On dissolution of the firm, a part of a liability is paid in cash, but the payment entry is not recorded in the Realisation Account. What will be the effect on the realisation profit?

Correct answer: Realisation profit will be overstated by the amount paid

When a liability is paid on dissolution, the Realisation Account is debited with the amount paid and the Bank Account is credited. If the payment is omitted from the Realisation Account, its debit is understated, causing the resulting realisation profit to be overstated by the amount paid. Therefore, option B is incorrect because it describes an understatement of profit. Exam tip: For settlement of a liability, remember the entry: Realisation Account Dr. and Bank Account Cr.