When a firm is dissolved, Provision for Bad and Doubtful Debt Account :-
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Is transferred into Realisaion Account but not paid out.
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On dissolution of a firm, all assets and liabilities (except cash/bank and fictitious assets) are transferred to the Realisation Account.
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Provision for Bad and Doubtful Debts (a liability on the liabilities side of the Balance Sheet) is also transferred to the credit side of the Realisation Account.
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The provision is not an external liability to be paid to a third party (like a Creditor or Loan). It is simply a reservation of profit made to cover a potential loss. Therefore, it is not paid out during the dissolution process.