Difference between Realisation Account and Revaluation Account

Difference between Realisation Account and Revaluation Account

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Apr 29, 2024 18:35 IST

 A Realisation Account is specifically used during the winding up of a business to handle the sale of assets and payoff of liabilities. It's done to determine the final profit or loss. On the other hand, a Revaluation Account is prepared during the reconstitution of a partnership firm to adjust asset and liability values without closing the business.

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In a firm deciding to wind up due to continuous losses, a Realisation Account is created to sell assets like inventory and furniture and settle liabilities such as supplier payments and bank loans. This account determines the net profit or loss from these activities.

Conversely, when a partner, Mr. Gupta, retires, a Revaluation Account is formed to reassess the current market value of assets and liabilities, reflecting the impact on the firm's financials and the remaining partners' capital. Let's understand the difference between both concepts.

Let’s understand the difference between a realisation account and a revaluation account.

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Table of Content

Comparative Table: Realisation Account and Revaluation Account

Aspects Realisation Account  Revaluation account
Purpose A realisation account records the sale of assets or converts investments into cash. Revaluation Account is used to record changes in the value of assets due to market changes.
Triggering Event The triggering event for the Realization Account is the sale of assets.  The triggering event for Revaluation Account is a change in market value.
Information Recorded Realization Account records the gain or loss on the sale of assets and transfers the gain or loss to the profit and loss account. Revaluation Account records an increase or decrease in the value of assets.
Timing The realization Account is recorded at the time of the sale of assets. Revaluation Account is recorded periodically to reflect the current market value of assets. Revaluation Account is recorded periodically to reflect the current market value of assets.
Frequency The realization Account is recorded once when the assets are sold.  Revaluation Account is recorded periodically, usually annually or semi-annually.
Impact on Financial Statements  The Realization Account affects the profit and loss account and the balance sheet. The Revaluation Account affects only the balance sheet.

What is Revaluation Account?

Revaluation Account is a financial accounting term that refers to a ledger account which records an increase or decrease in the value of assets due to market changes. The purpose of the Revaluation Account is to reflect the current market value of assets in the balance sheet.

We use Revaluation Account to periodically adjust the value of assets, such as property, plant, and equipment, to reflect changes in the market. For example, if the value of a building increases due to changes in the real estate market, the value of the building in the balance sheet will be adjusted to reflect the new market value. The Revaluation Account records this adjustment.

It helps organizations maintain accurate financial statements by reflecting the right value of assets in the balance sheet. By periodic asset revaluation, organizations can make informed decisions about managing their assets and ensure a clear picture of their financial position.

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What is Realisation Account?

A realisation Account is a financial accounting term that refers to a ledger account that records the sale of assets or converts investments into cash. It determines the gain or loss on the sale of assets and transfers that to the profit and loss account.

Companies use this account to track the sale of fixed assets, such as property, plant, and equipment, and the sale of investments, such as stocks and bonds. Realization Accounts record all sale proceeds, including brokerage fees, when an asset is sold. The profit and loss account records all the gains and losses as differences between the sale price and cost.

The Realisation Account is a key component of an organization’s financial accounting system. By doing so, it is possible to ensure that the financial statements accurately reflect the value of assets. The Realisation Account helps organizations make informed decisions about managing their assets by tracking the sale of assets and recording gains or losses.

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Conclusion

Both Realization Account and Revaluation Account assess the value of assets differently. Understanding their purposes, triggering events, and impacts on financial statements is important to account for asset values accurately. Both have their purpose of creation, and their creation depends on the organization’s needs.

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FAQs

What is Realisation Account?

A Realisation Account is an account used to record the profit or loss arising from the sale of assets during the winding up of a company or partnership. It is created when a firm is dissolved or liquidated, and it is used to determine how the proceeds from the sale of assets will be distributed among the partners or shareholders.

What is Revaluation Account?

A Revaluation Account is an account used to record any increase or decrease in the value of assets or liabilities of a business. It is created when there is a change in the value of an asset or liability due to factors such as market fluctuations, revaluation of assets, or changes in accounting policies. The purpose of a Revaluation Account is to adjust the book value of an asset or liability to its fair market value.

What is the main difference between a Realisation Account and a Revaluation Account?

The main difference between a Realisation Account and a Revaluation Account is that Realisation Account is used when a company or partnership is being dissolved or liquidated, and it records the profit or loss from the sale of assets. On the other hand, a Revaluation Account is used to record any increase or decrease in the value of assets or liabilities due to factors such as market fluctuations or changes in accounting policies.

When is Realisation Account created?

A Realisation Account is created when a company or partnership is being dissolved or liquidated. It is used to record the profit or loss arising from the sale of assets and to determine how the proceeds will be distributed among the partners or shareholders.

When is a Revaluation Account created?

A Revaluation Account is created when there is a change in the value of an asset or liability due to factors such as market fluctuations, revaluation of assets, or changes in accounting policies. The purpose of a Revaluation Account is to adjust the book value of an asset or liability to its fair market value.

Can Realisation Account and Revaluation Account be created at the same time?

Yes, it is possible for a Realisation Account and a Revaluation Account to be created at the same time. This can happen, for example, when a partnership is being dissolved or liquidated, and there is a change in the value of assets or liabilities that need to be adjusted to their fair market value. In this case, the Realisation Account would be used to record the profit or loss from the sale of assets. In contrast, the Revaluation Account would be used to adjust the book value of the assets or liabilities to their fair market value.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio