Settling the retiring partner

After all the adjustments, the balance in the outgoing partner's capital account is what the firm owes him. It can be settled:

• in cash, at once;
• by transferring it to his loan account, to be paid later in instalments;
• or partly each way.

If nothing has been agreed, Section 37 of the Partnership Act gives him, until he is paid, either interest at 6% per annum on the amount due, or a share of the profit earned with his money, whichever he chooses.

When it is paid in instalments, the interest is credited to his loan account (it adds to what is owed), and each payment is debited. Work each year in that order: interest first, then the payment.

Example: a loan of 60,000 is to be repaid in four equal annual instalments of 15,000 of the principal, plus 12% interest on the balance. First year: interest 7,200, so the first payment is 15,000 + 7,200 = 22,200. Each later year, the interest is smaller, because the balance is smaller.

Sometimes the payments are to be equal in total each year, principal and interest together. Then an annuity table is used: for 60,000 at 12% over 4 years, the equal annual payment is 19,754.

Until it is fully paid, the loan balance is a liability of the firm, shown in its balance sheet.