At the time of dissolution, creditors were paid ₹5,000 more than the amount due to them. What does this excess payment represent?

Correct answer: Loss of ₹5,000

Payment of ₹5,000 above the book amount payable to creditors is an additional expense for the firm; hence, it is a loss of ₹5,000. Creditors are transferred to the Realisation Account at their amount due, while the actual amount paid is recorded. The excess payment produces a net debit difference of ₹5,000 in the Realisation Account, representing loss. Exam tip: On dissolution, settlement of a liability for more than its book value results in a Realisation Loss equal to the excess.