If interest on a partner's loan was omitted from the books, what would be the effect on net profit?

Correct answer: Profit appeared higher

Interest on a partner's loan is an expense of the firm and should be deducted in the profit calculation. If this expense is omitted, total expenses are understated and net profit is overstated — hence profit appears higher. Option A is incorrect because omitting an expense does not reduce profit; option D is wrong because omitting an expense does affect net profit; option C is unrealistic—omission of an expense does not make profit zero. Exam tip: when preparing final accounts, verify that all interest and expense adjustments have been recorded so profits are not overstated.