Dissolution of a partnership: the realisation account
On dissolution the firm's assets are sold, liabilities paid and partners settled. The realisation account shows the profit or loss, shared in the profit ratio.
When a partnership is dissolved
- By agreement of all the partners.
- When the agreed period ends or the agreed venture is completed.
- On the death, retirement or bankruptcy of a partner, unless the agreement says the firm continues.
- When the business becomes illegal, or by order of a court.
Amal and Nuwan (3:2): statement of financial position at 31 March 2026 (Rs.)
| Item | Rs. |
|---|---|
| Equipment | 700,000 |
| Inventory | 450,000 |
| Trade receivables | 250,000 |
| Bank | 150,000 |
| Total assets | 1,550,000 |
| Trade payables | 300,000 |
| Loan from Nuwan | 100,000 |
| Capital: Amal | 700,000 |
| Capital: Nuwan | 450,000 |
| Total capital and liabilities | 1,550,000 |
Dissolution terms
- Equipment is sold for Rs. 560,000.
- Amal takes over the inventory at Rs. 400,000.
- Receivables realise Rs. 230,000.
- Payables are settled for Rs. 290,000.
- Realisation expenses of Rs. 30,000 are paid.
- Nuwan's loan is repaid in full.
Worked example 1: the realisation account
Prepare the realisation account and share the result.
- Debit, assets at book value: equipment 700,000 + inventory 450,000 + receivables 250,000 = 1,400,000.
- Debit, cash paid: payables 290,000 + expenses 30,000 = 320,000. Total debits: 1,400,000 + 320,000 = 1,720,000.
- Credit: payables transferred 300,000 + equipment sold 560,000 + inventory taken by Amal 400,000 + receivables collected 230,000 = 1,490,000.
- Loss on realisation: 1,720,000 − 1,490,000 = 230,000.
- Shared 3:2: Amal 230,000 × 3/5 = 138,000; Nuwan 230,000 × 2/5 = 92,000.
- Cross-check: assets realised 560,000 + 400,000 + 230,000 = 1,190,000, so 1,400,000 − 1,190,000 = 210,000 lost; − 10,000 saved on payables + 30,000 expenses = 230,000.
Loss on realisation Rs. 230,000: Amal Rs. 138,000, Nuwan Rs. 92,000.
Worked example 2: the bank account and settling the partners
Complete the bank account and settle the partners' capital accounts.
- Bank receipts: opening 150,000 + equipment 560,000 + receivables 230,000 = 940,000.
- Bank payments: payables 290,000 + expenses 30,000 + Nuwan's loan 100,000 = 420,000.
- Left for partners: 940,000 − 420,000 = 520,000.
- Amal: 700,000 − inventory taken 400,000 − loss 138,000 = 162,000 to be paid.
- Nuwan: 450,000 − loss 92,000 = 358,000 to be paid.
- Check: 162,000 + 358,000 = 520,000, exactly the bank balance.
Amal receives Rs. 162,000 and Nuwan Rs. 358,000; the bank account closes at zero.
Order of settlement and special cases
- Pay outside creditors (and realisation expenses) first, then partners' loans, then partners' capitals.
- Assets taken over by a partner are debited to that partner's capital account.
- If a partner's capital ends in debit, that partner must bring in cash.
- If that partner cannot pay, many textbooks apply the rule in Garner v Murray: the solvent partners bear the deficiency in the ratio of their last agreed capitals.
When two friends close a small Kandy tour business or a Galle restaurant run as a partnership, they must sell the assets and pay suppliers and the bank first, and only then share what remains. The realisation account shows exactly who gets what.
Short answer: “What is a realisation account?” A temporary account opened on dissolution to record the sale of assets and the settlement of liabilities; its balance is the profit or loss on realisation.
Structured question: “State the order in which the proceeds of a dissolved partnership are applied.” Realisation expenses and outside creditors first, then partners' loans, then partners' capitals, with any deficiency dealt with as the question directs.
Essay: “Prepare the realisation account, the partners' capital accounts and the bank account on dissolution.” Transfer assets and liabilities to realisation, record sales, takeovers and expenses, share the result in the profit ratio, then settle the partners through the bank.
Realisation account: assets in at book value (Dr), proceeds (Cr). The bank account must close at zero when the last partner is paid.