Financial Accounting · Dissolution of Partnership Firms including Piecemeal Distribution

Realisation Account and Closing Entries in Partnership Dissolution

Updated 10 October 2026 · Fact-checked

The Realisation Account records the sale of a dissolved firm's assets and the settlement of its liabilities. You debit it with assets at book value and payments made, and credit it with liabilities and amounts realised. The balancing figure is profit or loss on realisation, shared by partners in their profit-sharing ratio.

Understand Realisation Account and Closing Entries

When a firm is dissolved, its business stops and its assets are sold and liabilities paid. The Realisation Account is the ledger account that collects all of this in one place, so you can find the profit or loss on closing the business.

All assets other than cash and bank are moved to the debit of this account at their book values. All outside liabilities are moved to the credit. Partners' capital accounts, reserves and accumulated profits are not touched here. Later, cash from sales goes to the credit side, and payments of liabilities and expenses go to the debit side.

If a partner takes over an asset, the firm has in effect sold it to that partner. You credit Realisation A/c and debit the partner's capital account. If a partner takes over a liability, you debit Realisation A/c and credit the partner's capital account.

The balancing figure of the Realisation Account is the profit or loss. It is transferred to the partners' capital accounts in their profit-sharing ratio. Then the Bank Account shows what cash is left, and this is paid to partners to close their capital accounts. A closed set of books has every account at nil.

Key rules to remember

Transfer of assets: Realisation A/c Dr (book value) To Asset A/c; Exclude cash, bank, fictitious assets and the partners' own accounts. Fictitious assets such as deferred expenses or the P&L debit balance go to partners' capital accounts instead.
Transfer of liabilities: Liability A/c Dr To Realisation A/c; Outside liabilities only. Do not transfer partners' capital, reserves or accumulated profits.
Asset sold: Bank A/c Dr To Realisation A/c (amount received); Gain or loss arises because the amount received differs from the book value.
Asset taken by a partner: Partner's Capital A/c Dr To Realisation A/c (agreed value); No cash moves. Use the agreed value, not the book value.
Liability paid: Realisation A/c Dr To Bank A/c (amount actually paid); A discount on settlement shows up as a gain automatically.
Realisation expenses: Realisation A/c Dr To Bank A/c; If a partner bears them and gets a fixed sum, debit Realisation A/c and credit that partner's capital account with the fixed sum only.
Profit or loss on realisation: Total of credit side – total of debit side; If credits are more, it is a profit. Share it in the profit-sharing ratio. Debit Realisation A/c and credit capital accounts for profit. Do the reverse for loss.
Final payment to a partner: Capital balance after all adjustments = cash paid; Total of final payments must equal the closing bank balance. This is your check.

How to solve Realisation Account and Closing Entries questions

Use this order for any dissolution question. It keeps every item in the right account and gives you a built-in check at the end.

1Read the balance sheet and mark the items: assets other than cash and bank, outside liabilities, partners' capital, reserves, and fictitious assets.
2Open the Realisation Account. Debit it with all assets (except cash and bank) at book value. Credit it with all outside liabilities at book value.
3Deal with the partners' accounts that are not in Realisation: transfer reserves and accumulated profits to capital accounts in the profit-sharing ratio, and write off fictitious assets and losses to capital accounts in the same way.
4Record the facts given: sales of assets (credit Realisation, debit Bank), assets taken by partners (credit Realisation, debit capital), liabilities paid (debit Realisation, credit Bank), and any unrecorded assets or liabilities at the amount realised or paid.
5Record realisation expenses. Check who paid them and whether a partner is paid a fixed sum for bearing them.
6Balance the Realisation Account. Transfer the profit or loss to the capital accounts in the profit-sharing ratio.
7Prepare the capital accounts with their opening balances, reserves, partner-taken assets and profit or loss. Their balancing figures are the cash due to partners (or from them).
8Prepare the Bank Account. Opening balance plus receipts less payments must equal the sum of final payments to partners. If it does not, find the error.

Quickest way: Four-column ledger shortcut

When to use it: Use when time is short and the question asks for the ledger accounts and the balance, not every journal entry.

