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Difficulty: MediumRetirement and Death of a Partner

Complete the statement regarding the accounting settlement for a retiring partner.

Answer:Upon the retirement of a partner, if the total settlement amount due to them is not immediately paid out in cash or bank, the balance of their capital account is transferred to a 【loan】 account.

Answer

loan
When a partner leaves the firm and the business cannot settle their capital account immediately in cash, the credit balance in the retiring partner's capital account is transferred to a loan account in their name, representing a liability for the continuing partnership.

Step-by-Step Solution

1
Determine the final balance payable to the retiring partner after adjusting for goodwill, revaluation, and reserves.
The net amount due to the retiring partner is established in their capital account.
All share of revaluation profit/loss, goodwill adjustments, and accumulated reserves must be closed into the retiring partner's capital account first.
2
Record the transfer of the unpaid capital balance upon retirement.
Debit the retiring partner's capital account and credit the retiring partner's loan account.
Because the retiring partner ceases to be an owner, the unpaid balance cannot remain in the equity section and must be reclassified as an internal liability (loan) owed by the remaining partners.

Key Concept

Settlement of Retiring Partner's Account via Loan Account
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Topics

Retirement and Death of a Partner

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