Question

Explain the modes of payment to a retiring partner.

Answer 1

The following are the modes of payment to a retiring partner.

1. If the amount due to the retiring partner is to be paid in lump sum on the day of his/her retirement then the following Journal entry need to be passed.
Retiring Partner's Capital A/c                                         Dr.
        To Cash/Bank A/c
(Retiring partner paid in cash)

2) If the amount due to the retiring partner is to be paid in installments then the balancing figure of his/her capital account is transferred to his/her loan account. In this case, the retiring partner receives equal installments along with the interest on the amount outstanding. The following necessary Journal entry is to be passed.
Retiring Partner's Capital A/c                                          Dr.
        To Retiring Partner's Loan A/c

(Retiring partner capital account transferred to the retiring partner's loan account @ -------- % p.a.).

3) If the amount due to the retiring partner is to be paid partly in cash and partly in equal  installments then a certain amount is paid in cash to the retiring partner on the date of the retirement and the rest amount due to him/her is transferred to his/her loan account. The following necessary Journal entry is to be passed.

Retiring Partner's Capital A/c                                               Dr.
(with the total amount due to the retiring partner)
          To Retiring Partner's Loan A/c
           (with the amount transferred to the partner's loan                         account)   
          To Cash A/c (with the amount paid in cash immediately
          on the date of the retirement)
(Retiring partner partly paid in cash and balance transferred to the partner's loan account)