What will be the result if interest on retiring partner's loan is treated as interest on capital and posted to Appropriation Account?

Correct answer: Expense classification will be wrong

Direct answer: Option B, the expense has been classified incorrectly. Interest on a retiring partner’s loan is interest on a liability of the firm. It is a business expense and is charged to the Profit and Loss Account before profit is appropriated. Interest on capital is different: it is an appropriation of profit and is usually recorded through the Profit and Loss Appropriation Account, subject to the partnership agreement and applicable rules. Therefore, putting loan interest into the Appropriation Account treats an expense as if it were a distribution of profit. Option B is correct. Option A is wrong because an accounting classification error does not remove the loan liability. Option C is wrong because the posting itself does not increase bank balance; bank balance changes only when cash is received or paid. Option D is wrong because revaluation profit comes from changes in asset and liability values, not from misclassifying loan interest. Memory cue: loan interest is a charge against profit; capital interest is an appropriation of profit.