On the dissolution of a firm, the Creditors are transferred to:

Realization Account

The correct answer is Option (1) → Realization Account

On the dissolution of a partnership firm, a special nominal account called the Realization Account is opened to close the books and determine the profit or loss on the winding up of the business.

• Creditors (and all other external liabilities like Bills Payable, Bank Loan, etc.) are transferred to the credit side of the Realization Account at their book values.

• The journal entry for this transfer is: Creditors A/c (Dr.) to Realization A/c (Cr.).