Understanding the Realisation Account Sequence

When a partnership firm is dissolved, the Realisation Account is prepared to determine the profit or loss arising from the sale of assets and payment of liabilities. It is essentially a nominal account.

The process involves closing the books of accounts by transferring assets (except cash and bank) and outsider liabilities to this account. Then, assets are sold, liabilities are paid off, and finally, the gain or loss on this process is calculated.

Let's break down the given steps and determine their logical order in the preparation of the Realisation Account:

1. (D) Transfer of Assets to Realisation A/c: The very first step is to transfer all assets (excluding cash/bank balance) from the Asset side of the Balance Sheet to the debit side of the Realisation Account. This closes the asset accounts in the books.
2. (B) Transfer of outsider’s Liabilities to Realisation A/c: Simultaneously or immediately after transferring assets, all outsider liabilities (like Creditors, Bills Payable, Bank Overdraft, Loan from outsiders) from the Liabilities side of the Balance Sheet are transferred to the credit side of the Realisation Account. This closes the liability accounts.
3. (C) Realisation of Assets: Once assets are transferred, they are sold off. The amount received from the sale of assets is credited to the Realisation Account (and debited to Cash/Bank Account).
4. (E) Payment of Liabilities and Realisation Expenses: After receiving cash from the sale of assets, outsider liabilities transferred to the credit side of the Realisation Account are paid off. This payment is debited to the Realisation Account (and credited to Cash/Bank Account). Any expenses incurred during the dissolution process (realisation expenses) are also debited to the Realisation Account.
5. (A) Determination of Realisation Gain/Loss: Finally, after all assets are realised and all liabilities and realisation expenses are paid, the Realisation Account is balanced. The difference between the credit side total (credits from assets realised, liabilities transferred, etc.) and the debit side total (debits from assets transferred, liabilities paid, expenses paid, etc.) represents the profit or loss on realisation. A credit balance indicates a profit, while a debit balance indicates a loss. This gain or loss is then transferred to the Partners' Capital Accounts.

Based on this logical flow of the dissolution process and the steps involved in preparing the Realisation Account, the correct sequence is the transfer of assets, followed by the transfer of liabilities, then the realisation of assets, payment of liabilities and expenses, and finally, the determination of the gain or loss.

The correct sequence is therefore: (D), (B), (C), (E), (A).

Revision Table: Steps in Realisation Account Preparation

Additional Information on Partnership Dissolution

Partnership dissolution refers to the change in the relationship among partners. Dissolution of the firm means the discontinuation of the business altogether.

Key points about dissolution and the Realisation Account:

• Upon dissolution of the firm, the Realisation Account is the first main account prepared before preparing Partners' Capital Accounts and Cash/Bank Account.
• Assets like Cash and Bank balances are typically NOT transferred to the Realisation Account. They are handled directly in the Cash/Bank Account.
• Accumulated profits (like General Reserve, Profit & Loss Credit Balance) and accumulated losses (like Profit & Loss Debit Balance) are NOT transferred to the Realisation Account. They are transferred directly to Partners' Capital Accounts.
• Partners' loans to the firm are usually paid after outsider liabilities but before distributing capital. A separate Partner's Loan Account is prepared.
• Realisation expenses are costs incurred for dissolving the firm, such as legal fees, advertisement costs for sale, etc.