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Financial Accounting · Retirement of Partner

Settlement of Retiring Partner's Amount and Loan

Updated 10 October 2026 · Fact-checked

The amount due to a retiring partner is his capital plus his share of reserves, goodwill and revaluation profit, adjusted for drawings, interest and profit up to retirement. Transfer it to his capital account, then pay cash or move the balance to a loan account, charging interest on the outstanding balance as agreed.

Understand Settlement of Retiring Partner's Amount and Loan

When a partner retires, the firm must pay him what it owes him. This is not just the capital shown in the balance sheet. It is the final credit balance of his capital account after all adjustments: his share of reserves and accumulated profits, his share of goodwill, his share of revaluation profit or loss, interest on capital, salary, profit up to the date of retirement, and less drawings.

Once the adjustments are done, the retiring partner's capital account holds one closing balance. This is the amount due. The firm settles it in one of three ways: pay it all in cash, pay part in cash and leave the rest as a loan, or leave the whole amount as a loan.

When the balance is left in the firm, it is moved from his capital account to a Retiring Partner's Loan Account. It is a liability of the firm, not capital. It is shown under liabilities, and the retiring partner no longer shares profit or loss. Interest on this loan is a charge against profit. It is debited to the Profit and Loss Account, not to the continuing partners' capital accounts.

Payment in instalments works the same way. Interest is calculated on the balance outstanding at the start of each period, so it falls as you repay principal. Each payment is principal plus interest for that period. Read the question for the rate and the payment dates.

The Indian Partnership Act, 1932 also has a default rule in Section 37. If the continuing partners carry on the business using the firm's property without settling the outgoing partner's account, he can choose either the share of profits attributable to the use of his share of the firm's property, or interest at 6% per annum on his share in the firm's property. This applies where there is no final settlement. If the partners have agreed a rate, the agreement is normally followed. Some firms have an agreement giving the continuing partners an option to buy out the outgoing partner. If they exercise that option properly, he gets no further share of profits.

Key rules to remember

Amount due to retiring partner
Capital + Share of reserves/accumulated profits + Share of goodwill + Share of revaluation profit + Interest on capital + Salary/commission + Share of profit to date − Drawings − Interest on drawings − Share of revaluation loss − Share of accumulated losses
Use the closing balance of the retiring partner's capital account after all adjustments. Reverse the sign of an item that is a loss or a deduction.
Amount payable as loan
Amount due − Cash paid at retirement
Transfer this balance from the capital account to the Retiring Partner's Loan Account.
Interest on loan
Interest = Outstanding balance × Rate of interest × Time period (years)
Use the balance outstanding during each period. For months, multiply by months ÷ 12.
Instalment with interest
Instalment paid = Principal instalment + Interest on opening outstanding balance
Applies when equal principal instalments are paid. If total equal instalments are given, work out the interest part first and the rest is principal.
Section 37, Indian Partnership Act, 1932
Outgoing partner's option: share of profits attributable to use of his share of property OR interest at 6% p.a. on his share in the firm's property
Applies when the continuing partners carry on business using the firm's property without final settlement. It does not apply if the buy-out option in the agreement has been duly exercised.

How to solve Settlement of Retiring Partner's Amount and Loan questions

Use this sequence for any question on settling a retiring partner. It keeps the capital account and the loan account clean and earns step marks.

  1. 1Read the question and note the retirement date, old ratio, gaining ratio, cash paid, interest rate and payment dates.
  2. 2Pass the adjustment entries first: reserves, goodwill, revaluation, joint life policy, and profit up to retirement. Work out the retiring partner's share of each.
  3. 3Prepare the retiring partner's capital account (or a partners' capital account in columnar form) with all credits and debits. Find the closing balance.
  4. 4Find the amount due to the retiring partner. Show it clearly as 'Balance due'.
  5. 5Decide on payment. Transfer the cash part to Bank and the rest to the Retiring Partner's Loan Account. Pass the journal entry.
  6. 6Prepare the loan account. Show interest for each period on the opening outstanding balance, then the instalments paid, and the closing balance.
  7. 7Debit interest to Profit and Loss Account. Do not charge it to the continuing partners' capital accounts.
  8. 8Show the loan under liabilities in the new balance sheet and check that the balance sheet totals agree.

