ACCOUNTING FOR SPECIAL TRANSACTION

PARTNERSHIP LIQUIDATION
KEYWORDS to partners, if it has not been eliminated
in the previous steps.
• The remaining amount shall be paid to partners.
Liquidation - is the termination of business operations or the
winding up of affairs. Realization – conversion of non-cash Specific points in Lump-sum
assets of the partnership into cash through sale. Right of
offset – off-setting of partner’s accounts to capital.
1. All of the non-cash assets are realized.
Marshalling of assets – a form of elimination deficit on
partner’s capital through additional investment of the solvent 2. Gain or loss in realization are allocated directly to
partner. the partners’ capital.

Maximum loss absorption capacity – an amount of loss at 3. Actual liquidation expenses are allocated to the
which a partner can sustain without incurring a deficit. partners’ capital.

Cash priority program – a technique used to determine the 4. The deficit, if there is any, are eliminated.
priority payments among partners.
LIQUIDATION
5. Outside creditors are first to be paid in full.
Liquidation may be accomplished either through:
1. Lump-sum liquidation - where all non-cash assets
6. Liability to partners are second to be paid, if not
are realized in one single transaction or yet offset.
simultaneously. The proceeds shall be used to pay
the liabilities and the partners.
7. The balance shall be paid to the partners as
settlement of their interest
2. Installment liquidation – when the non-cash assets
of the partnership are realized in installments. For
every realization, the partnership shall pay off its Installment liquidation follows the same procedure as the
liabilities and its partners an amount that is not lump-sum liquidation, except that, in installment liquidation, it
prejudicial to the creditors. is required to compute for the amount safe to be distributed to
partners without affecting the interest of the outside creditors.
Steps in partnership liquidation Such amount is called the safe payments. The safe payments
may be computed as follows:
1.Realization phase – the step where the assets are
sold and realized and liquidation expenses are incurred. 1. By preparing a schedule of safe payments – a
 Selling/realizing of the non-cash assets at its document that shows how much is to be paid safely to
realizable values. partners. This schedule requires the same steps for
 Recognizing gain or loss on realization directly liquidation except for the following assumptions in the
in partner’s capital accounts. realization phase:
 Allocating the actual liquidation expenses
incurred.
2. Elimination of deficit – when after realization a partner’s  The unsold/unrealized non-cash asset are
capital had a deficit (debit balance), it shall assumed loss and to be allocated to partners’
be eliminated through the followings steps: capital
 Marshalling of assets – when there is a
solvent partner, a partner whose personal  .Future liquidation expenses are estimated and
assets exceeds personal liabilities, he is allocated to partners.
required to make additional investment. As
a rule, a general partner is liable up to the
extent of its properties.  The partnership may also withheld cash for future
 Right of offset – the payable to a partner may be unanticipated expenses which will also be
offset against the deficit balance of that
partner.
 allocated to the partners’ capital.
 Absorption – if after exhausting the steps
above there is still a deficit, it shall be
eliminated by absorption of the partners 2.By preparing a cash priority program.
that has credit balance.

3.Payment to creditors and partners – the following is the

priority of payment after the deficit in the previous step has
been eliminated.
• Payment to outside creditors or third party.
• Payment to inside creditors or the liabilities

BALIUAG UNIVERSITY │ THIRD YEAR (FIRST SEMESTER)

PAGE 1 OF 2
BALIUAG UNIVERSITY │ THIRD YEAR (FIRST SEMESTER)
PAGE 2 OF 2