Interest due on retiring partner's loan was divided among remaining partners' capital accounts in old ratio. Why is this wrong?

Correct answer: Because it is firm's expense, not distribution of profit or loss

The direct answer is A: loan interest is a firm expense, not a distribution of profit or loss among partners. Interest payable on a retiring partner’s loan is charged to the firm’s Profit and Loss Account. It reduces the firm’s profit before that profit is shared among partners. Therefore, it should not be divided directly among the remaining partners’ capital accounts in the old ratio. Option A is correct because an expense is recorded first in the firm’s accounts; a ratio is used only when distributing an actual profit or loss, where the partnership agreement requires it. Option B is wrong because interest payable is not always an asset; it is normally an expense or liability. Option C is wrong because stock records goods, not loan interest. Option D is wrong because interest is not a cash sale. Remember: first identify whether an item is an expense, asset, liability, income, or appropriation.