Accounting Treatment for Depreciated Assets
When an asset has been completely depreciated but continues to be used in the business, it will still be reported on the balance sheet (B/S) at its original cost along with the accumulated depreciation. No further depreciation expense will be recorded once the asset is fully depreciated. Accounting entries are only necessary if the asset is disposed of through sale, salvage, retirement, or other means.
Accounting Treatment When a Firm is Dissolved
Upon the dissolution of a firm, its books of accounts must be closed. The profit or loss emerging from the realization of assets and settlement of liabilities must be calculated. To achieve this, a Realisation Account is used to determine the net effect (profit or loss) from the realization of assets and payment of liabilities. This net effect is then transferred to the partners’ capital accounts in their profit-sharing ratio (PSR).
All assets and external liabilities are transferred to the Realisation Account. This account records the sale of assets, payment of liabilities, and realization expenses. The resulting balance in the Realisation Account, known as profit or loss on realization, is transferred to the partners’ capital accounts according to their profit-sharing ratio.
Realisation Account
| Debit Side (Dr.) | Credit Side (Cr.) |
|---|---|
| To Cash/Bank (from sale of assets) | By Creditors (settled amount) |
| – Sale of Equipment Rs 50,000 | – Payment to Creditors Rs 20,000 |
| To Debtors (amount collected) | By Outstanding Liabilities |
| – Collection from Debtors Rs 10,000 | – Payment of other liabilities Rs 5,000 |
| To Other Receivables (e.g., salvage value) | By Assets (book value) |
| – Salvage Value Rs 3,000 | – Transfer of Equipment at book value Rs 30,000 |
| To Realisation Expenses | |
| – Legal Fees, Commissions, etc. Rs 2,000 | |
| To Loss on Realisation | By Profit on Realisation |
| – Loss amount (if any) Rs 1,500 | – Profit amount (if any) Rs 1,500 |
| To Partners’ Capital Accounts | |
| – Transfer of final balance (Profit/Loss) |
Details for Debit Side
- To Cash/Bank: Rs 50,000 received from the sale of assets.
- To Debtors: Rs 10,000 collected from debtors.
- To Other Receivables: Rs 3,000 from salvage value.
- To Realisation Expenses: Rs 2,000 for expenses like legal fees or commissions.
- To Loss on Realisation: Rs 1,500 (if a loss is incurred, transferred to partners’ capital accounts).
Details for Credit Side
- By Creditors: Rs 20,000 paid to settle creditor accounts.
- By Outstanding Liabilities: Rs 5,000 paid for other liabilities.
- By Assets: Rs 30,000, the book value of assets transferred.
- By Profit on Realisation: Rs 1,500 (if profit is made, transferred to partners’ capital accounts).
- By Partners’ Capital Accounts: The final amount after accounting for profit or loss, distributed among partners.
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