Question

Ramesh, an old customer whose account for ₹ 25,000 was written off as bad debts last year, paid 80% of the amount at the time of dissolution of the firm. The entry to record this transaction will be ______.

Options

• Dr. Debtor’s A/c and Cr. Bad Debts Recovered A/c by ₹ 20,000.

• Dr. Bank A/c and Cr. Bad Debts Recovered A/c by ₹ 20,000.

• Dr. Bank A/c and Cr. Realisation A/c by ₹ 20,000.

• Dr. Realisation A/c and Cr. Bad Debts Recovered A/c by ₹ 20,000.

Answer 1

Ramesh, an old customer whose account for ₹ 25,000 was written off as bad debts last year, paid 80% of the amount at the time of dissolution of the firm. The entry to record this transaction will be Dr. Bank A/c and Cr. Realisation A/c by ₹ 20,000.

Explanation:

When a firm is being dissolved, any cash received from an unrecorded asset or a debt previously written off as bad is treated as an inflow from the realisation of assets. The amount received is ₹ 20,000 (80% of ₹ 25,000), which increases the firm’s cash balance and is credited to the Realisation Account instead of a regular “Bad Debts Recovered” account because all nominal accounts are closed during dissolution. Therefore, the correct journal entry is to debit the Bank Account to record the cash coming in and credit the Realisation Account to record the gain.