Which item reduces the balance of a retiring partner's loan account?

Correct answer: Payment by bank

The governing concept is the movement of a liability account. The retiring partner’s loan account normally has a credit balance because it represents an amount payable by the firm. When the firm makes a payment through Bank, the liability is reduced; therefore, the loan account is debited and Bank is credited. If ₹40,000 is outstanding and ₹10,000 is paid, the balance falls to ₹30,000. Interest on the loan increases the liability, and adding a new loan or payable amount also increases the credit balance. Thus, payment by bank is the only item among the options that reduces the loan account balance.