1.Piecemeal Distribution
As and when money is received from sale of
assets, it is used to pay liabilities. The liabilities
are also paid in stages or gradually. The money, in
short, is distributed piecemeal – in stages and not
in a single shot. This is known as Piecemeal
Distribution.
2.Settlement of Liabilities
In a piecemeal distribution, the amounts
realised from assets are used to settle the
liabilities in the following order:
[1] Realisation expenses
[2] Reserve for
Unrecorded/Contingent Liabilities
[3] Outside Liabilities
[4] Partners’ loans and
[5] Partners’ capitals. Surplus,
if arising at the last stage, is distributed to
all partners in their profit sharing ratio.
2.1 Realisation Expenses
Realisation expenses are paid or provided for, first.
2.2 Reserve for Unrecorded /Contingent
Liabilities
A reserve is created to meet any unrecorded liability or a contingent
liability (e.g. bills discounted).
2.3 Outside Liabilities
2.3.1 Types
Outside liabilities are the amounts due to outsiders other than
partners such as creditors, banks etc. These include amounts due to
even relatives of partners e.g. loan from partner’s wife etc. Outside
liabilities may be broadly classified into
[1] Secured Creditors and [2] Unsecured Creditors.
2.3.2 Secured Creditors
In case of Secured Creditors, the dues are secured by pledge, charge,
hypothecation or mortgage of an asset e.g. bank overdraft secured against
machinery and stock. Secured creditors may be (a) fully secured or (b) partly
secured.
(1) Fully Secured: In case of a fully secured creditor, the amount due is fully
covered by the value of asset pledged etc. On dissolution, such creditors can
fully recover their dues out of the realisations of the secured assets. Thus, on
dissolution the bank can fully recover the amount due on bank overdraft out of
the amounts realised from the sale of the machinery and stock. The surplus, if
any, belongs to the firm.
(2) Partly Secured: Partly Secured Creditors are those liabilities which are only
partly secured against an asset of the firm. In such cases the amount due is
only partly covered by the value of asset pledged etc. On dissolution, such
creditors can only partly recover their dues out of the amounts realised from
such assets. The remaining amount is treated as unsecured creditors and added
to the amount of unsecured liabilities.
2.3.3 Unsecured Creditors
Unsecured Creditors have no specific security at all.
Unsecured Creditors are further classified into
preferential creditors and other creditors.
(1)Preferential: Preferential creditors means (a) amounts due
to the Government e.g. income tax, municipal taxes etc.
(b) amounts due to the employees e.g. salaries and
wages, compensation for termination of services,
contribution to provident fund etc. These amounts are
paid first in preference to other unsecured creditors.
(2) Other: Other unsecured creditors are all the remaining
outside liabilities of the firm. These also include the
balance of partly secured creditors not met out of the
secured asset.
2.3.4 Order of Payment
Outside liabilities are paid in the following order:
(1) Out of the realisation from ‘charged’ (as security) assets,
secured creditors are paid first. Balance realisation, if
any is used to pay other creditors. Remaining secured
creditors, if any, are added to other creditors.
(2) Out of the other realisations, preferential creditors are
paid first in the following order: (a) Amounts Due to
Government (b) Amounts Due to employees.
(3) Once all the preferential creditors are paid balance cash
is used to pay the unsecured creditors.
2.3.5 Pro-rata Payment
If the cash is insufficient to pay off all dues, the payment is
made to the concerned creditors (in each category)
proportionately i.e. in the ratio of the outstanding
balances.
2.4 Partners’ Loans
After all the outside liabilities are paid off, the internal
liabilities i.e. the partners’ loans are paid off in the next
stage. If the cash is insufficient, payment is made against
all partners’ loans proportionately i.e. in the ratio of
outstanding balances.
2.5 Partners’ Capitals
After all the outside as well as internal liabilities are paid, the
partners’ capitals are paid off in the last stage. If the cash is
sufficient, all the capitals can be paid off. But if the balance
is insufficient, payment must be made against all capital
accounts prorata or proportionately. If the capital balances
are in the profit sharing ratio, there is no problem at all. The
payment is made to all partners in the ratio of their capital
balances. But if the capitals are not in the profit sharing
ratio, payments at each stage must be done in such a
manner that:
(a)The payments are in the ratio of the balances of capitals at
each stage and
(b) The payments ensure that the ultimate profit or loss on
realisation is distributed among all the partners in their profit
sharing ratio.
3.Proportionate Capital
Method
3.1 Meaning
This method is also known as Surplus Capital Method,
Highest Relative Capital Method, Excess Capital Method or
Quotient Method. The excess capital (actual capital less
capital proportionate to the profit sharing ratio) is paid first.
After excess capitals are paid, all capitals are in the profits
sharing ratio. Then the payments can be made in the profit
sharing ratio.
3.2 Procedure
3.2.1 Compute Adjusted Capitals
Adjusted Capital means the amount due to each partner by
way of capital adjusted for current account balances,
reserves, funds, accumulated profits, deferred revenue
expenses not written off etc.
Particulars
Rs.
