Unrecorded liabilities when paid are shown in:
Unrecorded liabilities when paid are shown in:
Solution
When unrecorded liabilities (liabilities not appearing in the books) are discovered and paid during dissolution or reconstitution of a partnership firm, the following journal entry is passed:
Realisation Account Dr.
To Bank Account
Realisation Account (Debit): All payments made for liabilities, whether recorded or unrecorded, are debited to Realisation Account. Since unrecorded liabilities were never shown in the books, they cannot be transferred from any liability account. They are directly debited to Realisation Account when paid.
Bank Account (Credit): When payment is made, cash goes out of the business, hence Bank Account is credited.
It's important to note that if the unrecorded liability is discovered but not yet paid, it would be:
- Realisation Account Dr.
To Concerned Liability Account
But when actually paid, Bank Account gets credited instead of the liability account.
The double-entry principle requires one debit and one credit, hence both Option 1 (Debit of Realisation Account) and Option 4 (Credit of Bank Account) are correct.
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