Draw the Realisation Account first. Put book values of assets on the left and liabilities on the right in one go.
Go through the question line by line. For each item, ask: does cash move, does a partner take it, or does it change only the profit or loss? Post it straight to the account that fits.
Mark each posting with a tick in the question, so no item is missed, especially unrecorded ones.
Total both sides, find the balancing figure, and share it. Then fill the capital accounts using the same sharing ratio.
Prepare the Bank Account last. Write the partners' payments as the final line. If the bank balances, all accounts are most likely correct.

Common mistakes in Realisation Account and Closing Entries

Transferring cash, bank balance or partners' capital to the Realisation Account.
Students transfer every item on the balance sheet automatically.
Fix: Only non-cash assets and outside liabilities go to Realisation A/c. Cash and bank stay in the Bank A/c. Capital and reserves go to the partners' accounts.
Using the book value instead of the agreed value when a partner takes over an asset.
The asset is already on the debit side at book value, so students reuse that number for the credit.
Fix: Credit Realisation A/c with the agreed takeover value. The difference from book value then shows up as profit or loss.
Ignoring unrecorded assets or liabilities.
These are not on the balance sheet, so students look for them there and miss them in the narrative.
Fix: Read the question for items like unrecorded investments or unpaid bills. Do not transfer them at the start. Record only the cash received or paid, on the credit or debit side of Realisation A/c.
Sharing realisation profit or loss in capital ratio instead of profit-sharing ratio.
Students confuse the capital ratio with the profit-sharing ratio when capital is shown prominently.
Fix: Use the profit-sharing ratio unless the question says otherwise. Reserves and accumulated profits also go in this ratio.
Treating realisation expenses wrongly when a partner bears them for a fixed sum.
Students debit the actual expenses and also pay the partner.
Fix: If the partner bears the expenses and receives a fixed amount, debit Realisation A/c with the fixed amount only and credit the partner's capital. The firm does not pay the actual expenses.
Closing balance of the Bank Account does not equal the total paid to partners.
One posting was missed or a settlement amount was taken at book value.
Fix: Recheck each item against the question. The bank account, capital accounts and realisation account must close together.

Worked examples

Example 1

A and B share profits 3:2. Balance sheet on dissolution: Capital A ₹2,50,000; Capital B ₹1,50,000; Creditors ₹1,50,000. Assets: Land and building ₹2,00,000; Stock ₹1,50,000; Debtors ₹1,00,000; Furniture ₹50,000; Cash at bank ₹50,000. Land and building sold for ₹2,40,000. A takes over stock at ₹1,20,000. Debtors realise ₹80,000. B takes over furniture at ₹40,000. Creditors paid ₹1,45,000 in full settlement. Realisation expenses of ₹10,000 paid by the firm. Investments not in the books were sold for ₹15,000. Prepare Realisation A/c, Partners' Capital Accounts and Bank A/c.

Show the solution

Realisation A/c debit side: Land and building ₹2,00,000; Stock ₹1,50,000; Debtors ₹1,00,000; Furniture ₹50,000 (total ₹5,00,000); Bank – creditors paid ₹1,45,000; Bank – expenses ₹10,000. Total ₹6,55,000.
Realisation A/c credit side: Creditors ₹1,50,000; Bank – land and building ₹2,40,000, debtors ₹80,000, investments ₹15,000 (total ₹3,35,000); A's capital – stock ₹1,20,000; B's capital – furniture ₹40,000. Total ₹6,45,000.
Credit side is less than debit side by ₹10,000, so there is a loss of ₹10,000. A bears ₹6,000 and B bears ₹4,000 (3:2).
Journal entry for the loss: A's Capital A/c Dr ₹6,000; B's Capital A/c Dr ₹4,000; To Realisation A/c ₹10,000.
A's Capital A/c: Cr balance ₹2,50,000; Dr stock ₹1,20,000; Dr loss ₹6,000; cash paid = ₹2,50,000 – ₹1,26,000 = ₹1,24,000.
B's Capital A/c: Cr balance ₹1,50,000; Dr furniture ₹40,000; Dr loss ₹4,000; cash paid = ₹1,50,000 – ₹44,000 = ₹1,06,000.
Bank A/c: Opening ₹50,000 + receipts ₹3,35,000 = ₹3,85,000. Payments: creditors ₹1,45,000, expenses ₹10,000 = ₹1,55,000. Balance ₹2,30,000.
Pay A ₹1,24,000 and B ₹1,06,000, total ₹2,30,000. Bank A/c closes at nil.

