Definition
A realizable account is used during the dissolution of a partnership to record the assets, expenses, and sales proceeds. It ensures that all financial activities related to the termination of the partnership are documented, and any profit or loss from the realization process is accurately calculated and allocated among the partners according to their profit-sharing ratio.
Detailed Explanation
The realizable account follows this structure:
- Debits: This side of the account records the total value of the partnership’s assets and any expenses incurred during the realization process.
- Credits: This side of the account includes the proceeds from any sales of the partnership’s assets.
Closing the Realizable Account
The difference between the total debits and credits represents the profit or loss on realization. This figure is then shared between the partners based on their agreed profit-sharing ratio.
Importance
Creating a realizable account ensures that all partners receive a fair share of the final financial position of the partnership. It also provides a clear and comprehensive record of the partnership’s dissolution process.
Examples
Example 1
Partnership A decides to dissolve. The realizable account shows:
- Debits:
- Assets: $100,000
- Realization Expenses: $10,000
- Credits:
- Sales Proceeds: $120,000
Profit on realization = $120,000 (Credits) - $110,000 (Debits) = $10,000. If Partner A holds 60% and Partner B holds 40% in the profit-sharing ratio, Partner A gets $6,000, while Partner B gets $4,000.
Example 2
Partnership B is dissolving. The realizable account shows:
- Debits:
- Assets: $200,000
- Realization Expenses: $30,000
- Credits:
- Sales Proceeds: $220,000
Profit on realization = $220,000 (Credits) - $230,000 (Debits) = -$10,000 (loss). If Partner C holds 50% and Partner D holds 50% in the profit-sharing ratio, Partner C incurs a loss of $5,000, and so does Partner D.
Frequently Asked Questions (FAQs)
Q1: What happens if there are more expenses than sales proceeds?
A1: If expenses exceed sales proceeds, the remaining amount will be a loss which needs to be shared among the partners as per the profit-sharing ratio.
Q2: Can a realizable account show a zero balance?
A2: Yes, if the debits and credits are equal, it indicates that there is neither profit nor loss on the realization.
Q3: Is the profit-sharing ratio always equal?
A3: No, the profit-sharing ratio can vary depending on the partnership agreement and the contributions of each partner.
Q4: What items can be considered under realization expenses?
A4: Realization expenses include costs incurred in selling assets, such as legal fees, advertising costs, and commissions.
Q5: Can a realizable account include liabilities?
A5: No, a realizable account typically includes only assets, proceeds from sales, and realization expenses.
Related Terms
Partnership Dissolution
The ending of a partnership and the winding up of its business affairs, which typically involves the settlement of all debts and the distribution of any remaining assets to the partners.
Profit-sharing Ratio
The proportion in which profits and losses are distributed among partners, as defined in the partnership agreement.
Realization
The process of converting assets into cash, especially during the dissolution of a partnership.
Liquidation
The process of bringing a business to an end and distributing its assets to claimants, often includes both the realization of assets and settlement of liabilities.
Online References
Suggested Books for Further Studies
- “Partnership Law” by Mark Blackett-Ord
- “Accounting for Partnerships” by Keith Howard
- “Advanced Accounting”, by Joe Ben Hoyle, Thomas Schaefer, and Timothy Doupnik
Accounting Basics: “Realizable Account” Fundamentals Quiz
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