CHAPTER- FOUR

ACCOUNTING FOR PARTNERSHIPS

1.1. Definition
Partnership is “an association of two or more persons to carry on a business as co-owners for
profit”. The owners of partnerships are called partners. Partnership form of business organization
is widely used by small businesses that wish to take advantage of the combined capital,
managerial talent, and experience of two or more persons.
1.2. Characteristics of Partnerships
Partnership has several characteristics that have accounting implications. These characteristics
are described as follows:
1. Partnerships have a limited life: Dissolution of partnership occurs whenever a partner ceases
to be a member of a firm for any reason, including withdrawals, bankruptcy, incapacity or
death. