Question

An unrecorded liability of \$5,000 is settled at \$4,500 during the dissolution of a partnership firm. Which of the following accounting treatments correctly records this settlement transaction inside the Realisation Account?

• A. \( \text{Debiting the Realisation Account with \$4,500} \)
• B. \( \text{Crediting the Realisation Account with \$4,500} \)
• C. \( \text{Debiting the Realisation Account with \$5,000} \)
• D. \( \text{Crediting the Realisation Account with \$500} \)

Hint:

For any liability payment during dissolution—whether the item was recorded or unrecorded—always debit the Realisation Account with the exact cash amount paid.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Dissolution of a firm involves selling assets and paying off all liabilities.
A "Realisation Account" is a nominal account prepared to determine the profit or loss on this winding up.
- All assets are debited to this account.
- All liabilities are credited to this account.
- When cash is paid to settle a liability, it is a loss/expenditure for the realization process, so it is debited to the Realisation Account.
Step 2: Detailed Explanation:
An "unrecorded liability" is one that was not appearing in the company's books (Balance Sheet) at the time of dissolution.
Therefore, there was no initial "transfer" of this liability to the credit side of the Realisation Account.
However, the actual cash payment made to settle it must be recorded because cash is leaving the business.
The journal entry for paying any liability during dissolution is:
\[ \text{Realisation A/c Dr.} \quad \$4,500 \]
\[ \text{To Bank/Cash A/c} \quad \$4,500 \]
The estimated unrecorded value (\$5,000) is ignored; only the actual amount paid is relevant for the ledger entry.
Step 3: Final Answer:
The Realisation Account should be debited with \$4,500, representing the actual cash outflow to settle the unrecorded obligation.