Sidhi, Gyan and Gayatri were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 2. On 31st March, 2025 their firm was dissolved. At the time of dissolution a debtor amounting to Rs. 25,000 whose debt had been previously written off as bad debt paid 40% of the amount. The accounting treatment for the above transaction will be :

Q: Sidhi, Gyan and Gayatri were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 2. On 31st March, 2025 their firm was dissolved. At the time of dissolution a debtor amounting to Rs. 25,000 whose debt had been previously written off as bad debt paid 40% of the amount. The accounting treatment for the above transaction will be :

**Correct option: (C) Rs. 10,000 will be credited to realisation account.** Since the debtor of Rs. 25,000 had already been written off as bad debt (and so does not appear anywhere in the books or Balance Sheet at dissolution), any amount now recovered from him — $40\% \times \text{Rs. }25,000 = \text{Rs. }10,000$ — is a pure gain arising during dissolution and is credited directly to the **Realisation Account**.

Dissolution of Partnership Firm

Dissolution of a Partnership Firm — Recovery of Bad Debts Previously Written Off

Options

(A)Rs. 10,000 will be credited to bad debts recovered account.

(B)Rs. 10,000 will be credited to the debtor's personal account.

(C)Rs. 10,000 will be credited to realisation account.

(D)Rs. 10,000 will be credited to bad debts account.

Official Answer

Correct option: (C) Rs. 10,000 will be credited to realisation account.

Since the debtor of Rs. 25,000 had already been written off as bad debt (and so does not appear anywhere in the books or Balance Sheet at dissolution), any amount now recovered from him — $40\% \times \text{Rs. }25,000 = \text{Rs. }10,000$ — is a pure gain arising during dissolution and is credited directly to the Realisation Account.

dissolution of partnership firmrealisation accountbad debts recovereddebtors written offgain on realisationwinding up of firm

Marking Scheme

11 mark for identifying Rs. 10,000 (40% of Rs. 25,000) as the amount recovered and crediting it to the Realisation Account, i.e. option (C).

Hint

A debt already written off is not part of the Balance Sheet debtors transferred to Realisation Account; any later recovery from it is a pure gain credited directly to Realisation Account.

Quick Oral Answer

Because the debtor had already been written off and removed from the books, any amount now recovered from him is treated as a fresh gain and credited straight to the Realisation Account, not to any debtor or bad debts account.

Analysis & Explanation

Concept

At dissolution, the Realisation Account records realisation of all assets and settlement of all liabilities — including unexpected gains or losses that surface only during the winding-up process, such as recovery of a bad debt that had already been written off in an earlier year.

Working

Debt written off earlier = Rs. 25,000 (no longer appears as an asset in the books)
Amount recovered now = $40\% \times \text{Rs. }25,000$ = Rs. 10,000
Since this debtor was not part of the assets transferred to the Realisation Account (having already been written off), the recovery is a fresh gain and is credited directly to the Realisation Account

Why other options are wrong

(A) 'Bad debts recovered account' is used in normal ongoing business, not during dissolution — at dissolution all such gains route through the Realisation Account.
(B) The debtor's personal account no longer exists in the books since the debt was already written off; there is nothing to credit there.
(D) 'Bad debts account' would apply only if the debt were being written off again, not recovered.

Common Mistakes

1Believing that since the item relates to a 'debtor', it should be credited to the debtor's personal account, forgetting that account was already closed when the debt was written off.
2Crediting the recovery to a general 'Bad Debts Recovered Account' as done in normal trading, instead of routing it through the Realisation Account as required during dissolution.
3Calculating the recovered amount incorrectly, e.g. taking 40% of the wrong base figure.

Interesting Facts

Dissolution accounting under Sections 39-47 of the Indian Partnership Act, 1932 requires the Realisation Account to capture every gain and loss arising from winding up, however unusual, which is why even an old bad-debt recovery flows through it.

In practice, recovery of previously written-off debts often happens during dissolution because departing partners or receivers pursue old dues more aggressively than an ongoing firm would.

Spotted a mistake or something unclear?

Tell us — we fix reported answers fast.

Frequently Asked Questions

Why is a recovered bad debt credited to the Realisation Account at dissolution?

Because the debt had already been written off and removed from the books before dissolution, the recovery is an unexpected gain arising specifically from the winding-up process, so it is credited to the Realisation Account along with all other dissolution gains and losses.

Would the answer differ if the debt had not been written off earlier?

Yes — if the debtor still appeared in the Balance Sheet, the debtor's account itself would have been transferred to the Realisation Account and the cash received would simply be recorded as a normal realisation of that asset.