Quickest way: Capital account first, then the loan table

When to use it: Use this when the question gives adjustments and a payment schedule, and time is short.

  1. Write the retiring partner's capital account on one side only with all credits (capital, reserve share, goodwill, revaluation profit) and then the debits (drawings, losses).
  2. Get the closing figure as 'Amount due'. Subtract cash paid. The rest is the loan.
  3. Draw a small loan table with columns: Year, Opening balance, Interest, Principal paid, Total paid, Closing balance.
  4. Fill interest as opening balance × rate. Reduce the balance by the principal only, not by interest.
  5. Check: closing balance after the last instalment must be nil.

Common mistakes in Settlement of Retiring Partner's Amount and Loan

  • Treating the capital shown in the balance sheet as the amount due.

    Students forget that reserves, goodwill and revaluation adjustments belong to the retiring partner too.

    Fix: Always pass the adjustment entries first, then take the capital account's closing balance as the amount due.

  • Charging interest on the original loan amount for every year of instalments.

    Students ignore that principal has been repaid.

    Fix: Calculate interest on the opening outstanding balance of each period. Reduce the balance by principal repaid.

  • Debiting interest on the retiring partner's loan to continuing partners' capital accounts.

    Students think interest is a profit-sharing item.

    Fix: Interest on a loan is a charge against profit. Debit the Profit and Loss Account and credit the loan account or bank.

  • Showing the amount due to the retiring partner as capital in the new balance sheet.

    Confusion between capital and loan after retirement.

    Fix: Once the balance is moved to the loan account, show it under liabilities. Only the continuing partners' capitals stay under capital.

  • Subtracting interest paid from the loan balance.

    Students treat the whole instalment as repayment.

    Fix: An instalment of principal plus interest reduces the loan only by the principal. Interest is an expense.

  • Applying the 6% Section 37 rate when the partners have agreed a different rate.

    Students memorise the section without its conditions.

    Fix: Use the rate stated in the question or agreement. Use 6% only where the question refers to Section 37 or gives no rate and no settlement was made.

Worked examples

Example 1

A, B and C share profits in the ratio 5:3:2. Their capitals are ₹5,00,000, ₹3,00,000 and ₹2,00,000. There is a general reserve of ₹1,00,000. C retires. Goodwill of the firm is valued at ₹3,00,000 and is not in the books. Assets are revalued, giving a net profit of ₹20,000. A and B will share future profits in the ratio 5:3. C is paid ₹1,00,000 in cash. The balance is payable in two equal annual instalments of principal at the end of each year, with interest at 10% p.a. on the outstanding balance. Find the amount due to C, give the journal entries and prepare C's loan account. Ignore drawings and profit to the date of retirement.

Show the solution
  1. C's share of general reserve = ₹1,00,000 × 2/10 = ₹20,000.
  2. C's share of goodwill = ₹3,00,000 × 2/10 = ₹60,000. A and B bear it in their gaining ratio 5:3, so A pays ₹37,500 and B pays ₹22,500.
  3. C's share of revaluation profit = ₹20,000 × 2/10 = ₹4,000.
  4. Amount due to C = ₹2,00,000 + ₹20,000 + ₹60,000 + ₹4,000 = ₹2,84,000.
  5. Cash paid ₹1,00,000. Balance transferred to loan = ₹2,84,000 − ₹1,00,000 = ₹1,84,000.
  6. Journal 1: General Reserve A/c Dr ₹1,00,000; to A's Capital ₹50,000, B's Capital ₹30,000, C's Capital ₹20,000.
  7. Journal 2: Revaluation A/c Dr ₹20,000; to A's Capital ₹10,000, B's Capital ₹6,000, C's Capital ₹4,000.
  8. Journal 3: A's Capital A/c Dr ₹37,500; B's Capital A/c Dr ₹22,500; to C's Capital A/c ₹60,000.
  9. Journal 4: C's Capital A/c Dr ₹2,84,000; to Bank A/c ₹1,00,000; to C's Loan A/c ₹1,84,000.
  10. Year 1 interest = ₹1,84,000 × 10% = ₹18,400. Principal instalment = ₹1,84,000 ÷ 2 = ₹92,000. Total payment = ₹92,000 + ₹18,400 = ₹1,10,400. Closing balance = ₹92,000.
  11. Year 2 interest = ₹92,000 × 10% = ₹9,200. Payment = ₹92,000 + ₹9,200 = ₹1,01,200. Closing balance = nil.

