If the transfer of assets and liabilities is recorded correctly but an adjustment in the Realisation Account is made incorrectly, what will be the effect?

Correct answer: The profit or loss on realisation and the closing balances of partners’ capital accounts will be incorrect

An adjustment in the Realisation Account may affect the proceeds from assets, the settlement of liabilities, or the resulting realisation profit or loss. Therefore, an incorrect adjustment produces an incorrect realisation profit or loss, which is transferred to the partners’ capital accounts and makes their closing balances incorrect. Option B is wrong because an accounting adjustment directly affects the result; the error need not be limited to the Cash Account or the cash realised. Exam tip: Realisation profit or loss is transferred to the partners’ capital accounts in their profit-sharing ratio.