Capital A/c (Cr.) as per Balance Sheet
xxx
Add: Current Account (Cr.)
xxx
Reserves/Funds (credited in PSR)
xxx
P & L A/c (Cr.) (credited in PSR)
xxx
Less: Current Account (Dr.)
P & L A/c (Dr.) (debited in PSR)
Deferred Revenue Expenses (debited in PSR)
Adjusted Capital Balances
Rs.
xxx
xxx
xxx
xxx
xxx
xxx
3.2.2 Compute Unit Capital
Unit Capital (UC) of a partner means his Adjusted capital divided by his
Share of profit.
3.2.3 Take Lowest UC as Base Capital
The next step is to take the lowest Unit Capital as the Base
Capital (BC). This is called the Minimum Capital or the
Core Capital.
3.2.4 Compute Proportionate Capital
Proportionate Capital (PC) of a partner is equal to the Base
Capital x His Share of Profit.
3.2.5 Compute Excess Capital
Excess Capital of a partner is equal to his Capital Balance
Less his Proportionate Capital. In case of the partner whose
unit capital is taken as a Base his Proportionate Capital is
equal to his Capital Balance, and hence his Excess Capital is
Nil.
3.2.6 Compute Next/Final Excess Capital
If there are two partners, there will be only one partner whose capital is
excess; in case of three partners, there may be two partners whose capitals
are in excess, and so on. In case of three partners, the excess capital is to
be computed twice; in case of four partners, it is to be computed thrice and
so on. The computation at first stage (First Excess) is done as explained
above. In the next stages the steps are same, except that, the Excess
Capital in the next stage is equal to Old Proportionate capital Less New
Proportionate capital. The Excess Capital in the last stage is called the
Final Excess or the Absolute Excess Capital.
3.2.7 Order of Payment
First, the Final Excess Capital is paid. Next, the
Proportionate Capital in the last stage is paid. Next, the
proportionate Capital in the last But one stage is paid and so
on. Finally, after all the excess amounts are paid, the balance
cash is paid I the profit sharing ratio of the partners.
Assignment Sums
Q1 A, B and C were in partnership sharing profit & losses in the ratio 3:2:1.
They dissolved the firm on 31-12-2003. On which date their balance sheet
appeared as follows:
Liabilities
Rs.
Creditors
40,000 Cash
10,000
Loan from A
10,000 Debtors
80,000
General Reserve
12,000 Stock
27,000
Capital :
A
20,000
B
25,000
C
10,000
1,17,000
Assets
Rs.
1,17,000
The realisation and expenses were as under:
Date
Debtors Rs.
Stock Rs.
Expenses Rs.
Jan,2004
12,000
6,000
1,000
Feb,2004
22,000
1,000
1,500
March,2004
6,000
10,000
1,200
April,2004
18,000
5,000
900
May,2004
15,500
3,000
1,500
It was agreed that available cash and net realisation should be distributed at
the end of each month. It was decided in May,2004, that C would take the
remaining debtors at Rs 2,500.
Prepare a statement by proportionate Capital method showing the distribution
of cash. Also show realisation account.
Q2 A, B and C were partners sharing in the ratio of 4:3:1. Their balance sheet
as on 31st March, 2003 was as follows:
Liabilities
Rs.
Creditors
26,250 Building
Bank Loans (Secured)
Assets
Rs.
60,000
8,750 Plant
20,000
Loan from A
10,000 Stock
55,000
Capital
70,000 Debtors
60,000
:A
B
30,000
C
50,000
1,95,000
1,95,000
They decided to dissolve the business. The assets are realised gradually and
the net amount were distributed immediately as given below:
Date
Assets Realised Rs.
Expenses Paid Rs.
May 20,2003
22,000
2,000
July 30,2003
16,800
1,800
Sept 20,2003
38,000
Nil
Nov 15,2003
45,000
5,000
Dec 30,2003
72,000
7,000
Show the distribution of cash and the loss to be borne by the partners.
Objective test
Match the column
•
•
•
•
Group ‘A’
A. Income tax payable by a firm as on
the date of dissolution
B. Balance of partly secured creditors
not met out of the secured asset
C. Bank loan obtained by
hypothecation of Machinery
•
•
•
•
Group ‘B
’(1) Secured Creditor
(2) Preferential Creditor
(3) Unsecured Creditor
Multiple Choice Questions:
(1) Income tax payable by a firm as on the date of dissolution is treated ________
(a) As preferential creditors (b) as secured creditors (c) as unsecured creditors (d) as
non-recoverable.
(2) Salaries and wages payable by a firm as on the date of dissolution is treated
_______
(a) As preferential creditors (b) as secured creditors (c) as unsecured creditors (d) as
non-recoverable.
(3) Unsecured Creditors are paid in the following order(a) All creditors pro data (proportionately)
(b) Due to Government, Due to Employees, Other Creditors
(c) Due to Employees, Due to Government, Other Creditors
(d) None of the above
(4) If cash is insufficient to pay off all partners’ loan, payment is made ________
(a) in the profit sharing ratio (b) in the profit sharing ratio (c) in the ratio of capitals
(d) None of the above. In the ratio of outstanding loan balances
Answers
•
•
•
•
Match the column answers
A-2 , B-3 , C-1
MCQ answers
1 a , 2 a, 3 c, 4 b