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

Concept: During dissolution, a Realisation Account is opened to close out asset accounts and pay off liabilities. Any cash payment made to settle a liability represents a business expenditure that must be recorded on the debit side of this account.

Step 1: Identify the proper treatment for unrecorded liabilities.{} Unrecorded liabilities do not have an initial balance to transfer into the Realisation Account. However, when an actual cash settlement occurs, the cash outflow must be recorded.

Step 2: Determine the journal entry and amount for the settlement.
The payment entry is recorded by debiting the Realisation Account and crediting the Bank Account. The entry uses the actual cash amount paid (\$4,500), rather than the original unrecorded book estimate (\$5,000): \[ \text{Realisation A/c} \quad \text{Dr.} \quad \$4,500 \] \[ \quad \text{To Bank A/c} \quad \$4,500 \] Therefore, the Realisation Account is debited with exactly \$4,500.