, inventory, and plant and machinery.
   • The total realized from these sales is, let's say, $75,000.

2. Settlement of Liabilities:

   • The firm pays off its creditors, which amount to $5,000.
   • The firm also repays the loans from partners A and B.

3. Realisation Account:

   • Now, we create the Realisation Account to record all these transactions. It looks like this:

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   Realisation Account
   | Particulars         | Debit ($) | Credit ($) |
   |---------------------|-----------|------------|
   | Assets Sold         | 75,000    |            |
   | Creditors Paid      |           | 5,000      |
   | Loan from A Paid    |           | 20,000     |
   | Loan from B Paid    |           | 15,000     |
   | Partners' Capital   |           |            |
   | A's Share (30,000)  | 10,000    |            |
   | B's Share (15,000)  | 5,000     |            |
   | Total               | 90,000    | 90,000     |
   

4. Surplus or Deficit Distribution:

   • The total amount in the Realisation Account is $90,000. This is the result of selling assets for $75,000 and settling liabilities of $40,000. The surplus is $90,000 - $40,000 = $50,000.

5. Distribution of Surplus:

   • Partners A and B will share the surplus according to their capital account balances. In this case, A's share is $30,000, and B's share is $15,000.
   • So, A receives 2/3 of the surplus, which is $50,000 x 2/3 = $33,333.33, and B receives 1/3, which is $50,000 x 1/3 = $16,666.67.

After this distribution, the partnership firm is dissolved, and the partners have received their respective shares of the surplus, effectively ending their partnership. The Realisation Account is closed, and the partners' capital accounts are adjusted to reflect the final distribution of assets and surplus.