Liquidation of a Partnership
Jamievelle B. Cortel August 14,2013
Bctng2 8:00-10:00
Liquidation of a Partnership
Explain the effects of the entries to record the liquidation of a partnership.
Liquidation
of a business involves selling the assets of the firm, paying liabilities, and distributing any remaining assets. Liquidation may result from the sale of the business by mutual agreement of the partners, from the death of a partner, or from bankruptcy.
Partnership liquidation ends both the legal and economic life of the entity.
From an accounting standpoint, the partnership should complete the accounting cycle for the final operating period prior to liquidation. This includes preparing adjusting entries and financial statements. It also involves preparing closing entries and a post-closing trial balance. Thus, only balance sheet accounts should be open as the liquidation process begins.
In liquidation, the sale of noncash assets for cash is called realization . Any difference between book value and the cash proceeds is called the gain or loss on realization
. To liquidate a partnership, it is necessary to:
1.
Sell noncash assets for cash and recognize a gain or loss on realization.
2.
Allocate gain/loss on realization to the partners based on their income ratios.
3.
Pay partnership liabilities in cash.
4.
Distribute remaining cash to partners on the basis of their capital balances
.
Each of the steps must be performed in sequence.
The partnership must pay creditors before partners receive any cash distributions. Also, an accounting entry must record each step.
When a partnership is liquidated, all partners may have credit balances in their capital accounts. This situation is called no capital deficiency
. Or, one or more partners may have a debit balance in the capital account. This situation is termed a capital deficiency
. To illustrate each of these conditions, assume that Ace Company is liquidated when its ledger shows the
Bctng2 8:00-10:00
Liquidation of a Partnership
Explain the effects of the entries to record the liquidation of a partnership.
Liquidation
of a business involves selling the assets of the firm, paying liabilities, and distributing any remaining assets. Liquidation may result from the sale of the business by mutual agreement of the partners, from the death of a partner, or from bankruptcy.
Partnership liquidation ends both the legal and economic life of the entity.
From an accounting standpoint, the partnership should complete the accounting cycle for the final operating period prior to liquidation. This includes preparing adjusting entries and financial statements. It also involves preparing closing entries and a post-closing trial balance. Thus, only balance sheet accounts should be open as the liquidation process begins.
In liquidation, the sale of noncash assets for cash is called realization . Any difference between book value and the cash proceeds is called the gain or loss on realization
. To liquidate a partnership, it is necessary to:
1.
Sell noncash assets for cash and recognize a gain or loss on realization.
2.
Allocate gain/loss on realization to the partners based on their income ratios.
3.
Pay partnership liabilities in cash.
4.
Distribute remaining cash to partners on the basis of their capital balances
.
Each of the steps must be performed in sequence.
The partnership must pay creditors before partners receive any cash distributions. Also, an accounting entry must record each step.
When a partnership is liquidated, all partners may have credit balances in their capital accounts. This situation is called no capital deficiency
. Or, one or more partners may have a debit balance in the capital account. This situation is termed a capital deficiency
. To illustrate each of these conditions, assume that Ace Company is liquidated when its ledger shows the