Explain the modes of payment to a retiring partner.
The outgoing partner’s account is settled as per the terms of the partnership deed. The payment can be made in lumpsum immediately or in various installments with or without interest as agreed. Sometimes, the payment is made partly in cash immediately and partly in installment at the agreed intervals.
In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable. It states that the outgoing partner has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits which has been earned with his/her money (i.e., based on capital ratio).
If the firm pays the amount due immediately, the Retiring Partners’ Capital Account is debited and Cash/Bank Account is credited. However, if the firm is not in a position to make the payment immediately, the amount due is transferred to the Retiring Partners’ Loan Account. The journal entry involves debiting the Retiring Partners’ Capital Account and crediting the Retiring Partners’ Loan Account.
When the retiring partner is partly paid in cash and the remaining amount is treated as a loan, the Retiring Partners’ Capital Account is debited with the total amount due. The Cash/Bank Account is credited with the amount paid and the Retiring Partners’ Loan Account is credited with the balance amount.
Explanation
The answer is derived directly from the provided textbook context which outlines the settlement of the outgoing partner's account. It covers the general modes of payment (lumpsum, installments), the statutory provision (Section 37) applicable in the absence of an agreement, and the specific accounting treatments (journal entries) for payment in full, transfer to loan account, and part payment.