Partner's Loan Account

When the amount due to a retiring or deceased partner is not paid immediately, it is transferred to the partner’s loan account and shown separately as a liability of the firm. This keeps the payable amount distinct from the partner’s capital account, and interest may be allowed according to the agreed terms. The account is not opened for distributing profit or increasing capital. Exam tip: an unpaid amount due to the outgoing partner is transferred to the Partner’s Loan Account.

When interest is paid in cash, cash flows out of the business. A decrease in an asset is recorded on the credit side, so the Cash Account is credited. The relevant entry is: Interest on Partner’s Loan A/c Dr. To Cash A/c. Debit is incorrect because Cash Account is debited when cash is received, not when it is paid. Exam tip: identify a cash outflow by crediting the Cash or Bank Account.

Interest for one year = ₹1,80,000 × 5/100 = ₹9,000, so option B is correct. Since 5% means one-twentieth of the principal, ₹1,80,000 ÷ 20 also gives ₹9,000. In exams, always match the interest rate period with the stated time period.

A partner’s loan is a liability of the firm. On payment, the partner’s loan account is debited and the bank account is credited; therefore, both the liability and cash or bank balance decrease. It is neither a revenue transaction nor a direct reduction in the partner’s capital. Exam tip: Record repayment in the partner’s loan account, not in the capital account.

On a partner’s retirement, the final amount due is calculated after adjustments for capital, goodwill, revaluation, and accumulated profits or losses. If this amount is not paid immediately, the capital account is closed and the amount due is credited to the retiring partner’s loan account. Admission of a new partner does not ordinarily create a retiring partner’s loan account. Exam tip: retirement plus deferred payment indicates a Partner’s Loan Account.

Interest on the loan account = Principal × Rate = ₹4,00,000 × 3/100 = ₹12,000. Therefore, option B is correct. ₹10,000 would represent approximately 2.5%, not 3%. In exams, convert the percentage into a fraction and multiply it by the principal.

Under the accrual concept, income and expenses are recognised when they are earned or become due, not merely when cash is received or paid. Therefore, interest on a partner’s loan is recorded as an expense and liability as soon as it accrues, even if it remains unpaid. The matching concept deals with associating expenses with related revenue, while prudence and consistency address different accounting principles. Exam tip: recognition on becoming due, rather than on payment, indicates the accrual concept.

Interest for one year = ₹1,10,000 × 4/100 = ₹4,400. Therefore, option B is correct. Values such as ₹4,200 and ₹4,600 result from errors in applying the percentage. In an exam, use the formula: Interest = Principal × Rate × Time/100.

The amount standing to the credit of the partner’s loan account is a liability of the firm. On paying each principal installment, cash or bank balance decreases and the outstanding loan liability decreases by the same amount. Thus, the firm’s liability decreases; the payment is not treated as an increase in profit or capital. Exam tip: Repayment of a loan generally reduces both cash and liability, not profit.

The amount payable to a retiring partner becomes a liability of the firm, and interest on this loan is charged against the firm’s profits. Therefore, the firm ultimately bears the interest, which reduces the profit available to the continuing partners. The interest is not charged back to the retiring partner’s account. Exam tip: Treat interest on a partner’s loan account as a charge against profits, not as an appropriation of profit.

Interest for one year = Principal × Rate × Time = ₹60,000 × 15/100 × 1 = ₹9,000. Therefore, option C is correct. The ₹10,000 distractor would result from using a rate higher than 15%. In an exam, when the period is one year, use Principal × Rate directly.

The loan account is closed only after the entire amount due to the retiring partner, transferred from the partner’s Capital Account to the Loan Account, has been fully paid. Retirement itself or the addition of interest does not close the account. Exam tip: the loan account continues to show a balance until the complete amount is settled.

Interest accrued on a partner’s loan is credited to the partner’s loan account, increasing the total amount payable by the firm. Therefore, the firm’s liability increases. Adding interest does not necessarily increase cash, as it is generally an accrual entry; it also reduces rather than increases the firm’s profit because it is an expense. Exam tip: interest on a partner’s loan is an expense for the firm and increases the loan liability.

