In a partnership account, the conversion of non-cash assets into cash is referred to as realization.
Realization is the process of converting non-cash assets, such as property or investments, into cash. This may occur when a partnership is dissolved, and the partners need to divide the partnership's assets and liabilities. The process of realization involves selling the partnership's assets, paying off its debts, and distributing the remaining cash to the partners according to their capital account balances.
Realization is an important concept in partnership accounting because it determines how the partners will divide the partnership's assets and liabilities. The amount of cash that each partner receives will depend on their capital account balance, which reflects their investment in the partnership.
For example, if a partnership has non-cash assets, such as property or investments, worth $100,000 and liabilities of $50,000, the partnership's net assets would be $50,000. If the partnership is dissolved and the assets are sold for cash, the $50,000 in liabilities would be paid off, leaving $50,000 in cash to distribute to the partners. If one partner had a capital account balance of $30,000 and the other had a balance of $20,000, the first partner would receive 60% of the cash ($30,000/$50,000), and the second partner would receive 40% of the cash ($20,000/$50,000).
In summary, realization is the process of converting non-cash assets into cash in a partnership account, and it determines how the partners will divide the partnership's assets and liabilities.