Answer: Loss on realisation ₹10,000 (A ₹6,000, B ₹4,000). Final cash paid: A ₹1,24,000 and B ₹1,06,000, total ₹2,30,000, equal to the closing bank balance.

Example 2

X and Y share profits equally. Balance sheet: Capital X ₹90,000; Capital Y ₹80,000; Creditors ₹50,000. Assets: Debtors ₹60,000; Stock ₹40,000; Plant ₹1,00,000; Cash at bank ₹20,000. Plant is sold for ₹1,10,000, stock for ₹35,000 and debtors realise ₹55,000. Creditors are paid in full. An outstanding repair bill of ₹8,000, not recorded in the books, is settled for ₹6,000. X agrees to bear all realisation expenses for a fixed remuneration of ₹5,000. Show the Realisation A/c, Capital Accounts and Bank A/c.

Show the solution

Realisation A/c debit side: Debtors ₹60,000; Stock ₹40,000; Plant ₹1,00,000 (total ₹2,00,000); Bank – creditors ₹50,000; Bank – repair bill ₹6,000; X's capital – remuneration ₹5,000. Total ₹2,61,000.
Realisation A/c credit side: Creditors ₹50,000; Bank – plant ₹1,10,000, stock ₹35,000, debtors ₹55,000 (total ₹2,00,000). Total ₹2,50,000.
The unrecorded repair bill is shown only at the ₹6,000 paid. The ₹8,000 figure is not used. X pays the actual expenses himself, so only the ₹5,000 is recorded.
Debit side exceeds credit side by ₹11,000, so there is a loss of ₹11,000. Each partner bears ₹5,500.
X's Capital A/c: Cr balance ₹90,000; Cr remuneration ₹5,000; Dr loss ₹5,500; cash paid = ₹89,500.
Y's Capital A/c: Cr balance ₹80,000; Dr loss ₹5,500; cash paid = ₹74,500.
Bank A/c: Opening ₹20,000 + receipts ₹2,00,000 = ₹2,20,000. Payments: creditors ₹50,000 and repair bill ₹6,000 = ₹56,000. Balance ₹1,64,000.
Pay X ₹89,500 and Y ₹74,500, total ₹1,64,000. The bank closes at nil.

Answer: Loss on realisation ₹11,000 (₹5,500 each). Final payments: X ₹89,500 and Y ₹74,500, total ₹1,64,000.

Exam tips

Write the Realisation Account in the first five minutes. Most of the marks in a 14-mark question come from its correct postings.
Show working for the profit or loss share and for each capital account balance. Step marks are given for the method even if one number is wrong.
Underline each non-routine item in the question: unrecorded assets and liabilities, partner-taken assets and expenses borne by a partner. These are where the question tests you.
In MCQs, check which side of Realisation A/c an item goes to and use the agreed value. Quick questions ask for the profit or loss figure or the final payment to a partner.
Always tie the Bank Account to the total payments to partners. If they do not agree, fix it before moving on.

Practice questions from Dissolution of Partnership Firms including Piecemeal Distribution

Realisation Account and Closing Entries: frequently asked questions

What is the format of a Realisation Account?

It is a ledger account with two sides. The debit side has assets at book value, payments of liabilities and realisation expenses. The credit side has liabilities at book value, cash from sales and assets taken over by partners. The balancing figure is the profit or loss.

How do you record an asset taken over by a partner?

Debit the partner's capital account and credit the Realisation Account with the agreed value. No cash is involved. If the agreed value differs from book value, the difference affects the profit or loss on realisation.

How are unrecorded assets and liabilities treated in the Realisation Account?

They are not transferred at the start because they are not in the books. When an unrecorded asset is sold, credit Realisation A/c and debit Bank A/c. When an unrecorded liability is paid, debit Realisation A/c and credit Bank A/c, at the amount actually paid.

Why are cash and bank balances not transferred to the Realisation Account?

Cash and bank are already money. They are not realised or sold. They are used in the Bank Account to collect receipts and pay creditors, expenses and partners.