If interest is first credited to loan account and then paid what will be the payment entry?

Correct answer: Retiring partner loan account debit and bank account credit

The direct answer is A: debit the retiring partner’s loan account and credit the bank account. First understand the sequence. When interest is credited to the loan account, the amount owed to the retiring partner increases, so the loan account is credited. That interest is already included in the loan balance; it must not be recorded again when payment is made. At payment, the firm gives money through the bank, so the bank balance decreases and Bank Account is credited. The liability to the partner also decreases, so the partner’s Loan Account is debited. Therefore the entry is: Retiring Partner’s Loan Account Dr. To Bank Account. Option A is correct because it records both the reduction of the liability and the reduction of bank money. Option B is wrong because Interest Account should not be debited again after interest has already been transferred to the loan account. Option C is wrong because Bank Account is not debited when money leaves the bank; it is credited, and the loan account is not credited at settlement. Option D is wrong because Profit and Loss Account is not involved in this payment entry. Memory cue: when an existing liability is paid, debit the liability account and credit Cash or Bank.