However, Accounting Procedures May Vary On The Situation at Hand Due To Some Accounts Being Present or Absent (E.g. Loan Payable To Partner A)

Liquidation
It is the process of winding up the affairs of the business towards termination.
Terminologies in Partnership Liquidation:

1. Realization – the process of selling non-cash assets
2. Gain or Loss on Realization – difference between the cash proceeds and the book
value of the asset sold.
a. If cash proceeds > book value = gain
b. If cash proceeds < book value = loss
c. If cash proceeds = book value = no gain nor loss
3. Capital deficiency – results when the share of a partner in the partnership losses
(whether in from operating activities or selling of assets) is higher than his/her capital
balance. Hence, the partner’s capital account is now a debit balance.
4. Right of Offset – legal right to apply a part or all amount (depending on how much
is the deficiency) owing to a partner against his/her capital deficiency.
5. Partner’s interest – represents the sum of the loan payable to the partner and
his/her capital account.
6. Partner’s free interest - represents partner’s interest that can be paid out of the
available cash of the partnership (possible only after the partnership creditors have
been paid)
7. Partner’s restricted interest – represents interest that cannot be paid out to the
partners due to inadequacy of cash when there is: (a) unpaid capital deficiency; (b)
unsold properties; (c) cash is restricted for contingent expenses
8. Solvent partners – partners with sufficient remaining personal assets after
deducting or liquidating their personal liabilities
9. Theoretical loss – represents possible or potential future loss of the partnership
arising from: (a) unsold properties; (b) deficiency of partners; (c) future liquidation
expenses. Tis
Accounting procedures in Partnership Liquidation:

Generally, it will take three steps to accomplish a liquidation of partnership:
1. Realization of all non-cash assets into cash with the gain or loss being allocated
among the partners with accordance to their profit/loss ratio.
2. Paying partnership liabilities and liquidation expenses.
3. Distributing the remaining cash in payment of the partners’ interest (for loan and
capital balances including profit share)
However, accounting procedures may vary on the situation at hand due to some
accounts being present or absent (e.g. loan payable to partner A)
A more justifiable accounting process is shown below:

1. The books of the entity must be adjusted and closed. A statement of financial
position should be prepared.
2. Non-cash assets must be sold and be converted into cash with the gain or loss
being allocated among the partners with accordance to their p/l ratio.
3. Payment of liabilities or claims owing to outside creditors (e.g. accounts payable,
etc.).
4. If there is a deficient capital, eliminate it by:
a. Applying right of offset if a respective loan payable is present to the deficient
partner.
b. An additional investment may be done if the deficient partner is solvent
(investment must be to the extent of his excess in personal asset).
c. Absorbing the loss of the deficient partner (if insolvent, limited, or can’t invest
more) by the remaining partners with accordance to the p/l ration without the
deficient partner
5. Payment of loan receivable, if any.
6. Payment of partners’ interest for remaining loan balance and capital balance
Legal Provision under Partnership Liquidation

1. Under Article 1839 of the New Civil code, the liabilities shall be paid in the following
order:
a. Those owing to creditors other than partners (outside creditors)
b. Those owing to partners other than capital and profit (inside creditors or partners)
c. Those owing to partners in respect of capital (capital balances of the partner/s)
d. Those owing in to partners in respect of profits
2. Under Article 1839, if a partner has become insolvent or his/her estate is insolvent,
the claims against his separate property shall be in the following order:
a. Those owing to separate creditors (personal creditors)
b. Those owing to partnership creditors
c. Those owing to partners by way of contributions
3. Partnership creditors have priority over partnership properties; in the same manner
that the partners’ personal creditors have a priority over partners’ personal
properties.
4. If the partnership is insolvent, all partners (including industrial partners) shall be
liable pro rata with all their property and after all the partnership assets have been
exhausted (Art. 1816).
5. Under Article 1858, a limited partner is liable to the extent of his/her contribution to
the partnership.
6. A deficient partner may apply the right of offset to a loan balance owing him/her by
the partnership.
Types of Liquidation:
1. Simple Liquidation – this is the process where all non-cash assets are sold before
any cash is disbursed to the partnership creditors and partners. It is also known as
lump-sum liquidation.
2. Installment Liquidation – this is the process where non-cash assets are sold in
installments so that the cash is disbursed to all equity interest as the cash becomes
available.
Installment Liquidation accounting process:

1. Record the sale of non-cash assets and the distribution of gain or loss on realization.
2. Record liquidation expenses by decreasing cash and the capital balances of the
partner based on the p/l ratio.
3. Record the payment of liabilities. If liabilities are not to be paid in full, an equal
amount of cash should be set aside for the unpaid debts and future liquidation
expenses – this should not be distributed to the partners.
4. If there is cash available to be distributed, prepare a schedule of safe payments or a
cash priority program.
5. Repeat the steps aforementioned until the final sale when the rules for liquidation by
total should then be observed.
Schedule of Safe Payments procedure:

1. Get the total partners’ interest by adding (deducting) the loan payable (loan
receivable) to the capital balances before distribution.
2. Deduct any restricted interest to the total partners’ interest.
3. Absorb any capital deficiency in accordance to the p/l ratio without the deficient
partner.
Cash Priority program procedure:

1. Get the total partners’ interest by adding (deducting) the loan payable (loan
receivable) to the capital balances before liquidation.
2. Divide it by their p/l ratio to get their Loss Absorption Ability (LAA)
3. The partner that has the highest LAA has the first priority to be paid when cash
becomes available. To get the amount, subtract the highest LAA to the next highest
LAA and the difference is multiplied by the partner’s p/l ratio.
4. If ever the business has 3 or more partners, repeat step 3 until the LAA of the
partners becomes equal.

However, Accounting Procedures May Vary On The Situation at Hand Due To Some Accounts Being Present or Absent (E.g. Loan Payable To Partner A)

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Liquidation

It is the process of winding up the affairs of the business towards termination.

Terminologies in Partnership Liquidation:

Accounting procedures in Partnership Liquidation:

A more justifiable accounting process is shown below:

Legal Provision under Partnership Liquidation

Installment Liquidation accounting process:

Schedule of Safe Payments procedure:

Cash Priority program procedure:

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