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.
Browse more Topics under Retirement Of A Partner
- Calculation of Gaining Ratio
- Revaluation and Reserves
- Final Payment to Retiring Partner
- Joint Life Policy – Accounting Treatment
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
- Interest on 31 March 2015 = 57000 x 6/100
= 3420
Amount payable on 31 March 2015 = 14250 + 3420 = 17670
- Interest on 31 March 2016 = 42750 x 6/100
= 2565
Amount payable on 31 March 2016 = 14250 + 2565 = 16815
- Interest on 31 March 2017 = 28500 x 6/100
= 1710
Amount payable on 31 March 2017 = 14250 + 1710 = 15960
- Interest on 31 March 2018 = 14250 x 6/100
= 855
Amount payable on 31 March 2018 = 14250 + 855 = 15105
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