What is a Realisation Account?
When a firm is dissolved, its books of account are closed to compute the financial outcome. For this purpose, a Realisation Account is prepared. The primary objective of this account is to ascertain the net effect (profit or loss) arising from the realisation of assets and the discharge of liabilities.
To determine this profit or loss, the account records the transfer of all assets and all external liabilities. Specifically, assets such as Debtors, Stock, Furniture, and Machinery are transferred to the debit side, while liabilities like Creditors and Bank Overdraft are transferred to the credit side. It is important to note that cash in hand, bank balance, and fictitious assets are not transferred to this account.
The account also records the actual proceeds from the sale of assets and the amounts paid for the payment of liabilities. Additionally, any realisation expenses incurred during the dissolution process are debited to this account.
Finally, the balance remaining in this account represents the profit or loss on realisation. This balance is transferred to the partners' capital accounts in their profit sharing ratio.
Explanation
The answer is derived directly from Section 4.4 'Accounting Treatment' of the provided textbook context. It defines the account's purpose (ascertaining profit/loss on dissolution), lists what is transferred (assets excluding cash/bank/fictitious, and external liabilities), describes the entries (sale of assets, payment of liabilities, expenses), and explains the treatment of the resulting balance (transfer to partners' capital accounts). Examples like Debtors and Creditors are taken from the provided solution illustrations to add depth.