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ACTPACO: Partnership and Corporation Accounting Partnership Liquidation Partnership Liquidation Liquidation

The process of winding-up a business which normally consists of the conversion of a portion or all of the assets into cash, settlement with creditors, and the distribution of remaining assets to the partners. It marks end of both the legal and economic life of the business and is always preceded by dissolution but dissolution may not always lead to liquidation.


Gain on Realization Loss on Realization Capital Deficiency

It is the conversion of assets into cash (sale of non-cash assets).

It is the excess of the selling price over the cost or book value of the non-cash assets sold. It is the excess of the cost or book value over the selling price of the non-cash assets sold. It is the excess of the partners share on losses over his capitala debit balance in a capital account. It is only

Deficient Partner

realizable when there is a loss on realization.

A partner with a debit balance in his capital account after receiving his share on the loss realization or having a capital deficiency; He/she may be solvent or insolvent.

Solvent Deficient Partner

A deficient partner whose personal assets exceed his personal liabilities; hence, he is able to make additional investment into the partnership to cover his capital deficiency.

Insolvent Deficient Partner his capital deficiency.

A deficient partner whose personal liabilities exceed his personal assets; hence, he is unable to make additional investment into the partnership to cover his capital deficiency. The other partners will have to cover/absorb

Right of Offset

The legal right to apply part or all of the amount owing to a partner (loan balance) against a deficiency in his capital account resulting from losses in the process of liquidation.

Partners Interest


ACTPACO: Partnership and Corporation Accounting Partnership Liquidation The sum of the partners capital, loan balance, and advances to the partnership decreased/increased by his Methods of Liquidation drawing account, if any

1. Lump-Sum Liquidation Lump-Sum Liquidation

2. Installment Liquidation (or Piecemeal Liquidation) Cash distribution to partners is made only after realization of all non-cash assets has been completed and the

Installment Liquidation

full gain or loss from realization is known, and that all liabilities to outsiders have been settled.

Non-cash assets are realized on a piecemeal basis and cash is distributed to partners on a periodic basis as it Procedure in Lump-Sum Liquidation becomes available even before converting all non-cash assets into cash.

1. The books should be adjusted and closed, the net income or loss for the period carried to the partners drawing accounts, if any, and the drawing accounts are closed to the capital accounts. losses to be divided among the partners according to their profit and loss sharing ratio. become the basis for settlement.

2. Assets are sold and any difference between the book values and the amount realized represents gains or 3. The gains or losses are carried to their capital accounts, after which the capital account balances will from partnership), the law permits the exercise of the right of offset. contribution to settle his deficiency. less than his personal liabilities.

4. When a partners capital account reports a debit balance and such partner has a loan balance (collectible 5. A debit capital balance in the absence of a loan balance or after the exercise of the right of offset indicates the need for contribution by the deficient partner. A deficient but solvent partner is able to make cash

6. If the deficient partner is unable to contribute any further, he is said to be insolvent thus the partners with 7. As cash becomes available for distribution, it is first applied to the payment of outside creditors, after which, it is applied in settlement of partners loan and capital balances. ratios. credit capital balances will have to absorb the deficiency. A partner is insolvent if his personal assets are

8. The final cash distribution to partners is made based on the partners capital balances and not on any debited. These are Allowance for Doubtful Accounts and Accumulated Depreciation.

9. In recording sale of accounts receivable and plant assets, their related contra-accounts, if any, should be 10. Liquidation expenses may be incurred to facilitate the immediate realization of non-cash assets. Payment of liquidation expense reduces cash and is recorded as deduction from partners capital based on existing profit and loss ratio.


ACTPACO: Partnership and Corporation Accounting Partnership Liquidation Statement of Liquidation An accounting statement that summarizes the winding-up of the affairs of the partnership.

It shows the balances of the asset, liability, and capital accounts before realization; sale of non-cash assets, Minimum set of column headings include cash, non-cash assets (carrying amount), liabilities, and heading. the payment of liabilities, and the distribution of the remaining cash to the partners. partners capital accounts (individually provided), with profit and loss ratio indicated at the column

Installment Liquidation Characteristics:

Non-cash assets are sold on a piecemeal basis because the complete liquidation process might take several months. Cash payments to creditors and partners are on installment basis as the cash becomes available. available to direct accurate premature cash distribution.

To guarantee that premature cash distribution to partners would not result to overpayment, tools are

Tools for Installment Cash Distribution 1. Schedule of Safe Payments 2. Cash Priority Program

Schedule of Safe Payments

This statement is prepared when there is available cash after payment to outside creditors is made. It indicates how the available cash should be distributed to partners.

Procedure of Installment Liquidation (optional).

1. Provide appropriate columns for the capital accounts of the partners. The last column is for the total 2. Indicate the profit and loss ratio of each partner. partner to the partnership.) 3. Enter the total interest of the partners (capital account after the closing process plus any loan of the

4. Indicate the maximum loss absorption capacity of each partner. and estimated liquidation expenses, if any.

5. The partners maximum capacity to absorb losses is the total of the following data multiplied by the

7. The final balance of the capital account represents the amount of cash that can be safely distributed to the partner.

6. If there is any capital deficiency at this point, assume that the partner is insolvent so that the remaining partners with positive capital balance are to absorb the capital deficiency.

partners profit and loss ratio: book value of unsold non-cash assets, estimated liabilities incurred, if any,