Liquidation of a Partnership

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10 Nov 2010
Liquidation of a Partnership
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 Æ 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
¾ No Capital Deficiency: Cash should not be distributed to partners on the basis of
their income-sharing ratios
¾ Capital Deficiency: This may be caused by recurring net losses, excessive drawings,
or losses from the realization during liquidation. When a deficiency occurs, the
partner with the deficiency must pay for the balance from their personal assets
Payment of Deficiency: A direct DR Cash, CR Capital may solve this
Nonpayment of Deficiency: If the capital deficiency is unable to be paid, the
outstanding amount is to be paid by the partners. The loss is allocated on the
basis of income ratios.
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