If all realisation expenses are recorded at amounts lower than their actual amounts on dissolution of the firm, what will be the effect on the result of the Realisation Account?

Correct answer: Realisation profit will be overstated

Realisation expenses are debited to the Realisation Account. If they are recorded below their actual amount, the total debit is understated, so the actual loss is reduced or the profit is overstated. Therefore, the realisation profit will appear higher than it should. Option B would apply if the expenses were recorded in excess of the actual amount. Exam tip: Understated realisation expenses overstate profit, while overstated expenses understate profit.