How to Make a Realisation Account




Making a realisation account involves keeping track of the profit or loss arising from the sale of assets or investments. It is important to maintain this account to determine the true financial position of a business. Here is a detailed explanation of how to make a realisation account:




Step 1: Understand the Purpose of a Realisation Account
A realisation account is created to record the profit or loss resulting from the sale of assets or investments during the winding up or dissolution of a business partnership or company.




Step 2: Prepare the Opening Entries
To begin, transfer the balances of all assets and liabilities to the realisation account. Ensure that the values are adjusted to reflect their current market or fair values.




Step 3: Record the Sales of Assets
List all the assets sold during the liquidation process. Include the date of sale, the description of the asset, the selling price, and any associated expenses or charges. It is crucial to account for every asset sold accurately.




Step 4: Calculate the Profit or Loss on the Sale of Assets
Determine the difference between the selling price and the adjusted value of each asset. If the selling price exceeds the adjusted value, it indicates a profit, while if the selling price is lower than the adjusted value, it represents a loss. Calculate the total profit or loss by summing up all the individual amounts.




Step 5: Allocate the Profit or Loss
Based on the partnership or company agreement, allocate the profit or loss among the partners or shareholders. This distribution is typically done according to their profit-sharing ratios or as stipulated in the agreement.




Step 6: Prepare the Closing Entries
Close the realisation account by transferring the allocated profit or loss to the partners' or shareholders' capital accounts. Adjust the capital accounts accordingly to reflect the final distribution.




Step 7: Verify the Balances
Ensure that the total of the allocated profits or losses matches the closing balance of the realisation account. This verification guarantees accuracy in the accounting records.




By following these steps, you can create a realisation account to accurately track the profit or loss arising from the sale of assets or investments during the winding up or dissolution of a business partnership or company.