Answer: Amount due to C = ₹2,84,000. Loan = ₹1,84,000. Payments: ₹1,10,400 at the end of year 1 and ₹1,01,200 at the end of year 2. Total interest = ₹27,600, charged to Profit and Loss Account.

Example 2

D retired from a firm on 1 July 2026. The amount due to him was ₹4,00,000. It was left as a loan, carrying interest at 9% p.a. The firm paid ₹1,00,000 of the loan on 31 December 2026. The firm closes its books on 31 March each year. Calculate the interest for the year ended 31 March 2027 and the closing loan balance, assuming interest is paid on 31 March 2027. Also find the interest if there were no agreement and D chose interest under Section 37 of the Indian Partnership Act, 1932.

Show the solution
  1. Period 1: 1 July 2026 to 31 December 2026 is 6 months on ₹4,00,000. Interest = ₹4,00,000 × 9% × 6/12 = ₹18,000.
  2. Period 2: 1 January 2027 to 31 March 2027 is 3 months on ₹3,00,000 (₹4,00,000 − ₹1,00,000). Interest = ₹3,00,000 × 9% × 3/12 = ₹6,750.
  3. Total interest for the year = ₹18,000 + ₹6,750 = ₹24,750. Entry: Interest on D's Loan A/c Dr ₹24,750; to Bank A/c ₹24,750; then transfer to Profit and Loss A/c.
  4. Closing loan balance on 31 March 2027 = ₹4,00,000 − ₹1,00,000 = ₹3,00,000.
  5. Under Section 37, D may choose interest at 6% p.a. on his share in the firm's property. Interest = ₹4,00,000 × 6% × 6/12 = ₹12,000 for the first 6 months.
  6. Next 3 months: ₹3,00,000 × 6% × 3/12 = ₹4,500. Total = ₹12,000 + ₹4,500 = ₹16,500.

Answer: Interest for the year at the agreed 9% = ₹24,750. Closing loan balance = ₹3,00,000. Under Section 37 at 6%, the interest option would be ₹16,500.

Exam tips

  • Draw the retiring partner's capital account first. Marks are given for each adjustment line, even if the final figure is wrong.
  • Read the payment terms carefully: 'at the end of each year', 'equal annual instalments' and 'with interest on the outstanding balance' each change the working.
  • Show the loan account as a table with opening balance, interest, payment and closing balance. This earns marks for method.
  • For MCQs, the quick check is: loan = amount due − cash paid. Interest is on the outstanding balance, not on the original amount.
  • If a question cites Section 37, write the condition: the business is continued with the firm's property and there is no final settlement. Then state the option: profit share or 6% p.a. interest.

Practice questions from Retirement of Partner

Settlement of Retiring Partner's Amount and Loan: frequently asked questions

What is included in the amount due to a retiring partner?

It includes his capital, his share of reserves and accumulated profits, goodwill, and revaluation profit, plus interest on capital, salary and profit up to retirement. Drawings, interest on drawings and any losses are deducted. The closing balance of his capital account is the amount due.

How is interest on a retiring partner's loan calculated?

Use the rate given in the agreement or question. Multiply the balance outstanding during the period by the rate and by the time in years. When instalments are paid, interest for the next period is calculated on the reduced balance.

Is interest on a retiring partner's loan an expense or an appropriation?

It is a charge against profit. Debit it to the Profit and Loss Account. It is not shared among partners as an appropriation of profit.

What does Section 37 of the Indian Partnership Act, 1932 say about an outgoing partner?

If the continuing partners carry on the business with the firm's property without settling the outgoing partner's account, he can choose either the profit share attributable to the use of his share of the property, or interest at 6% per annum on his share in the property. The option does not apply where a buy-out option in the agreement has been duly exercised.