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What is the effect of adding interest in a loan account?

Answer and explanation

Correct answer: The amount payable increases

Interest credited to a retiring partner’s loan account is an additional amount owed by the firm. Therefore, the credit balance of the loan account and the total amount payable increase. It does not automatically increase bank balance, reduce goodwill, or reduce the liability. A payment would decrease the loan, but merely adding interest increases the obligation.

Related tags

Partner LoanInterestAmount PayableLiabilityPartner's Loan AccountPartner S Loan AccountReconstitution Retirement Or Death Of A PartnerAccountancy

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