Preparation of Realisation Account, Partner’s Loan Account, Partner’s Capital Accounts, and Cash/Bank Account

The preparation of the Realisation Account, Partner’s Loan Account, Partners’ Capital Accounts, and Cash/Bank Account is an essential part of the accounting process during the dissolution of a partnership firm. When a firm is dissolved, its business activities are brought to an end, assets are realised, liabilities are settled, and the remaining amount is distributed among the partners. The Realisation Account records the transfer and disposal of assets, settlement of liabilities, and dissolution expenses to determine the profit or loss on realisation. The Partner’s Loan Account records the repayment of loans or advances made by partners separately from their capital contributions. Partners’ Capital Accounts determine the final amount payable to or recoverable from each partner after necessary adjustments. The Cash/Bank Account records all receipts and payments made during the dissolution process. These accounts ensure proper recording of financial transactions, systematic settlement of liabilities, and fair distribution of available funds according to the partnership agreement and applicable provisions of the Indian Partnership Act, 1932.

1. Preparation of Realisation Account

A Realisation Account is prepared at the time of dissolution of a partnership firm to record the transfer and sale of assets, settlement of liabilities, and expenses incurred during dissolution. It helps determine the profit or loss arising from the realisation of assets and settlement of liabilities. The resulting profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio.

Main Accounting Treatment:

• Transfer of assets to Realisation Account: Debit Realisation Account and credit individual asset accounts, subject to applicable exceptions.

• Transfer of external liabilities: Debit the liability accounts and credit Realisation Account.

• Sale of assets: Debit Cash/Bank Account and credit Realisation Account.

• Payment of liabilities: Debit Realisation Account and credit Cash/Bank Account.

• Payment of realisation expenses: Debit Realisation Account and credit Cash/Bank Account.

• Profit on realisation: Debit Realisation Account and credit Partners’ Capital Accounts.

• Loss on realisation: Debit Partners’ Capital Accounts and credit Realisation Account.

Example: Suppose assets transferred to Realisation Account total ₹2,00,000, external liabilities transferred total ₹50,000, assets are sold for ₹1,80,000, and liabilities are paid at their recorded value.

Realisation Account:

Correction: The totals above would not balance because the stated profit is incorrect. The correct calculation is as follows:

Realisation profit = Assets sold + Liabilities transferred − Assets transferred − Liabilities paid

= ₹1,80,000 + ₹50,000 − ₹2,00,000 − ₹50,000

= ₹20,000 loss.

The correctly balanced Realisation Account is:

2. Preparation of Partner’s Loan Account

Meaning: A Partner’s Loan Account records the amount payable by the firm to a partner for a loan or advance made separately from their capital contribution. Under the usual dissolution settlement order in Section 48 of the Indian Partnership Act, 1932, external creditors are paid first, followed by partners’ advances distinct from capital, then partners’ capital claims. The account records repayment of the loan and any balance remaining due.

Accounting Treatment:

• Transfer or recognition of a partner’s loan: Record the loan as a liability of the firm.

• Repayment of the loan: Debit Partner’s Loan Account and credit Cash/Bank Account.

• If the loan is not fully repaid, the unpaid amount remains outstanding, subject to the applicable legal provisions and agreement.

Example: A partner has a loan balance of ₹40,000, and the firm repays the full amount through its bank account.

Journal Entry:

Partner’s Loan Account Dr. ₹40,000 To Bank Account ₹40,000

(Being the partner’s loan repaid on dissolution.)

Partner’s Loan Account:

3. Preparation of Partners’ Capital Accounts

Meaning: Partners’ Capital Accounts are prepared to determine the final amount payable to or recoverable from each partner when the firm is dissolved. These accounts record the transfer of realisation profit or loss, accumulated reserves and profits, drawings, and other relevant adjustments. After liabilities and loans have been settled, the remaining amounts due to partners are paid according to their final balances and applicable legal rights.

Accounting Treatment:

• Transfer of realisation profit: Credit Partners’ Capital Accounts in the profit-sharing ratio.

• Transfer of realisation loss: Debit Partners’ Capital Accounts in the profit-sharing ratio.

• Transfer of accumulated profits and reserves: Credit Partners’ Capital Accounts where applicable.

• Transfer of accumulated losses and drawings: Debit Partners’ Capital Accounts where applicable.

• Payment of final capital balances: Debit Partners’ Capital Accounts and credit Cash/Bank Account.

• If a partner has a debit balance, the amount recoverable is dealt with under the applicable partnership agreement and legal provisions.

Example: A and B share profits in the ratio of 3:2. Their capital balances are ₹80,000 and ₹60,000 respectively. The firm incurs a realisation loss of ₹20,000.

A’s share of loss = ₹20,000 × 3/5 = ₹12,000.

B’s share of loss = ₹20,000 × 2/5 = ₹8,000.

Final capital balances:

A = ₹80,000 − ₹12,000 = ₹68,000.

B = ₹60,000 − ₹8,000 = ₹52,000.

If both amounts are paid in full, the journal entry is:

A’s Capital Account Dr. ₹68,000 B’s Capital Account Dr. ₹52,000 To Bank Account ₹1,20,000

(Being the final capital balances paid to partners.)

Partners’ Capital Accounts:

4. Preparation of Cash/Bank Account

Meaning: The Cash/Bank Account records all cash and bank receipts and payments arising during dissolution. It shows the amount received from the sale of assets, contributions made by partners, payments to external creditors, repayment of partners’ loans, realisation expenses, and final payments to partners. The account is used to establish the remaining cash or bank balance and to verify whether all available funds have been properly accounted for.

Accounting Treatment:

• Sale of assets: Debit Cash/Bank Account.

• Collection of amounts due: Debit Cash/Bank Account.

• Capital contributions to cover deficiencies: Debit Cash/Bank Account.

• Payment of external liabilities: Credit Cash/Bank Account.

• Repayment of partners’ loans: Credit Cash/Bank Account.

• Payment of realisation expenses: Credit Cash/Bank Account.

• Final payment to partners: Credit Cash/Bank Account.

Example: A firm receives ₹1,80,000 from selling assets and pays external liabilities of ₹50,000, realisation expenses of ₹10,000, and partners’ capital balances of ₹1,20,000.

Cash/Bank Account:

The account balances, showing that the full amount received has been used to settle the stated payments.