Key differences between Revaluation Account and Realisation Account

Key differences between Revaluation Account and Realisation Account

Revaluation Account

Revaluation Account is a temporary account used during the reconstitution of a partnership to record any changes in the value of assets and liabilities. When a partnership undergoes changes such as the admission of a new partner, retirement of an existing partner, or changes in profit-sharing ratio, revaluation ensures that all assets and liabilities are reflected at their fair value. Any profit or loss arising from revaluation is credited or debited to the existing partners’ capital accounts according to their old profit-sharing ratio. This ensures that the partners share the impact of revaluation before the partnership is restructured.

Characteristics of Revaluation Account:

• Prepared during Reconstitution

Revaluation Account is created when there is a change in the structure of a partnership, such as admission, retirement, or death of a partner. It helps in adjusting the book values of assets and liabilities to reflect their current market value.

• Objective: Adjust Assets and Liabilities

The primary purpose of a Revaluation Account is to account for any increase or decrease in the value of assets and liabilities, ensuring that existing partners are appropriately compensated for changes before the reconstitution.

• Records Profits or Losses from Revaluation

Any increase in the value of assets or decrease in the value of liabilities is credited, while any decrease in the value of assets or increase in liabilities is debited. The resulting balance (profit or loss) is shared among the partners in their old profit-sharing ratio.

• Temporary Account

Revaluation Account is a temporary account. It is opened only for the purpose of recording revaluation and adjustments and is closed after transferring the resulting profit or loss to the partners’ capital accounts.

• Partner Compensation

The profits or losses from revaluation ensure that existing partners do not lose out or benefit disproportionately due to changes in the partnership. This adjustment helps in fair redistribution among old and new partners.

• No Impact on Cash or Bank Balance

Revaluation Account only deals with notional changes in the values of assets and liabilities. There is no actual cash inflow or outflow involved in the process unless specified otherwise.

• Linked with Balance Sheet Adjustments

The revised values of assets and liabilities recorded in the Revaluation Account are reflected in the new balance sheet of the reconstituted firm. This ensures that the balance sheet presents a true and fair view of the firm’s financial position.

• Helps in Maintaining Accuracy

By recording the changes in asset and liability values, the Revaluation Account helps maintain the accuracy and fairness of financial statements during significant partnership changes. It ensures that any hidden reserves or unrealized losses are accounted for before reconstitution.

Realisation Account

Realisation Account is prepared during the dissolution of a partnership firm to account for the sale of assets, settlement of liabilities, and distribution of any surplus or deficit among partners. It helps in determining the net gain or loss from the process of dissolving the firm. All firm assets (except cash) are transferred to the realisation account at book value, and liabilities are credited. Proceeds from the sale of assets and payments to settle liabilities are recorded. The final balance, representing profit or loss, is distributed among partners according to their profit-sharing ratio.

Characteristics of Realisation Account:

• Prepared at the Time of Dissolution

Realisation Account is created when a partnership firm is dissolved. Its main purpose is to determine the profit or loss arising from the disposal of the firm’s assets and the settlement of its liabilities during dissolution.

• Objective: Liquidate Assets and Settle Liabilities

Realisation Account helps in liquidating the firm’s assets and settling all its external liabilities. Any balance left after the settlement is distributed among the partners according to their respective capital accounts and profit-sharing ratios.

• Records Sale of Assets

All assets (except cash or bank balance) are transferred to the debit side of the Realisation Account at their book values. The proceeds from the sale of these assets are recorded on the credit side of the account. Any profit or loss from the sale is eventually realized.

• Records Payment of Liabilities

Liabilities that need to be settled during dissolution are transferred to the credit side of the Realisation Account. Payments made to settle these liabilities are recorded on the debit side. Any remaining liabilities or costs, such as dissolution expenses, are also debited.

• Determines Profit or Loss on Realisation

Realisation Account helps calculate the net profit or loss from the process of liquidating assets and settling liabilities. If the credit side exceeds the debit side, a profit is realized, while if the debit side exceeds the credit side, a loss is incurred. This balance is shared among partners in their profit-sharing ratio.

• Partner Compensation for Realisation

In cases where a partner takes over an asset or liability, it is recorded in the Realisation Account. The corresponding value is debited or credited to the partner’s capital account, ensuring fairness in the final distribution of funds.

• Temporary Account

Realisation Account is also a temporary account. It exists only for the purpose of determining the outcome of the dissolution process and is closed after the profit or loss is transferred to the partners’ capital accounts.

• Involves No Future Transactions

Realisation Account is concerned solely with transactions that occur during the dissolution process. It does not record any future transactions since the firm ceases to exist once the dissolution process is complete.