Question

On dissolution of a firm, bank overdraft is transferred to

• A. Bank Account
• B. Realisation Account
• C. Partners Capital Account
• D. Partners Loan Account

Answer 1

The Correct Option is B

Treatment of Liabilities on Dissolution: Realisation Account 

Upon the dissolution of a partnership firm, all assets are realized (converted into cash), and all liabilities are settled. To facilitate this process, a Realisation Account is prepared.

Transfer of Liabilities to the Realisation Account

On dissolution, all liabilities, including bank overdrafts, are transferred to the Realisation Account for settlement. This includes both external liabilities (e.g., creditors, loans) and internal liabilities (e.g., partner's loans).

Purpose of Transferring Liabilities

The purpose of transferring liabilities to the Realisation Account is to:

• Consolidate all liabilities in one account for easy management.
• Ensure that all liabilities are properly accounted for and settled during the dissolution process.
• Calculate the profit or loss on realization after settling all liabilities and realizing all assets.

Accounting Treatment

To transfer liabilities to the Realisation Account:

• Debit - Respective Liability Accounts (e.g., Creditors A/c, Bank Overdraft A/c, Loan A/c)
• Credit - Realisation Account

Conclusion

Therefore, the correct answer is Option 2: On dissolution, all liabilities, including bank overdrafts, are transferred to the Realisation Account for settlement.

Answer 2

Settling Bank Overdraft on Dissolution of a Firm 

Upon the dissolution of a partnership firm, a bank overdraft is settled through the Realisation Account. This account is created to record the sale of assets and the payment of liabilities during the dissolution process.

Here's a breakdown of the process:

• Realisation Account: This is a nominal account opened to record the value realized from the sale of assets and the liabilities paid off during the dissolution of a firm. All assets (except cash and bank balances, and fictitious assets) are transferred to the debit side of the Realisation Account at their book values. All external liabilities, including bank overdraft, are transferred to the credit side of the Realisation Account.
• Treatment of Bank Overdraft: Since a bank overdraft is a liability of the firm, it is transferred to the credit side of the Realisation Account. When the overdraft is paid off, the payment is recorded on the debit side of the Realisation Account.

The journal entry for the payment of a bank overdraft during dissolution is:

Realisation Account Debit

To Bank Account

The effect of this entry is to reduce the bank balance (or increase the overdraft if the firm does not have sufficient funds) and to reduce the firm's liability. The Realisation Account ultimately shows the profit or loss arising from the realization of assets and settlement of liabilities during the dissolution process. This profit or loss is then distributed among the partners in their profit-sharing ratio.

In essence, including the bank overdraft in the Realisation Account ensures that all liabilities are properly accounted for and settled during the winding up of the business.