THE LIQUIDATION OF A

PARTNERSHIP

UNIT 3
LIQUIDATION OF A PARTNERSHIP
PRESCRIBED TEXT REFERENCE
About Financial Accounting, Volume 2, Latest Edition, PR

Berry et al, LexisNexis. CHAPTER 4

A concept-based introduction to Financial Accounting, Latest

Edition, DL Kolitz et el. JUTA, CHAPTER 17

Accounting an Introduction: Latest Edition, JE Myburgh et

al, LexisNexis. CHAPTER 18

Fundamental Accounting, Latest Edition, David Flynn and

Carolina Koornhof. CHAPTER 23

LEARNING OUTCOMES
After studying this unit, you should be able to:
Describe the term “liquidation” from the perspective of this unit.
Distinguish between a simultaneous and a piecemeal liquidation.
Record the simultaneous and a piecemeal liquidation:
• profit on liquidation
• loss on liquidation, where all the partners have sufficient personal funds
to cover any shortages (deficits) on their capital accounts
• loss on liquidation, where all the partners do not have sufficient personal
funds to cover any deficits on their capital accounts and where the
capital deficits must be apportioned to the capital accounts of the solvent
partners according to either Garner versus Murray rule or their profit
sharing ratio; and
Record the piecemeal liquidation of a partnership, and calculate the
interim repayments to be made to the partners according to both the
surplus-capital and the loss-absorption-capacity method.
DEFINITION OF TERMS
Liquidation:
“Winding up the affairs of a business entity to realize its assets and
use the proceeds thereof to pay the liabilities of the company. At
liquidation a business will be closed. E.g. going concern principle
will not apply anymore.”
INTRODUCTION
In general terms, liquidation is usually associated with
insolvency.
An insolvent partnership cannot settle its debts according to
agreed terms, whereas a solvent partnership can.
However, the liquidation of a partnership is not necessarily
caused by the insolvency thereof.
There are various reasons for the liquidation of a partnership,
such as the death or retirement of a partner, or on the
strength of a court order at the request of the partners.
INTRODUCTION
To distinguish between the liquidation of a solvent partnership,
the liquidation of the latter is referred to as the “sequestration
“thereof.
From the viewpoint of this unit, the liquidation of as partnership
implies that the assets must be converted into cash (in other
words, the assets must be liquidated / realized), the liabilities
settled, and the remaining cash paid to the partners according
to the balances of their capital accounts.
The liquidation of a partnership is a form of dissolution which
results in the termination of the business activities thereof.
Basically, there are two methods according to which a
partnership can be liquidated, namely by simultaneous or
piecemeal liquidation.
 LIQUIDATION METHODS
A partnership can be liquidated simultaneously or piecemeal.
A simultaneous liquidation occurs when the assets of a partnership are
sold /liquidated simultaneously or over a relatively brief period, usually
by a partnership which has discontinued its trading activities.
Simultaneous liquidations seldom occur in practice, as assets are
usually liquidated at less favorable amounts, due to the short period
available for the liquidation thereof.
There are also other factors that could complicate a simultaneous
liquidation such as debtors who may be unwilling or unable to pay their
debts over a decreased time span.
In contrast to a simultaneous liquidation, a piecemeal liquidation allows
a partnership to continue with its business activities, but on a steadily
decreasing scale thereby providing the opportunity to liquidate the
partnership at the best possible price.
LIQUIDATION OF A PARTNERSHIP
THE LIQUIDATION ACCOUNT
• With a simultaneous liquidation, a single liquidation
account is prepared to determine the net profit or
loss made on the liquidation of the entire
partnership.
• With a piecemeal liquidation, a number of liquidation
accounts are prepared to determine the net profits or
losses made on the liquidation of portions of the
partnership.
• There are various methods according to which
liquidation accounts are prepared these methods are
determined by preference and circumstance.
THE LIQUIDATION ACCOUNT
Two methods according to which a liquidation account can be prepared in
the case of a simultaneous liquidation, are hereby discussed:
Method 1:
• At the date the liquidation process commences, all the asset (with the
exception of the bank account), contra-asset (such as accumulated
depreciation or allowance for credit losses) and liability accounts are
closed off to the liquidation account.
• The liquidation of the assets and the settlements of the debts are then
recorded therein.
• Any further income received or expenses paid must also be recorded in
the liquidation account.
• Thereafter, the balancing amount of the liquidation account will reflect the
net profit/loss made on the liquidation of the entire partnership.
• This balance is closed off to the capital accounts of the partners
according to their ratio.
 THE LIQUIDATION ACCOUNT
As far as the liquidation of an asset is concerned, a
profit/loss is reflected in the liquidation account by the
difference between the carrying amount of the asset (on the
debit side of the liquidation account) and the selling price (on
the credit side of the liquidation account) thereof.
For Example, assume that a vehicle was closed off (debited)
to the liquidation account at a carrying amount of
N$20 000.00
The Vehicle was then sold for N$18 000. On the date of the
sale the liquidation account is credited with N$18 000.00
In the liquidation account, the difference between the debit
entry of N$20 000.00 and the credit entry of N$18 000 reflects
a loss of N$2 000.
THE LIQUIDATION ACCOUNT
Settlement discounts received when liabilities are settled are
reflected in the liquidation account in a similar fashion.
For Example, assume that a creditor’s control account of
N$15 000 was closed off (credited) to the liquidation account
and that it was then settled in full by a cash payment of
N$13 500.
The liquidation account is debited with N$13 500 and the
bank account credited with N$13 500 on the date of
settlement
The difference between the credit entry of N$15 000 and the
debit entry of N$13 500 in the liquidation account reflects a
settlement discount received of N$1500.
THE LIQUIDATION OF A PARTNERSHIP
ACCOUNTING PROCEDURE TO RECORD THE
SIMULTANEOUS LIQUIDATION OF A
PARTNERSHIP
Various accounting procedures exit to record the liquidation of partnership. The
following steps are suggested as a guideline to administer and record the
simultaneous liquidation of a solvent partnership. These steps are shown in
example

