Unrecorded liabilities when paid at the time of dissolution of a partnership firm, are shown in:
Unrecorded liabilities when paid at the time of dissolution of a partnership firm, are shown in:
Solution
When a partnership firm is dissolved, all assets and liabilities are transferred to the Realisation Account. This account records all transactions related to the realization of assets and settlement of liabilities.
Unrecorded liabilities are those liabilities that existed but were not recorded in the books before dissolution. When these liabilities are discovered and paid during dissolution, they represent an additional burden on the firm.
The journal entry for payment of unrecorded liabilities is:
Realisation A/c Dr.
To Bank A/c
Since Bank Account is credited (cash going out), the corresponding debit goes to Realisation Account.
Why Realisation Account is debited:
All payments and losses during dissolution are debited to Realisation Account. Unrecorded liabilities, when paid, are treated as an expense or loss in the dissolution process. Just like recorded liabilities are debited to Realisation Account when paid, unrecorded liabilities follow the same treatment.
The Realisation Account collects all such payments (both recorded and unrecorded liabilities) on its debit side, while receipts from asset realization appear on the credit side. The difference determines the profit or loss on realization to be distributed among partners.
Correct Answer: Option 1 - Debit of Realisation Account
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