Question

Assertion (A): On dissolution of a partnership firm, bank overdraft is first transferred to the credit side of realisation account and then paid off.

Reason (R): Bank Overdraft is a third party liability and hence transferred to Realisation Account.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct explanation of (A).

• Both (A) and (R) are correct but (R) is not the correct explanation of (A).

• Only (A) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct and (R) is the correct explanation of (A).

Explanation:

On dissolution, bank overdraft is a third-party liability and is credited to the realisation account before it is paid off. This treatment is because bank overdraft represents what the firm owes to outsiders, so it must be settled from the realised assets of the firm through the realisation account.