Open In App

Settlement of Amount due to a Retiring Partner: Amount Paid in Instalment

Last Updated : 05 Apr, 2023
Like Article

Sometimes the retiring partner may agree to receive the settlement amount in instalments instead of taking the full amount at once. The principal amount is then paid in an agreed number of instalments, and the settlement amount in such cases is transferred to the Retiring Partners’ Loan Account. The Retiring Partner is also eligible to receive interest on the amount outstanding at the beginning of the year. The interest amount is credited to the retiring partner’s loan account and is paid along with the instalment amount.

Accounting Treatment:

The full principal amount is transferred to the Retiring Partner’s Loan Account, and then such amount is paid in an equal number of agreed instalments along with the interest at the end of each year.

Journal Entries:

1. Transferring Due Amount to Retiring Partner’s Loan Account:


2. Providing for Interest on the Loan Amount outstanding at the beginning of the year:


3. Payment of Installment and Interest Amount:



Following is the Balance Sheet of Zinc Partnership Firm as on 1st April, 2020. The firm is owned by three partners Akhil, Sid, and Addy who share their profits and losses in a ratio of 3: 2: 1.


Sid decided to retire on 1st April, 2020 on the following terms:

  1. The goodwill of the firm is valued at ₹ 90,000, and adjustment related to this is to be made against the remaining partners’ capital accounts without raising Goodwill Account.
  2. Building to be appreciated by ₹ 35,000.
  3. Provision for Doubtful Debts is to be created @ 5% on Debtors.
  4. The amount of settlement is to be transferred to Sid’s Loan Account and shall be paid in 2 equal annual instalments with an interest of 6% p.a. 

Prepare the Revaluation Account, the Partner’s Capital Account, and the Balance Sheet of the New Firm. Also, prepare Sid’s Loan Account till the date of the Last Installment Payment.







Working Notes:

1. Calculation of Gaining Ratio:

Since no information about the new ratio is given, the Gaining Ratio of Akhil and Addy is calculated by simply striking off the share of Sid (Retiring Partner).

Thus, The Gaining Ratio of Akhil: Addy = 3: 1

2. Calculation of Share of Goodwill of the Retiring Partner:

Value of Goodwill= ₹ 90,000

Share of Goodwill of Sid90,000\times\frac{2}{6}= ₹30,000

This amount of ₹ 30,000 is payable to Sid by the remaining partners in their Gaining Ratio, i.e., 3: 1

Amount Payable by Akhil =  30,000\times\frac{3}{4} = ₹22,500

Amount Payable by Addy = 30,000\times\frac{1}{4}=₹7,500

Like Article
Suggest improvement
Share your thoughts in the comments

Similar Reads