If all assets are converted into cash but an actually paid external liability is omitted from the Realisation Account, what will be the effect?

Correct answer: Loss will be overstated

A liability transferred to the Realisation Account is credited, while its payment is debited. If an actually paid liability is omitted from the account, the related debit is not matched by the liability credit, causing the loss on realisation to be overstated. Therefore, the loss increases rather than the profit. Exam tip: liabilities transferred are credited, and liabilities paid are debited in the Realisation Account.