During the dissolution of a firm, realisation expenses of ₹5,000 paid in cash were debited to a partner’s Capital Account instead of the Realisation Account. What will be the effect on the realisation profit?

Correct answer: The realisation profit will be overstated by ₹5,000

The correct entry for realisation expenses is to debit the Realisation Account and credit Bank. This expense reduces the realisation profit. Since ₹5,000 was wrongly debited to the partner’s Capital Account, the Realisation Account was not debited, so the profit is overstated by ₹5,000. Option B would apply if the expense had been correctly recorded in the Realisation Account. Exam tip: During dissolution, debit all realisation expenses to the Realisation Account unless the agreement specifically assigns the expense to a partner.