DISSOLUTION OF FIRM T.S.Grewal Ch-7 Que no-21( Realisation Account Format) Class 12 Accounts 2023-24
MS Academy Accounts・2 minutes read
The lesson emphasizes the creation of a realization account for asset and liability adjustments during dissolution, detailing specific inclusions and exclusions for both sides of the account. Using examples of partners Ramesh and Umesh, the text illustrates the importance of accurate documentation and calculation, culminating in the distribution of loss between the partners.
Insights
- The lesson emphasizes the importance of accurately creating a realization account during the dissolution process, highlighting that assets must be listed on the debit side while liabilities are recorded on the credit side, with specific exclusions for certain items. This structured approach ensures that students understand the distinction between nominal accounts and the necessity of including adjustments, such as asset sales and liabilities, to maintain balance in the account.
- Through the example involving partners Ramesh and Umesh, the text illustrates practical applications of the realization account, detailing how asset values are adjusted, liabilities are settled, and profits or losses are distributed among partners. This real-world scenario underscores the need for clarity in documenting transactions and reinforces the significance of following the established format to achieve accurate financial reporting during dissolution.
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Recent questions
What is a realization account?
A realization account is a financial record used during the dissolution of a partnership or business to document the process of liquidating assets and settling liabilities. It consists of two sides: the debit side, which lists all the assets being realized, and the credit side, which records the liabilities that need to be settled. The purpose of this account is to provide a clear overview of the financial position of the partnership at the time of dissolution, ensuring that all assets are accounted for and that any profits or losses from the realization process are accurately reflected in the partners' capital or current accounts. This account helps in maintaining transparency and accuracy in the financial dealings during the winding up of a business.
How do you list assets in accounting?
In accounting, assets are listed on the debit side of the realization account, and it is crucial to include all relevant assets while excluding specific items such as cash, bank balances, and certain partner-related accounts. The assets should be categorized based on their nature, including tangible assets like land, buildings, machinery, and stock, as well as intangible assets like goodwill and patents. Each asset's value must be accurately recorded, and any provisions against these assets should be noted on the credit side. This systematic listing ensures that the financial statements reflect the true value of the assets being realized, which is essential for determining the overall financial outcome of the dissolution process.
What are realization expenses?
Realization expenses refer to the costs incurred during the process of settling liabilities and liquidating assets in a business dissolution. These expenses are recorded on the debit side of the realization account and may include payments made to creditors, legal fees, and other costs associated with the winding up of the business. It is important to document these expenses accurately, as they impact the overall financial outcome of the realization process. Any adjustments related to liabilities should be reflected on the credit side, ensuring that the total liabilities are settled appropriately. By accounting for realization expenses, businesses can maintain a clear financial record and ensure that all obligations are met during the dissolution.
How is profit or loss calculated in dissolution?
Profit or loss in the context of business dissolution is calculated by comparing the total value of assets realized against the total liabilities settled. After listing all assets on the debit side and liabilities on the credit side of the realization account, the net result is determined. If the total assets exceed the total liabilities, a profit is realized; conversely, if liabilities surpass assets, a loss occurs. This profit or loss is then transferred to the partners' capital or current accounts based on their agreed-upon distribution ratio. This calculation is crucial for ensuring that each partner receives their fair share of the remaining assets or is accountable for any losses incurred during the dissolution process.
What adjustments are needed for asset values?
Adjustments for asset values are necessary during the dissolution process to accurately reflect the current worth of assets being realized. These adjustments may include noting whether assets are sold or taken over by partners, with the sale price or takeover price recorded accordingly. For instance, if a partner takes over an asset, it is essential to document their name and the value of the asset to maintain clarity in the accounts. Additionally, any discounts applied to asset values, such as a reduction in stock value, should be clearly indicated. These adjustments ensure that the realization account accurately represents the financial position of the partnership, allowing for a fair distribution of profits or losses among the partners.
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Summary
00:00
Understanding Realization Accounts in Dissolution
- The lesson focuses on creating a realization account as part of the chapter on dissolution from the Grewal textbook, specifically starting from question 21 after covering the first 20 general entry-based questions.
- The realization account format is introduced, emphasizing that it consists of two sides: debit (assets) and credit (liabilities), with a focus on understanding the nature of these accounts as nominal accounts.
- Students are instructed to list all assets on the debit side, excluding eight specific items: cash, bank balance, capital account, current account, drawings, profit and loss, loans to partners, and teacher's assets.
- Examples of assets to include on the debit side are land, buildings, plant, machinery, stock, bills receivable, prepaid expenses, and goodwill, while any provisions against these assets should be recorded on the credit side.
- On the liability side, students should include creditors, bills payable, outstanding expenses, loans, and employee provident funds, but exclude partner loans and only include loans from partners' relatives.
- Adjustments related to asset values must be noted, indicating whether assets are sold or taken over, with the sale price or takeover price recorded accordingly, and the partner's name noted if they take over an asset.
- Realization expenses, which may appear on the debit side, are payments made to settle liabilities, and any adjustments regarding liabilities should be reflected on the credit side.
- Intangible assets such as goodwill, patents, trademarks, copyrights, and computer software are noted as having a zero value unless specified otherwise, while tangible assets are released at book value if no information is provided.
- The realization account's total must balance, with any profit or loss transferred to the partner's capital or current account based on their fixed or fluctuating capital status.
- The example provided involves partners Ramesh and Umesh, detailing their capital contributions, asset distributions, and the realization of liabilities, emphasizing the importance of following the established format for clarity and accuracy in accounting.
12:04
Adjustment Process and Financial Distribution Summary
- The adjustment process begins with Ramesh applying a 50% discount on the stock valued at ₹130,000, resulting in a total of ₹65,000, which he takes away along with ₹10,000, leading to a net amount of ₹55,000 that should be recorded either as a partner's name or as cash in the accounts.
- Umesh is responsible for furniture valued at ₹50,000, which must be recorded in the adjustments by crossing it out, indicating it has no impact on profit or loss, and should be placed in brackets to denote its exclusion from overall calculations.
- The machine's value is set at ₹450,000, and it is essential to document the partner's name or the bank's name when sold in the market, ensuring clarity that no third party is involved in the transaction.
- The total liability recorded is ₹160,000, with a settlement amount of ₹140,000 noted in brackets, indicating it remains with the bank or the partner, and all liabilities must be paid off, especially if no information is provided regarding intangible assets like goodwill or patents.
- The final calculations yield a total of ₹180,000, indicating a loss, which is then transferred to the partner's current account in a 7:3 distribution ratio, resulting in ₹546,000 for one partner and ₹234,000 for the other, concluding the adjustment process.
