MGAB01H3 Lecture : Liquidation of a Partnership

• School: UTSC
• Department: Financial Accounting
• Course: MGAB01H3
• Professor: Liang Chen

Document Summary

The liquidation of a partnership terminates the business. A partnership liquidation ends both the legal and economic life of the entity. Before liquidation, the accounting cycle must be completed. Realization is the sale of noncash assets for cash; any difference is to be record in the gain or loss on realization. It is necessary to follow these steps sell noncash assets, allocate gain or loss on realization to partners based on income ratios, pay partnership liabilities in cash, distribute remaining cash to partners based on capital balances. Creditors must be paid before partners receive any cash distributions. Capital deficiency is when there is a debit balance in the capital accounts. No capital deficiency: cash should not be distributed to partners on the basis of their income-sharing ratios. Capital deficiency: this may be caused by recurring net losses, excessive drawings, or losses from the realization during liquidation.