In the case of dissolution of a partnership firm, unrecorded liabilities when paid are shown in:
In the case of dissolution of a partnership firm, unrecorded liabilities when paid are shown in:
Solution
When unrecorded liabilities are paid during dissolution, they represent a loss to the firm that was not previously recorded in the books.
The Realisation Account is prepared to record all assets realized and liabilities settled (except cash/bank and partners' capital/loans). It captures all gains and losses arising from the dissolution process.
Since paying an unrecorded liability is an additional expense or loss for the firm, it must be debited to the Realisation Account.
The journal entry for payment of unrecorded liability:
Realisation A/c Dr.
To Bank A/c
In the Realisation Account:
- Debit side shows: Assets taken over, liabilities paid (including unrecorded ones), and any loss on realization
- Credit side shows: Liabilities taken over by partners, assets realized, and any profit on realization
Unrecorded liabilities, when paid, increase the total payments made by the firm, thus appearing on the debit side of the Realisation Account.
Note that if an unrecorded liability is taken over by a partner (not paid by the firm), it would be credited to Realisation Account as it reduces the firm's burden.
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