Partnership Liquidation

Partnership Liquidation
Dissolution with Liquidation
• A partnership is liquidated when its
business operations are completely
terminated or ended. The partnership
assets are sold, the partnership creditors
are paid, and the remaining assets, if any,
are distributed to the partners as a
return of their investments.
Partnership dissolution with liquidation may be
caused by any of the following factors:
• The accomplishment of the purpose for which
the partnership was organized.
• The termination of the term/period covered
by the partnership contract.
• The bankruptcy of the firm.
• The mutual agreement among the partners to
close the business.
Marshaling of assets
-involves the order of creditors’ rights against the partnership’s assets and the
personal assets of the individual partners. The order in which claims
against the partnership’s assets will be marshaled is as follows:
Partnership creditors other than partners
Partner’s claims other than capital and profits, such as loans payable and
accrued interest payable.
3. Partner’s claim to capital or profits, to the extent of credit balances in
capital accounts.
The order of claims against the personal assets of the individual partners is as
1. Personal creditors of individual partners
2. Partnership creditors on unpaid partnership liabilities regardless of a
partner’s capital balance in the partnership.
Right of offset
– involves offsetting a deficit in a partner’s
capital (debit balance in the capital account of
a partner) against the loan payable to that
partner. The loan payable to a partner has a
higher priority in liquidation than a partner’s
capital balance but a lower priority than
liabilities to outside creditors.
Definition of Terms
• Dissolution – the termination of a partnership as a going
concern; it is the termination of the life of a partnership.
• Winding up – the process of settling the business or
partnership affairs; it is synonymous to liquidation.
• Termination – the point in time when all partnership affairs
are ended.
• Liquidation – the interval of time between dissolution and
termination of partnership affairs.
• Realization – the process of converting non-cash assets into
• Gain on realization – the excess of the selling price over the
cost or book value of the assets disposed or sold through
Definition of Terms
• Loss on realization – the excess of the cost or book value over
the selling price of the assets disposed or sold through
• Capital deficiency – the excess of a partner’s share on losses
over his capital.
• Deficient partner – a partner with a debit balance in his
capital account after receiving his share on the loss on
• Right of offset – the legal right to apply part or all the amount
owing to a partner on a loan balance against deficiency in his
capital account resulting from losses in the process of
• Partner’s interest – the sum of a partner’s capital, loan
balance and advances to the partnership.
Types of Liquidation
• Lump-sum Liquidation – this is a process whereby the
distribution of cash to the partner is done only after all
the non-cash assets have been realized, the total
amount of gain or loss on realization is known and all
liabilities have been paid.
• Liquidation by installment or piecemeal liquidation –
this is a process whereby assets are realized on a
piecemeal basis and cash is distributed to partners on a
periodic basis as it becomes available; even before
converting all non-assets into cash.
Statement of Liquidation
• The Statement of liquidation is a statement
prepared to summarize the liquidation
process. It is the basis of the journal entries
made to record liquidation. This statement
presents in working paper form the effect of
the liquidation on the Statement of Financial
Position. It shows the conversion of assets into
cash, the allocation of gain or loss on
realization, and the distribution of cash to
creditors and partners.
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