If the amount paid to settle an external liability during dissolution is understated in the Realisation Account, what will be the effect?

Correct answer: Realisation profit will be overstated

The payment made to settle a liability is debited to the Realisation Account. If the payment is recorded at a lower amount, the debit to the account is understated and the expense is shown as lower. Consequently, the realisation profit is overstated, or the realisation loss is understated; therefore, option A is correct. Option B states the opposite effect. Exam tip: Record payments made for liabilities on the debit side of the Realisation Account.