Q.After all adjustments for goodwill, revaluation and reserves, the amount standing to the credit of Z's Capital Account, on his retirement, is ₹85,000. The firm's Bank balance is ₹50,000. It is agreed that Z will be paid ₹35,000 in cash immediately, and the balance will be transferred to his Loan Account. Pass the necessary journal entry.

Z's final capital balance is settled partly in cash and partly by creating a fresh liability of the firm in his favour.

Z's Capital Account, after every adjustment for goodwill, revaluation and reserves has already been posted to it, shows a final credit balance of ₹85,000 — this is the total amount the firm now owes him. Since only part of this can be paid immediately (₹35,000 in cash), the remaining balance must be carried forward as a liability.

Amount transferred to Loan Account = ₹85,000 − ₹35,000 = ₹50,000.

Journal entry

(Being the amount due to Z on retirement settled: ₹35,000 paid immediately by Bank, and the balance of ₹50,000 transferred to his Loan Account) …

Students sometimes credit the full ₹85,000 to Bank regardless of the actual cash available, ignoring that the firm's Bank balance (₹50,000 here) may not even be sufficient to pay the whole amount — always check the amount the q …