At the time of dissolution a liability takes over by partner is to be debited to:

Question

Accepted Answer

The correct option is 3:

When a partnership firm is dissolved, all assets are transferred to the debit side of the Realisation Account, and all external liabilities are transferred to its credit side. The primary purpose of the Realisation Account is to close the books and ascertain the net profit or loss arising from the realisation of assets and settlement of liabilities. When a partner agrees to take over a liability, the firm's obligation to that third party is considered settled. Therefore, to record the settlement of the liability, the Realisation Account must be debited, and the respective Partner's Capital Account is credited because the firm now owes that amount to the partner. This debit entry to the Realisation Account is a standard procedure to finalise the firm's liabilities.

The incorrect option is 1:
The Revaluation Account is an entirely different account used in partnership accounting and is not applicable during dissolution. This account is prepared only at the time of reconstitution of a firm, such as upon the admission, retirement, or death of a partner, or on a change in the profit-sharing ratio. Its function is to record the increase or decrease in the value of assets and the reassessment of liabilities, and the resulting profit or loss is transferred to the partners' capital accounts. Since dissolution involves winding up the business entirely, not merely reassessing values, the Revaluation Account is not used.

The incorrect option is 2:
The Partner's Capital Account is indeed part of the dissolution entry, but it is not the account that is debited; rather, it is *credited*. When a partner assumes a liability, it means they are undertaking the firm's debt, which increases the amount the firm ultimately owes the partner. This is a gain for the partner's account, hence their Capital Account is credited to reflect the increase in their claim against the firm's assets. The matching debit entry, according to double-entry bookkeeping, is placed in the Realisation Account.

The incorrect option is 4:
The Cash or Bank Account is used only to record actual cash or bank transactions carried out by the firm. This account is debited when cash is received from the sale of assets and credited when cash is used to settle liabilities to external parties. In the transaction where a partner takes over a liability, there is no immediate flow of cash *to or from the firm* to settle that specific liability. Instead, it is converted into an internal claim between the partner and the firm, which is why the Realisation Account and the Partner's Capital Account are used.