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Retirement of a Partner

Treatment of Partners Loan

At the time of retirement of a partner, the partners after calculating the final payment to the retiring partner may decide to keep the capital of the retiring partners as a loan. Hence, for this purpose, they transfer the balance amount after all the adjustments on the credit side of the Retiring Partner’s Capital A/c to Partners Loan Account.

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Treatment of Partners Loan Account

The remaining partners can pay the final amount payable to the retiring partner as a lump sum payment or may treat it as loan and repay in installments. The partners treat the amount due to the retiring partner as a loan from the partner so that they don’t have to arrange the finance immediately from outside.

However, the retiring partner also enjoys the interest income in this case. Sometimes, the remaining partners repay the amount of loan in equal installments with interest on the balance amount. In such case, we divide the loan into equal parts and calculate the interest on the balance amount. The installment will consist of principal plus interest.

Partners Loan Account

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The Journal Entries are

Date Particulars   Amount (Dr.) Amount (Cr.)
1. On transfer of the final amount due to loan A/c Retiring Partner’s Capital A/c Dr. xxx
     To Retiring Partner’s Loan A/c  xxx
(Being final amount due to the retiring partner treated as the loan from him and transferred to Loan A/c)
2. Charge Interest on Partner’s Loan Interest on Loan A/c Dr. xxx
     To Retiring Partner’s Loan A/c xxx
(Being interest payable on retiring partner’s loan charged to loan A/c)
3. Repayment of the loan in installments. Retiring Partner’s Loan A/c Dr. xxx
     To Bank A/c xxx
(Being the amount of installment paid to the retiring partner)
4. Transfer of interest to Profit & Loss A/c Profit and Loss A/c Dr. xxx
     To Interest on Loan A/c xxx
(Being interest on loan transferred to Profit and Loss A/c, at the end of each year)

 

Solved Example For You

Sunil, Raj, and Dev are partners sharing profits and losses in the ratio of 3:2:1 with the capital of ₹150000, ₹100000, and ₹50000, respectively. Dev retires on 31 March 2014. The revaluation profit on retirement is ₹30000. They surrender the Joint Life Policy and the Insurance Company pays ₹12000.

The partners agree to transfer the amount due to Dev to his loan A/c. The loan from Dev is paid in 4 equal installments with the interest at 6%.

Prepare Partners Capital Accounts on 31st March 2014 and Loan from Dev A/c for four years.

Ans.

Partners Capital A/c

Particulars Sunil Raj Dev Particulars Sunil Raj Dev
To Loan from Dev A/c 57000 By Balance b/d 150000 100000 50000
To Balance c/d 171000 114000 By Revaluation A/c (profit in old ratio) 15000 10000 5000
By Joint Life Policy A/c (surrender value in old ratio) 6000 4000 2000
  171000 114000 57000   171000 114000 57000

 

Loan from Dev A/c

Date Particulars Amount Date Particulars Amount
31 Mar’14 To balance c/d 57000 31 Mar’14 By Dev’s Capital A/c 57000
31 Mar’15 To Bank A/c 17670 1 Apr’15 By Balance b/d 57000
To Balance c/d 42750 31 Mar’15 By Interest on Loan A/c 3420
60420 60420
31 Mar’16 To Bank A/c 16815 1 Apr’16 By Balance b/d 42750
To Balance c/d 28500 31 Mar’16 By Interest on Loan A/c 2565
45315 45315
31 Mar’17 To Bank A/c 15960 1 Apr’17 By Balance b/d 28500
To Balance c/d 14250 31 Mar’17 By Interest on Loan A/c 1710
30210 30210
31 Mar’18 To Bank A/c 15105 1 Apr’18 By Balance b/d 14250
31 Mar’18 By Interest on Loan A/c 855
60420 60420

 

Working Notes:

Calculation of instalments and interest:

Four equal instalments = 57000/4

= 14250

  1. Interest on 31 March 2015 = 57000 x 6/100

= 3420

Amount payable on 31 March 2015 = 14250 + 3420 = 17670

  1. Interest on 31 March 2016 = 42750 x 6/100

= 2565

Amount payable on 31 March 2016 = 14250 + 2565 = 16815

  1. Interest on 31 March 2017 = 28500 x 6/100

= 1710

Amount payable on 31 March 2017 = 14250 + 1710 = 15960

  1. Interest on 31 March 2018 = 14250 x 6/100

= 855

Amount payable on 31 March 2018 = 14250 + 855 = 15105

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