Page 177 - DEBKVOL-1

8.2 Double Entry Book Keeping—CBSE XII
Treatment of Firm’s Debts and Private Debts (Section 49)
(a) Firm’s property is applied first towards the payment of firm’s debts; then the surplus, if any, is applied towards
the payment of partner’s private debts to the extent to which the concerned partner is entitled to share in
the surplus; and
(b) Partner’s private property is applied first in payment of his private debts and the surplus, if any, in payment
of firm’s debts if the firm’s liabilities exceed the firm’s assets.
• Closing of Firm’s Books: Firm’s books are closed by preparing the following accounts:
(i) Realisation Account; (ii) Loan by Partner Account; (iii) Loan by Firm to Partner Account; (iv) Partners’ Capital
Accounts; and (v) Bank or Cash Account.
• Realisation Account: It is prepared on dissolution of a firm. The object or purpose of preparing the account
is to determine gain (profit) or loss on realisation of assets and payment of liabilities.
Accounting Entries Relating to Realisation Account
Transfer of assets (except cash and Realisation A/c ...Dr. [At book value]
bank balances) To Sundry Assets A/c
Transfer of liabilities (except partners’ Sundry Liabilities A/c ...Dr. [At book value]
loan, capital and undistributed profits) To Realisation A/c
Sale of assets Bank/Cash A/c ...Dr. [At selling price]
To Realisation A/c
Assets taken over by a partner Concerned Partner’s Capital A/c ...Dr. [At agreed value]
To Realisation A/c
Assets taken over by a Partner Partner’s Loan A/c ...Dr. [With Loan Amount]
against Payment of his Loan To Realisation A/c [Agreed Value]
To Realisation A/c [Loan Amount less Agreed Value]
Sale of unrecorded asset Bank/Cash A/c ...Dr. [Amount received on sale]
To Realisation A/c
Payment of liabilities Realisation A/c ...Dr. [Amount of payment]
To Bank/Cash A/c
Any liability taken over by a partner Realisation A/c ...Dr. [At agreed value]
To Concerned Partner’s Capital A/c
Payment of realisation expenses Realisation A/c ...Dr. [Amount of payment]
paid by the firm To Bank/Cash A/c
Payment of unrecorded liability (which Realisation A/c ...Dr. [Amount of payment]
did not appear in the Balance Sheet) To Bank/Cash A/c
Payment of realisation expenses by Realisation A/c ...Dr. [Amount of payment]
any partner on firm’s behalf To Concerned Partner’s Capital A/c
Credit balance of Realisation Account Realisation A/c ...Dr. [In profit-sharing ratio]
Gain(Profit) To Partners’ Capital A/cs
Debit balance of Realisation Account Partners’ Capital A/cs ...Dr. [In profit-sharing ratio]
(Loss) To Realisation A/c
Points to Remember
• An Asset (e.g., Debtors) against which a provision or reserve exists, is transferred to Realisation Account at its
gross value.
• Fictitious asset like debit balance of Profit and Loss Account or Deferred Revenue Expenditure is not transferred
to Realisation Account. It is debited to Partners’ Capital Accounts in their profit-sharing ratio.
• Balances of Partners’ Capital Accounts/Current Accounts are not transferred to Realisation Account.
• Balances of Partners’ Current Accounts are transferred to respective Partners’ Capital Accounts.
• Loan provided by the firm to the partner is transferred to the debit side of his Capital Account.
• Balance of Realisation Account means gain (profit) (if it has credit balance) and loss (if it has debit balance) on
realisation.
• Gain (Profit) or Loss on realisation is transferred to Partners’ Capital Accounts in the profit-sharing ratio.
• Balance at Bank is not transferred to Realisation Account.
• If the question is silent about the realisation of any asset, it is assumed that such asset has not realised any amount.
• If the question is silent about the payment of a liability, it has to be paid out in full.