Read the following information and answer the questions.

Raina and Meena were partners in a firm sharing profits and losses equally. They dissolved their firm on 31st March, 2018.
On this date, the Balance Sheet of the firm, apart from realizable assets and outside liabilities showed the following:
Raina’s Capital ₹40,000 (Dr.)
Meena’s Capital ₹20,000 (Dr.)
Profit & Loss Account ₹10,000 (Dr.)
Raina’s loan to the firm ₹15,000
Contingency Reserve ₹7,000

On the date of dissolution of the firm:
(a) Raina’s loan was repaid by the firm along with interest of ₹500.
(b) The dissolution expenses of ₹1,000 were paid by the firm on behalf of Raina who had to bear these expenses.
(c) An unrecorded asset of ₹2,000 was taken over by Meena while Raina discharged an unrecorded liability of ₹3,000.
(d) The dissolution resulted in a loss of ₹60,000 from the realization of assets and settlement of liabilities.

The contingency fund will be debited or credited to which account?

Partners’ Capital Account

The correct answer is option 1- Partners’ Capital Account.

In the dissolution of a partnership firm, the contingency reserve is treated as part of the firm’s reserves. This reserve is used to cover any unforeseen liabilities or losses that might arise during the dissolution process. The reserve should be transferred to the Partners’ Capital Accounts in their profit-sharing ratio. This is because, during dissolution, any reserve funds are adjusted against the partners' capital accounts to settle the accounts of the firm.