ADVANCED FINANCIAL
DISSOLUTION
ACCOUNTING
AND
REPORTING
PARTNERSHIP
DISSOLUTION is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business.
CAUSES OF PARTNERSHIP DISSOLUTION
1. ADMISSION OF A NEW PARTNER
The admission of a new partner may be effected either through:
a. Purchase of interest in the partnership
 A personal transaction between and among the partners
 Any consideration paid or received is not recorded in the partnership books
 Only a transfer within equity is made to establish the capital account of the new
partner and decrease the capital account(s) of the selling partner(s).
 No gain or loss shall is recognized in the partnership
b. Investment in the partnership
 The incoming partner invests directly to the partnership instead of purchasing interest
from an existing partner(s).
 This is a transaction between the new partner and the partnership. Any consideration
paid by the incoming partner is recorded in the partnership books.
 No gain or loss shall be recognized
REVALUATION OF ASSETS
When a partnership is dissolved but not liquidated, a new partnership is created. The
assets and liabilities carried over to the new partnership are restated to fair values.
Any adjustment to the assets and liabilities is allocated first to the existing partners
before recording the admission of the new partner.
2. WITHDRAWAL, RETIREMENT, OR DEATH OF A PARTNER
 When a partner withdraws, retires or dies, his interest may be purchased (a) by
one or all of the remaining partners or (b) by the partnership.
 The interest of the withdrawing, retiring, or deceased partner shall be adjusted for
the following:
 his share of any profit or loss during the period up to the date of his withdrawal,
retirement or death; and
 his share of any revaluation gains or losses as at the date of his withdrawal,
retirement, or death.
2. WITHDRAWAL, RETIREMENT, OR DEATH OF A PARTNER
 Purchase by one or all of the remaining partners.
This is a transaction between and among the partners (or deceased partner’s estate). As
such, the settlement amount is not recorded in the books. The only entry to be made in
the partnership books is a transfer within equity.
 Settlement by the partnership This is a transaction between the retiring or withdrawing
partner (or deceased partner’s estate) and the partnership. As such, the settlement
amount is recorded in the books.
3. INCORPORATION OF A PARTNERSHIP
On date of incorporation: The partners’ capital balances are adjusted for their respective
shares in any profit or loss and revaluation gains or losses as at the date of incorporation.
The adjusted capital balances may be used in determining the number of shares to be
issued to each partner. Normally, the books of the partnership are closed and new books are
set-up for the corporation.
Notes:
Partnership Dissolution - is the change in the relation of partners caused by any partner ceasing
to be associated in the carrying on as distinguised from the winding uo of the business of the
partnership.
On dissolution, the partnership is not terminated. Most changes in the ownership of the
partnership are accomplished without interruption of its normal operations.
Causes of Dissolution
1. Admission of a partner
2. Withdrawal or Retirement of a partner
3. Death of a partner
4. Incorporation of the partnership
Admission of a partner
1. Purchase of Interest from existing partner/s
- The settlement is only within the knowledge of partner to partner. Partnership's Capital remains
the same.
2. Investment of Assets in a Partnership
- The settlement is within the partner and the partnership. Partnership's Capital will include new
investments.
*ALL PARTNERS MUST AGREE ON PARNERSHIP DECISION MAKING, DISSOLUTION
WILL NOT CONTINUE.
AGREED CAPITAL CONTRIBUTED CAPITAL BONUS/ASSET REVALUATION
OLD
XXX
XXX
XXX
NEW
XXX
XXX
XXX
TOTAL
XXX
XXX
XXX
Contributed Capital sum of the CApital business of old parners and actual investment of new
partner
Agreed Capital total capital of the partnership after considering the capital cedit given to each
partners.
3. Withdrawal / Retirement of a partner
4. Death of a partner
Sale of Intereset to a partner or an Outsider
Sale of Interest to the partnership
ADVANCED FINANCIAL
LIQUIDATION
ACCOUNTING
AND
REPORTING
PARTNERSHIP
LIQUIDATION is the termination of business operations or the winding up of affairs. It is a
process by which
a. the assets of the business are converted into cash,
b. the liabilities of the business are settled, and
c. any remaining amount is distributed to the owners.
Methods of Liquidation
• Lump-sum liquidation – the partners’ claims are settled in a single, lump-sum
payment after all non-cash assets are realized and after all liabilities are settled.
• Installment liquidation – the partners’ claims are settled on an installment basis
as non-cash assets are realized and as cash becomes available, but only after all liabilities
are fully settled.
Settlement of Claims
The available cash of the partnership is used to settle claims in the following descending order:
1. First, to outside creditors;
2. Second, to inside creditors (e.g., payables to partners);
3. Third, to owners’ interests
RIGHT OF OFFSET
The legal right of offset allows a deficit in a partner’s capital account to be offset by a loan
payable to that partner.
Lump-sum
All of the non-cash assets
are converted to cash.
Installment
Some of the non-cash assets
are converted to cash.
The carrying amount of any
unsold non-cash asset is
considered as a loss. This
is allocated to the partners
capital balances based on
their profit or loss ratios.
Actual liquidation expenses
are allocated to the partners'
capital balances based on
their profit or loss ratios.
The liabilities to outside
creditors are
fully settled.
The liabilities to inside
creditors are fully settled.
The total gain or loss on the
sale is allocated
partners' capital balances
based on their profit or loss
ratios.
Actual and estimated future liquidation
expenses are allocated to the partners’ capital
balances based on their profit or loss ratios.
The liabilities to outside
creditors are partially or
Fully settled.
The liabilities to inside creditors are partially
or fully settled but only after full settlement of
the liabilities to outside creditors.
If both the liabilities to outside and inside If both the liabilities to outside and inside
creditors are fully settled, any remaining cash creditors are fully settled, any remaining cash If
If both the liabilities to outside and inside both the liabilities to outside and inside
creditors are fully settled, any remaining cash creditors are fully settled, any remaining cash
Marshalling of Assets
• A partner who is solvent, shall be required to make additional contributions to settle any
deficiency in his capital balance, subject to the following order of priority over his personal
assets:
1. The partner’s separate creditors
2. The partnership creditors
3. To the other partners by way of contribution
• The capital deficiency of an insolvent partner shall be offset to the capital credits of the other
partners.
Notes:
Partnership Liquidation - is the winding up of its business activities characterize by sale of all
non-cash assets, settlement of all liabilities, and distribution of remaining cash of the partners.
Steps of Liquidation
1. Realization of all non-cash assets
Realization - conversion of non-cash into cash
* When cash is higher than the non-cash assets, there is a gain on realization. Otherwise, loss on
realization.
Gain or loss is shared by partners depending on their profit sharing ratio.
2. Settlement of the Liabilities
- Outside Creditors - not related to business
1. Liquidation of Expenses - first
2. Salaries - second
3. Taxes - third
4. Creditors - fourth
- Inside Creditors - partners that is really part of the partnership
* Trust Fund Doctrine - Creditors are paid first before the owners.
3. Distribution to Partners
* Remaining cash will be distributed to partners based on their remaining balances
Methods of Partnership Liquidation
1. Lump-sum Liquidation - all non-cash assets are realized and all liabilities are settled before a
single final cash distribution is made to the partners.
Steps:
1. Realization of Non-cash Asset
2. Settlement of Liabilities
3. Distribution of Partners
2. Installment Method