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Difference between Realisation account and Revaluation account

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What is Realisation Account?

At the time of dissolution of the Partnership firm, Assets are realised, outside liabilities are paid, loan by partner is repaid and the balance, if any, is distributed among the partners. Realisation account is prepared to close the books of accounts by realising assets (i.e. selling off ) and payment of liabilities. Realisation Account is a type of Nominal account.  The primary purpose of preparing Realisation A/c is to realise the value of assets and to settle liabilities of the firm. Thereby, closing the books of accounts. The gain (profit) or loss of the dissolved firm is determined by the realisation of assets and payment of liabilities. 

Following are the steps involved in the preparation of Realisation A/c: 

1. All assets (except fictitious assets, loans to partners, and Cash or Bank A/c) are transferred to the debit side of the Realisation A/c. 

2. All liabilities except Loan by Partners and Partner’s Capital A/cs) are transferred to the credit side of the Realisation A/c. 

3. Amount realised from the sale of assets is transferred to the credit side of the Realisation Account. 

4. Payment of all the liabilities is recorded on the debit side of the Realisation Account.

5. Expenses incurred in the realisation by the firm are debited in the Realisation Account.

Balance of Realisation A/c is either gain (when the Credit side is more than the Debit side) or loss (when the Debit side is more than the Credit side) is transferred to the Capital A/c of all the partners in their profit-sharing ratio.

What is Revaluation Account?

At the time of reconstitution of the firm (Admission of a partner, Change in profit sharing ratio, Retirement of a partner, and Death of a partner), it is essential to revalue assets and reassess the liabilities of the firm, as with the passage of time, the value of some assets might have gone up and value of other might have fallen. Likewise, the amount of liabilities may be different from those in the books. Thus, revaluation of assets and reassessment of liabilities may result in profit or loss, allocated among the partners in their profit sharing ratio before the reconstitution of the firm. It is also a type of Nominal Account. 

Following are the steps involved in the preparation of Revaluation A/c:

1. Increase in the value of any asset is recorded on the Credit side of the Account. 

2. Decrease in the value of any liability is recorded on the Credit side of this Account.

3. Decrease in the value of any asset is recorded on the Debit side of the Account. 

4. Increase in the value of any liability is recorded on the Debit side of this Account.

5. All the unrecorded assets are recorded on the Credit side of the Account. 

6. All the unrecorded liabilities are recorded on the Debit side of the Account. 

Balance of Revaluation A/c is either profit (when the Credit side is more than the Debit side) or loss (when the Debit side is more than the Credit side) is transferred to the Capital or Current A/c of all the partners in their profit-sharing ratio.

Difference between Revaluation Account and Realisation Account

Basis

Revaluation Account 

Realisation Account

Meaning

The effect of revaluation of assets and reassessment of liabilities is shown in this Account. The effect of realisation of assets and settlement of liabilities is shown in this Account.

Purpose 

To determine profit or loss on account of revaluation of assets & reassessment of liabilities.  To ascertain profit or loss on account of realisation of assets & payment of liabilities. 

Time 

It is prepared at the time of reconstitution of the firm (death, admission, retirement of a partner). It is prepared at the time of dissolution of the firm.

Distribution of profit/ loss  

Profit or loss on revaluation is transferred to the old partner’s Capital A/c in their profit sharing ratio (in case of admission) and to all partner’s Capital A/c (in case of retirement or death). Profit or loss on Realisation A/c is transferred to all partner’s capital A/c in their profit sharing ratio.

Frequency of Preparation

It may be prepared many times during the life of the firm. It is prepared only once during the life of the firm.

Closure of accounts 

Accounts of assets & liabilities are only revalued, thus no closure of these accounts.  Accounts of assets and liabilities are closed.

Last Updated : 24 Jul, 2023
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