Partner's Loan Account

The unpaid amount becomes a loan, so it is transferred to the loan account. Exam tip: remember the difference between capital account and loan account.

The firm has to pay this amount, so it is a liability. Exam tip: treat it like an amount payable by the firm.

The loan amount is payable to the retiring partner, so interest is given to that partner. Exam tip: treat interest as the cost of the loan.

In the absence of an agreement, the general rule is six percent per annum. Exam tip: always read whether the rate is annual.

Loan interest is an expense of the firm, so it is debited to Profit and Loss Account. Exam tip: expenses are linked with the debit side.

Interest becomes payable to the retiring partner, so the loan account is credited. Exam tip: payable amounts are normally credited.

Payment reduces the liability, so the loan account is debited. Exam tip: a decrease in liability is debited.

Payment is made through bank, so Bank Account is credited. Exam tip: when cash or bank goes out, it is credited.

The loan is a liability of the firm, so its balance appears on the credit side. Exam tip: loans normally have credit balances.

If the full amount is paid immediately, no unpaid liability remains. Exam tip: the loan account is prepared only for the unpaid amount.

The direct answer is A: liability increases. A retiring partner’s loan account represents an amount that the firm must pay to that partner. Interest on this loan is also an amount payable by the firm. Therefore, when interest is added, the firm’s total obligation becomes larger. For example, if the principal due is ₹20000 and interest is ₹1200, the liability before payment becomes ₹21200. Option A is correct. B is wrong because adding an amount payable cannot reduce the liability. C is wrong because interest does not cancel the principal or end the loan. D is wrong because an amount owed by the firm remains a liability, not an asset. The partner’s loan account may be credited with the interest, while the firm recognises the increased amount due. Memory cue: payable interest increases a liability.

It is an account, so it is prepared in the ledger. Exam tip: keep accounts and journal entries separate.

The closing balance is the amount still unpaid. Exam tip: link it with the liabilities side of the balance sheet.

The governing concept is classification according to who owes the amount. After retirement, any amount due to the former partner that is not paid immediately becomes a loan of the firm. The firm is the debtor and the retiring partner is the creditor, so the loan represents an external or other liability. It is therefore shown on the liabilities side of the balance sheet, normally separately from the continuing partners’ capital accounts. Option B is correct. It is not an asset because the firm cannot recover it, and it is neither an expense nor income; those are statement-of-profit concepts rather than balance-sheet classifications.

The capital account is debited to close the amount due in it. Exam tip: read the transfer entry sides carefully.

A new liability is created in the loan account, so the loan account is credited. Exam tip: credit a liability when it is created.

The governing concept is that the retiring partner’s loan account contains the unpaid balance of the amount due after any immediate settlement. The total amount due is ₹50,000, and ₹20,000 is paid at once. Therefore, the amount remaining unpaid is calculated by subtraction: ₹50,000 − ₹20,000 = ₹30,000. This balance is transferred to the partner’s Loan Account and remains payable by the firm according to the agreed terms. Hence option A is correct. Option B ignores the cash payment, option C states only the amount already paid, and option D incorrectly adds the amount paid to the total due instead of deducting it.

The direct answer is A, ₹2,400. Interest for one year is calculated as principal or balance × annual rate × time. Here the balance is ₹40,000, the rate is 6%, and time is 1 year. Convert 6% to 6/100: interest = ₹40,000 × 6/100 × 1 = ₹2,400. Option A is correct. Option B, ₹4,000, would represent 10% of ₹40,000, not 6%. Option C, ₹6,000, would represent 15% of ₹40,000 and is too high. Option D, ₹24,000, is six times the correct amount and may result from treating 6 as a whole number rather than 6 percent. Because the time is exactly one year, no extra time conversion is needed. Interest is an expense for the firm and is generally credited to the retiring partner’s loan account when due, depending on the accounting entry required. Memory cue: one-year interest = amount × rate/100; never forget the percent sign.

Six months is half a year, so interest is half of six percent of ₹60000, that is ₹1800. Exam tip: convert time into years.

A retiring partner’s unpaid amount may be transferred to a loan account. Once it becomes a loan, it is a liability payable by the firm, just like other borrowed money. Interest is therefore calculated for the period during which the loan remains outstanding, according to the agreed or applicable rate. If the firm pays the loan in parts, interest is calculated on the unpaid balance for the relevant period, rather than automatically ending on the retirement date.

Option A is correct because it says interest continues until the loan remains unpaid. The retirement date is important for creating the loan, but it is not necessarily the last date for interest. Options B and C confuse retirement or admission dates with the actual period of borrowing. Option D is wrong because a loan normally carries interest when the agreement or rules provide for it.

After retirement, the partner's capital may become an unpaid loan. Exam tip: classify capital and loan separately.

The governing concept is settlement of a liability. After retirement, the amount payable to the retiring partner may be transferred to a loan account when it is not paid immediately. This credit balance represents an obligation of the firm. Whenever the firm makes a partial payment, cash or bank decreases and the liability is reduced by exactly the amount paid. For example, if the loan balance is ₹40,000 and ₹10,000 is paid, the remaining credit balance becomes ₹30,000. Therefore, option A is correct. The payment does not increase the loan balance, automatically increase the partner’s capital, or create profit. It merely settles part of an existing liability and leaves the unpaid amount outstanding for later payment, with interest if the agreement requires it.

A credit balance in the retiring partner’s loan account represents an amount payable by the firm. When the firm makes a payment, the outstanding liability decreases by the amount paid. Thus, new balance = ₹25,000 − ₹10,000 = ₹15,000. Option A is correct. Adding the payment gives an incorrect balance, while ₹10,000 and zero do not represent the remaining unpaid amount.

Payment reduces the loan liability, so it is recorded on the debit side. Exam tip: debit payments in the loan account.

Interest increases the amount payable, so it is recorded on the credit side. Exam tip: add interest to the loan.