At the time of dissolution of a firm, outstanding salaries payable to employees are classified under which category?

Correct answer: External liability

Outstanding salaries represent an amount payable by the firm to its employees, who are not partners. Therefore, they are treated as an external liability and are included in the settlement of outside liabilities on dissolution. They are neither an asset nor part of the partners’ capital. Exam tip: Amounts payable to employees or other non-partners are generally classified as external liabilities.