How is the Amount Disposed when a Partner Retires?

The partner who is retiring, his or her a/c is settled as per the terms and conditions of partnership deed i.e., in lump sum instantly or in different instalments, either with or without interest as consented or partly in cash directly and partially in installment at the consented intermissions. In the absenteeism of any deed, Section 37 of the Indian Partnership Act, 1932 is pertinent, which states that the partner who is retiring or moving out, has a choice to receive interest @ 6% per annum until the date of payment or such share of gains which has been earned with his or her money (i.e., which is based on the capital ratio). Therefore, the total amount overdue to the retiring partner which is determined after all the modifications and adjustments have been made is to be compensated instantly to the retiring or an outgoing partner. In case the enterprise is not in a situation to make the payment right away, the amount that is overdue is being transferred to the retiring or outgoing Partner’s Loan A/c. The required journal entries are recorded as follows :

When retiring partner is paid cash in full :

Retiring Partner’s Capital A/c

To Cash/Bank A/c

Dr.

When retiring partner’s whole amount is treated as loan :

Retiring Partner’s Capital A/c

To Retiring Partner’s Loan A/c

Dr.

When retiring partner is partly paid in cash and the remaining amount treated as loan :

Retiring Partner’s Capital A/c (Total amount due)

To Cash/Bank A/c ((Amount Paid)

To Retiring Partner’s Loan A/c (Amount of Loan)

Dr.

When Loan account is settled by paying in instalment includes principal and interest :

  • For interest on loan
  • Interest A/c

    To Retiring Partner’s Loan A/c

  • For payment of instalment
  • Retiring Partner’s Loan A/c

    To Cash/Bank A/c

Dr.

(The above mentioned Journal entries are fetched from NCERT website)

The above mentioned is the concept that is explained in detail about Disposal of Amount Due to Retiring Partner for the class 12 Commerce students. To know more, stay tuned to BYJU’S.