Step 1:
• Close off the balance s of the drawing and current accounts (if any) to the
capital accounts on the date when the simultaneous liquidation
commences.
• The drawing and current account form part of the equity of a partnership,
and are therefore closed off to the capital account of the partners.
• Should a current account have a credit balance in closing, this balance is
debited in the current account and credited in the relevant capital account.
Should a current have debit balance in closing, this balance is credited in
the current account and debited in the relevant capital account.
• Drawing accounts have debit balances. Therefore, a drawings account is
credited with the balance thereof and the relevant capital account is
debited with this amount.
ACCOUNTING PROCEDURE TO RECORD
THE SIMULTANEOUS LIQUIDATION OF A
PARTNERSHIP

Step 2:
• Close off the balances of the goodwill and revaluation surplus
accounts (where applicable) to the capital accounts of the
partners according to their profit sharing ratio on the date when
the simultaneous liquidation commences.
• Goodwill cannot be sold at liquidation and revaluation
surpluses form part of equity. Therefore these items are closed
off to the capital accounts.
ACCOUNTING PROCEDURE TO RECORD
THE SIMULTANEOUS LIQUIDATION OF A
PARTNERSHIP
Step 3
Prepare the liquidation account. The liquidation account is prepared as
follows:
On the date on which the simultaneous liquidation commences, the
liabilities are closed off by debiting the liability accounts with their balances
and crediting the liquidation account.
The balances of the remaining assets accounts (with the exception of the
bank and capital accounts) are also closed off to the liquidation account.
If an asset was recorded at the carrying amount thereof, the liquidation
account is debited and the asset account credited with the closing balanced
of the asset account.
An asset was recorded at the cost (for example, vehicles at cost), the
liquidation account is debited and the asset account is credited with closing
balance of the asset account. Any related contra-asset account (for example,
accumulated depreciation) must be closed off to the liquidation account by
debiting the contra-asset account and crediting the liquidation account with
the closing balance of the contra- asset account.
ACCOUNTING PROCEDURE TO RECORD
THE SIMULTANEOUS LIQUIDATION OF A
PARTNERSHIP

Record the liquidation of the assets

When an asset is sold for cash, the bank account is debited and
the liquidation account is credited with the selling price (cash
amount) of the asset on the date of liquidation.
Should a panel take over an asset, the amount at which the asset
is taken over is debited in the partners’ capital account and
credited in the liquidation account.
ACCOUNTING PROCEDURE TO RECORD
THE SIMULTANEOUS LIQUIDATION OF A
PARTNERSHIP

Record income received.

Income received, for example services rendered for cash, is
debited in the bank account and credited in the liquidation
account on the date of sale.
Record of the payment of the liquidation cost
Usually, the settlement of liquidation cost enjoys preference over
all other payments.
The liquidation account debited and the bank account credited
with the amount paid on the date of payment.
Record payment of the liability account the settlement of the
current liabilities is recorded by debiting the liquidation account
and crediting the bank account with the payment.
ACCOUNTING PROCEDURE TO RECORD
THE SIMULTANEOUS LIQUIDATION OF A
PARTNERSHIP
Record the payment of any further expenses.
Any further expenses paid are recorded by debiting the liquidation
account and by crediting the bank account on the date of payment.
After all the entries in the liquidation account have been made, the
balancing amount of the liquidation account represents the net
profit/loss made on the liquidation of the partnership.
If a profit was made the liquidation account is debited with profit
and the capital account of the partners credited according to their
profit sharing ratio.
If a loss was made, the capital accounts are debited according to
their profit sharing ratio and the liquidation account is credited.
Close off the balance of liquidation balance account to the capital
accounts of the partners according their profit sharing ratio.
ACCOUNTING PROCEDURE TO RECORD
THE SIMULTANEOUS LIQUIDATION OF A
PARTNERSHIP

Step 4:
Record the settlement (once-off repayment) of the capital account of the
partners
At this stage of the liquidation process, only the bank account and the
capital account of the solvent partners have balances in book of the
partnership.
The balance of the bank account will be equal to sum of the capital
account balances, indicating the liabilities of the partnership towards
each partner.
Similar to the settlement of a liability, the balances of the capital
account, which are necessarily in the profit-sharing ration of the
partners are debited and the bank account of the partnership credited.
After such settlement is recorded, the liquidation process is finalised
and the partnership ceases to exist.