Interest of ₹12,500 should have been recorded in the Loan Account, but only ₹9,500 was recorded. What is the effect on profit and liability?

Correct answer: Profit is overstated by ₹3,000 and liability is understated by ₹3,000

The correct interest is ₹12,500, but only ₹9,500 has been recorded. The understatement is ₹12,500 − ₹9,500 = ₹3,000. Because interest is an expense, recording ₹3,000 too little causes total expenses to be understated and reported profit to be overstated by ₹3,000. The corresponding credit to the partner’s Loan Account is also ₹3,000 too low, so the liability is understated by ₹3,000. The bank balance is not automatically affected because the question concerns a recording error, not an actual payment. Thus, option A correctly states both effects.