Realisation Account

The direct answer is option A, the profit will be overstated. In a Realisation Account, only genuine realisation items and properly recorded gains or losses should be included. A contingent gain is uncertain and is not an actual realised gain merely because it is possible. If it is wrongly credited or added as a gain, the accounting result contains an extra positive amount. Therefore the calculated realisation profit becomes larger than the true profit; equivalently, a loss may appear smaller than it really is. Option A is correct. Option B, profit understated, would be the effect of wrongly adding an expense or omitting a genuine gain, not of adding a gain. Option C, no effect, is incorrect because the wrongly included amount changes the total used to calculate profit. Option D, liability increases, does not describe the direct effect: a contingent gain is not automatically a liability, and its incorrect inclusion changes profit rather than increasing a liability. The exact treatment in a real set of accounts may depend on the nature and certainty of the item, but under the question’s stated assumption that a gain has been included, profit is overstated. Exam cue: an extra gain increases profit; an extra expense decreases profit.

The governing concept is the calculation of profit or loss on realisation. Assets transferred to the Realisation Account are compared with the amount received: book value ₹220,000 minus sale proceeds ₹185,000 gives an asset loss of ₹35,000. Settling an external liability for less than its recorded amount creates a gain of ₹75,000 − ₹68,000 = ₹7,000. Realisation expenses are an additional loss of ₹4,000. Therefore, net loss = ₹35,000 − ₹7,000 + ₹4,000 = ₹32,000. Option A is correct. Option B overlooks the liability gain, option C treats the asset loss as a gain, and option D ignores the asset loss and expenses.