Partner's Loan Account

Correct answer: A. It will not be used

A partner’s Loan Account is used when the amount due to a retiring partner is not paid immediately and is converted into a loan payable by the firm. In this case, the entire amount is paid through the bank at once. The liability is therefore settled directly, and no unpaid balance remains to be transferred to a Loan Account. Option B is incorrect because a loan account is not compulsory in every retirement. Option C is incorrect because interest may arise only if an outstanding loan exists; it does not require a loan account after full settlement. Option D is unrelated to retirement accounting. Therefore, the Loan Account will not be used, making option A correct.

Correct answer: B. The principal will remain unchanged

The governing concept is the separation of principal and interest in a loan account. Interest is the periodic finance cost charged for using the loan, whereas principal is the amount originally borrowed and still payable. If the bank payment covers only the interest accrued for the relevant period, that payment is recorded against interest and does not reduce the liability for the borrowed amount. Therefore, the principal balance remains ₹P, or whatever amount was outstanding before the interest-only payment. It will decrease only when a payment or adjustment is specifically made towards principal. Option A would be correct only if principal were also repaid; C and D have no accounting basis.