The main difference between a Revaluation Account and a Realisation Account is that while the former is prepared at the time of reconstitution of a firm, the latter is prepared at the time of dissolution.
A revaluation account is prepared to find out the profit or loss on the revaluation of assets and liabilities. When a firm is reconstituted for example, on admission and retirement/death of a partner, its assets and liabilities are revalued. The effect of such revaluation is ascertained and the profit or loss arising thereon is transferred to the capital accounts of old partners in their old profit-sharing ratio.
On the other hand, a realisation account is prepared to determine the profit or loss on account of the dissolution of a partnership firm. The books of the firm are closed and any profit or loss arising on the sale of assets and settlement of liabilities is ascertained through the preparation of the Realisation account.
Why is the revaluation account prepared?
Sometimes it is important to determine the amount of profit or loss made by a firm on the revaluation of its assets and liabilities.
For example, when a new partner is admitted to a firm, he is not to be benefitted from any appreciation in the value of assets or any decline in the value of liabilities. Similarly, he is not to bear any loss due to an increase in the value of liabilities or a decrease in the value of assets. Thus, he should not be affected by any profit or loss arising from the value of assets/liabilities up to the date of his admission. Such profit or loss is of the old partners. Therefore, whenever a firm is reconstituted, its assets and liabilities are revalued to determine the profit or loss arising thereon so that it can be distributed amongst the old partners in their old profit-sharing ratio. For this purpose, a revaluation account is prepared.
The format of a revaluation account looks like this:
Why is the realisation account prepared?
A realisation account is a nominal account that is prepared on the dissolution of a firm. When a firm is dissolved, its books of account are closed and a realisation account is opened to transfer all assets and liabilities. Assets are sold and liabilities are settled. And the profit or loss arising therefrom is then transferred to all the partners’ capital accounts in their profit-sharing ratio.
The following steps are followed for the preparation of a realisation account:
1. All assets are transferred to it except cash in hand and at the bank.
2. Sundry Debtors are to be transferred at the gross amount.
3. The Account is credited with all liabilities to outsiders and provisions against assets such as Provision for Bad Debts.
4. Accounts of accumulated losses or profits are not to be transferred to Realisation Account.
5. Loans from partners and Loans to partners are also not transferred to Realisation Account. They are settled through the capital accounts of partners or through cash.
6. The Realisation account is credited with the amounts realized from the sale of assets. If a partner takes over an asset, his capital account is debited and the Realisation account is credited with the agreed value.
7. Similarly, the amount paid to creditors for the settlement of liabilities is debited to the Realisation account. If a partner takes over a liability, his capital account is credited and the Realisation account is debited with the agreed value.
8. Expenses incurred during the process of dissolution are also debited to the Realisation account.
9. The profit or loss shown by the Realisation Account is transferred to all the partners’ capital accounts in their profit-sharing ratio.
The format of a realisation account looks like this:
From the above discussion, the key differences between a Revaluation Account and a Realisation Account can be summarized as follows:
|Basis||Revaluation Account||Realisation Account|
|Recording||A revaluation account records the effect of the revaluation of assets and liabilities.||A realisation account records the sale of various assets and the payment of liabilities.|
|Time||A revaluation account is prepared at the time of reconstitution of a partnership firm.||A realisation account is prepared at the time of dissolution of the partnership firm.|
|Profit/loss||This account is prepared to find out the profit or loss arising as a result of the revaluation of assets and liabilities.||This account is prepared to find out the profit or loss arising from the realisation of assets and settlement of liabilities when the firm is dissolved.|
|Assets/liabilities||Only those assets and liabilities are recorded in this account that have been revalued.||Generally, all assets and liabilities are recorded in this account.|
|Balance||The balance of the revaluation account is transferred to the old partners’ capital accounts.||The balance of the realisation account is transferred to the capital accounts of all partners.|
|Entries||The entries in this account are made based on the difference between book values and revalued figures of assets and liabilities.||Here, the accounting entries are made at the book values of assets and liabilities.|
|Closure||The accounts of assets and liabilities are not closed on revaluation.||When the realisation account is prepared, the accounts of assets and liabilities are closed.|
|Items recorded||Increase or decrease in the value of assets and liabilities||Sale of assets, settlement of liabilities, expenses on dissolution, etc.|
Hope the information provided in this blog is helpful!
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