When a firm is dissolved, Provision for Bad and Doubtful Debt Account :-

Is transferred into Realisation Account but not paid out.

The correct answer is Option (2) → Is transferred into Realisaion Account but not paid out.

• On dissolution of a firm, all assets and liabilities (except cash/bank and fictitious assets) are transferred to the Realisation Account.

• 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.

• 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.