At the dissolution of a firm, what effect does a realisation loss have on the partners’ capital accounts in their profit-sharing ratio?

Correct answer: Decreases

A realisation loss is debited to the partners’ capital accounts in their profit-sharing ratio, so each partner’s capital decreases. In contrast, a realisation profit is credited to the capital accounts. Exam tip: remember that a realisation loss reduces capital, while a realisation profit increases it.