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If an amount lower than the actual payment of a liability is recorded in the Realisation Account, what will be the effect?

Answer and explanation

Correct answer: Profit will be overstated

Payment of a liability is debited to the Realisation Account. If the recorded amount is lower than the actual payment, the debit and recorded expense will be understated, causing the realisation profit to be overstated. Hence, option B is correct. Option A shows the reverse effect, and the error does not increase the value of assets. Exam tip: understatement of a realisation expense leads to overstatement of realisation profit.

Related tags

Partnership DissolutionRealisation AccountRealisation ProfitLiability SettlementAccounting ErrorsDissolution Of A Partnership FirmAccountancyClass 12 Mcq

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