When the amount due to the deceased partner is not settled immediately, it remains with the firm for a period of time. Interest on the loan account compensates the deceased partner’s executor or estate for the firm’s use of that amount and the delay in settlement. It is not meant to increase capital or adjust stock. Exam tip: After a partner’s death, the amount due is transferred to a loan account, and interest on it represents a liability of the firm.

Interest for one year = Principal × Rate × Time = ₹75,000 × 12/100 × 1 = ₹9,000. Therefore, option D is correct. ₹7,500 represents 10% of the principal, not 12%. In the exam, remember to convert the percentage rate correctly and multiply by the relevant time period.

Interest on the opening balance is 6% of ₹1,00,000 = ₹6,000. Therefore, closing balance = Opening balance + Interest − Payment = ₹1,00,000 + ₹6,000 − ₹20,000 = ₹86,000. Hence, option B is correct. Exam tip: Interest credited to a partner’s loan account is added, while repayments are deducted.

Immediate payment = ₹2,40,000 × 25% = ₹60,000. Therefore, the balance transferred to the loan account = ₹2,40,000 − ₹60,000 = ₹1,80,000. ₹2,00,000 is only an approximate figure; the exact 25% deduction must be made. Exam tip: subtract the percentage paid immediately from the total amount due to determine the amount transferred to the loan account.

Interest on a partner’s loan is the cost of borrowed funds used by the business. Therefore, it is a revenue expenditure and is debited to the Profit and Loss Account. This differs from interest on a partner’s capital, which is generally treated as an appropriation of profit. Exam tip: interest on a partner’s loan is a charge against profit, whereas interest on capital is usually an appropriation of profit.

Once the amount due to the deceased partner is transferred to a loan account, it represents an amount payable by the firm and therefore becomes a liability. Hence, ₹1,75,000 is shown on the liabilities side of the balance sheet, not as an expense, income, or asset. Exam tip: When a partner’s amount due is converted into a loan, classify it as a liability of the firm.

Annual interest = Principal × Rate = ₹96,000 × 7.5/100 = ₹7,200, so option C is correct. The rate may also be written as 0.075 before multiplication. Exam tip: always convert the percentage into a fraction or decimal before calculating interest.

When the amount due to a retiring or deceased partner is not paid immediately, it is transferred to the partner’s loan account. This records the amount as a liability of the firm and allows interest to be credited as applicable. Option C is incorrect because the amount becomes a loan payable to the outgoing partner, not additional capital of the continuing partners. Exam tip: If the amount due is unpaid after retirement or death, it is transferred from the partner’s capital account to a loan account.

Nine months must be expressed as \(9/12\) of a year. Interest = ₹2,25,000 × 8% × \(9/12\) = ₹13,500, so option B is correct. Option A results from using an incorrect period or calculation. In such questions, always convert months into a fraction of a year.

The amount due to the retiring partner is transferred to the partner’s loan account. Interest on this loan is income for the retiring partner, so the retiring partner receives the benefit. For the firm, the interest is an expense, not a benefit. Exam tip: Interest on a retiring partner’s loan account is debited to the Profit and Loss Account and credited to the partner’s loan account.

New balance = Opening balance − Payment = ₹1,10,000 − ₹30,000 = ₹80,000. A payment reduces the amount payable to the partner, so option B is correct. ₹90,000 is incorrect because it reflects a deduction of only ₹20,000. Exam tip: Whenever part of a partner’s loan is repaid, subtract the repayment from the outstanding loan balance.

One-year interest = Principal × Rate = ₹1,32,000 × 5.5/100 = ₹7,260. This can also be verified as ₹6,600 for 5% plus ₹660 for 0.5%. Option A is incorrect because it does not include the additional 0.5% interest. Exam tip: Convert the percentage into a fraction before calculating.