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Partnership Liquidation

Chapter 4

Liquidation the winding up of the business

activities characterized by sale of non-cash
assets, settlement of all liabilities and
distribution of remaining cash to partners.
Realization conversion of non-cash assets
into cash
Capital Deficiency the excess of a partners
share in losses over the partners capital
credit balance.
Partners interest the sum of the partners
capital and loan account.
Assets of Partnership

Assets of the partnership, in relation to

liquidation process include the following:
Partnership properties
Additional contributions of the partners
needed for the payment of all liabilities
Order of Preference as to
Distribution of Partnership Asset
1. Those owing to outside creditors
2. Those owing to inside creditors in the
form of loans or advances for business
expenses by the partners.
3. Those owing to the partners with respect
to their capital contributions
4. Those owing to the partners with respect
to their share of the profits.
Right of offset

The legal right of a partner to apply part or

all of his loan account balance against his
capital deficiency resulting from losses in
the realization of the partnership assets.
Distribution of Separate Properties
of an insolvent partner
The following distributions are to be made,
in order of priority:
1.Those owing to separate creditors.
2.Those owing to partnership creditors.
3.Those owing to partners by way of
additional contributions when the assets of
the partnership were insufficient to settle all
Methods of Partnership
1. Lump-sum method
All non-cash assets are realized and the related
gains or losses distributed and all liabilities are
paid before a single final cash distribution is
made to partners.
2. Installment Method
Realization of non-cash assets is accomplished
over an extended period of time. When cash is
available, creditors may be partially or fully paid.
Any excess may be paid to the partners in
accordance with the program of safe payments or
cash priority program.
Lump-sum Liquidation

1. Realization of non-cash assets with gain/loss

2. Payment of liabilities
3. Elimination of partners capital deficiencies in
the following order:
a. Exercise right of offset
b. Investment of additional cash if the partner is
c. Absorption of deficiency by other partners if the
deficient partner is insolvent,
4. Payment to partners in the following order:
a. Loan accounts
b. Capital accounts