Debit capital Balances in a Solvent

partnership
If liquidating partnerships are solvent, sufficient resources exist
to pay creditors and distribute some cash to the partners.
However, the process of liquidation may result in losses that
force the capital accounts of some partners into debit balances.
When this happens, those partners with debit balances have an
obligation to partners with credit balances, and they can be
required to use their personal assets to settle their partnership
obligations. If the partners with debit balances are without
personal resources, the partners with positive equity absorb
losses equal to the debit balances. Such losses are shared in the
relative profit- and loss-sharing ratios of the partners with
positive equity balances.
Journal Entries
Journal Entries
The partnership of Jay, Jim, and Joe is in the
process of liquidation. The partnership accounts
have the following balances after all assets have
been converted into cash and all liabilities have
been paid (amounts in thousands):
Partnership Stetment of Partnership
Liquidation
UPA assigns higher payment priority in liquidation to amounts
owed to partners other than their capital balances. This priority
is usually abandoned and the legal doctrine of right of offset is
applied when the partner has a debit capital balance. In this
situation, the amount owed to the partner offsets up to the
debit capital balance amount.
For example, assume that the partnership of Jay, Jim, and Joe
had the following account balances
(in thousands):