Chapter 17

Partnership
Liquidation
Partnership Liquidation: Objectives

1. Understand the legal aspects of

partnership liquidation.
2. Apply simple partnership liquidation
computations and accounting.
3. Perform safe payment computations.
4. Understand installment liquidations.
5. Learn about cash distribution plans for
installment liquidations.
6. Comprehend liquidations when either
the partnership or the partners are
insolvent.
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 Partnership Liquidation

1: LEGAL ASPECTS OF
LIQUIDATION

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Process of Liquidation
Usually, partnership liquidation involves the
following process:

1. Convert noncash assets to cash

2. Recognize gains or losses and expenses
3. Settle all liabilities
4. Distribute cash to partners according to
balances in capital accounts
Assumes
– Business is solvent
– Partners have equity in net assets
– No partner loans
– Assets are converted to cash before cash is
distributed to partners
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Order of Payment
As these assumptions are relaxed, the liquidation process
becomes more complex. Accordingly, this chapter begins with
simple liquidations for solvent partnerships and proceeds to
installment liquidations and liquidations of insolvent
partnerships.

The Uniform Partnership Act provides the following rank

ordering for payments in partnership liquidations:
1. Amounts owed to creditors other than partners and
amounts owed to partners other than for capital and
profits
2. Amounts due to partners liquidating their capital balance
upon conclusion of the liquidation of partnership assets
and liabilities

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 Partnership Liquidation

2: SIMPLE LIQUIDATION

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Simple Liquidation

Convert all assets to cash, and then make a

single distribution to partners in final
settlement.

Gains and losses on conversion of assets are

distributed to partners.
– Use established profit and loss ratios
– Ignore salary, bonus, interest allowances

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Statement of Partnership
Liquidation

Beginning balances in cash, noncash assets, liabilities

and partner accounts are adjusted as assets are converted to
cash, and cash payments are made.

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Debit Capital in Solvent Firm
If one or more (not all) partners has a debit
balance in capital AND the firm has
sufficient cash and other assets of value to
pay all creditors, then…
The partner with the debit capital balance
must either
• Contribute that amount to the firm, or
• If unable, the debit balance is absorbed
by the remaining partners
- Profit and loss ratios of remaining
partners remains consistent relative
to each other
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Other Partner Balances
• The Uniform Partnership Act ranks amounts
owed to partners, other than capital
balances, higher than the capital balances.

• However, a partner with a debit capital

balance may only offset other amounts
owed to the partner with the debit capital
account balance.

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