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

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 Realisation Account but not paid out.

On dissolution, sundry debtors go to the debit of the Realisation Account at their gross value, and the provision for doubtful debts goes to its credit side along with the liabilities. The provision is only an estimate of debts that may not be recovered; it is not a liability owed to anyone, so nothing is ever paid out against it. Whatever the debtors actually realise is credited to the Realisation Account, and the provision only balances the gross figure.

Option (1) Is transferred into Realisation Account and paid out. — Incorrect. The provision is closed by transfer, but there is no outsider to pay.

Option (3) Is not transferred into Realisation Account. — Incorrect. Every provision is closed by transfer to the credit of the Realisation Account.

Option (4) Is not transferred into Realisation Account and also not paid out. — Incorrect. The first half is wrong: the provision is transferred.

NCERT (2026-27 edition):
Journal Entries – “1. For transfer of assets All asset accounts excluding cash, bank and the fictitious assets, if any are closed by transfer to the debit of Realisation Account at their book values. It may be noted that sundry debtors are transferred at gross value and the provision for doubtful debts is transferred to the credit side of Realisation Account along with liabilities. The same thing will apply to fixed assets, if provision for depreciation account is maintained.”

NCERT (2026-27 edition):
Journal Entries – “… 2. For transfer of liabilities All external liability accounts including provisions, if any, are closed by transferring them to the credit of Realisation account.”