On dissolution of a firm, bank overdraft is transferred to:
Realisation Account
Understanding Firm Dissolution Accounting
When a partnership firm is dissolved, all assets are realised (converted into cash), and all liabilities are paid off. To facilitate this process and ascertain the profit or loss on realisation of assets and payment of liabilities, a special account called the Realisation Account is prepared.
Transferring Liabilities to Realisation Account
The primary purpose of the Realisation Account is to consolidate the values of assets and liabilities at the time of dissolution. All external liabilities, which are the amounts owed by the firm to outsiders, are transferred to the debit side of the Realisation Account. This includes items like Sundry Creditors, Bills Payable, Outstanding Expenses, Bank Loan, and importantly, Bank Overdraft.
Bank Overdraft is a short-term liability where the firm has withdrawn more money from its bank account than it has deposited. Since it is an amount owed to the bank (an external party), it is treated as an external liability during the dissolution process.
Why Bank Overdraft is Transferred to Realisation Account
- During dissolution, the firm needs to pay off all its debts.
- The Realisation Account is used to record the settlement of these liabilities.
- Transferring liabilities like Bank Overdraft to the debit side of the Realisation Account helps in calculating the net effect (profit or loss) of winding up the firm's affairs.
- After transferring the liability, the actual payment to the bank is recorded on the credit side of the Realisation Account (or through the Bank/Cash Account, which then affects the Realisation Account balance indirectly via closing accounts).
Analysing the Options
Let's look at why the other options are incorrect treatments for Bank Overdraft during firm dissolution:
- Bank Account: The Bank Account shows the cash balance at the bank. While the eventual payment of the bank overdraft will involve the bank account, the liability itself is first transferred to the Realisation Account to be included in the overall calculation of realisation profit or loss.
- Partners’ Capital Account: Partners' Capital Accounts record the partners' contributions, shares of profit/loss, withdrawals, etc. Firm's external liabilities like Bank Overdraft are not transferred here.
- Partners’ Loan Account: This account is for loans provided by partners to the firm. Bank Overdraft is a liability owed to the bank, not a partner.
Therefore, the correct destination for the transfer of Bank Overdraft upon dissolution of a firm is the Realisation Account.
Revision Table: Treatment of Items on Dissolution
| Item | Transferred To | Side |
|---|---|---|
| Assets (except Cash/Bank) | Realisation Account | Debit |
| External Liabilities (Creditors, Bills Payable, Bank Overdraft, Loan, etc.) | Realisation Account | Credit |
| Provisions against Assets (e.g., Provision for Doubtful Debts) | Realisation Account | Credit |
| Accumulated Profits/Reserves (e.g., General Reserve) | Partners' Capital Accounts | Credit |
| Accumulated Losses (e.g., Debit balance of P&L A/c) | Partners' Capital Accounts | Debit |
| Partners' Loans | Partners' Loan Accounts (Paid directly, not transferred to Realisation) | N/A |
Additional Information: Realisation Account Purpose
The Realisation Account serves as a summary account during the dissolution of a partnership. Its main purposes are:
- To close the books of the firm.
- To record the transfer of assets and liabilities.
- To record the sale of assets and payment of liabilities.
- To calculate the profit or loss arising from the realisation of assets and payment of liabilities. This profit or loss is then transferred to the Partners' Capital Accounts.
The balance in the Realisation Account represents either the net profit or net loss on realisation. A credit balance signifies a profit on realisation, while a debit balance indicates a loss on realisation.
Important Questions from Dissolution of a Partnership Firm
In case of dissolution of partnership firm, all assets, except cash/bank and fictitious assets, are transferred to debit side of:
Match List I with List II:
List – I List – II A. Dissolution Agreement I. When a partner becomes insane B. Dissolution by Court II. By the completion of venture C. Compulsory dissolution III. In accordance with contract between partners D. On happening of certain contingencies IV. Event making it impossible for partners to carry on business Choose the correct answer from the options given below:
Record journal entry for the following on dissolution of a firm:
Firm has a stock of ₹2,40,000. Arun, a partner, took over 50% of the stock at a discount of 15%.
The dissolution of a partnership firm takes place in the following order:
(A) Outsiders’ liabilities are paid out.
(B) Partner’s capital account is settled.
(C) All assets and outside liabilities are transferred to the realization account.
(D) Partner’s loan is repaid in proportion.
(E) Assets are sold and realized.
Choose the correct answer from the options given below:
At the time of dissolution of a partnership firm, the following accounting adjustments are considered:
(A) Partner’s current A/c is transferred to the respective partner’s loan A/c.
(B) Accumulated losses are transferred to the partner’s capital A/c in profit-sharing ratio.
(C) All assets except cash and fictitious assets are transferred to the debit side of Realisation A/c.
(D) Partners’ loans are transferred to Realisation A/c.
(E) All external liabilities are transferred to the credit side of Realisation A/c.
Choose the correct answer from the options given below:
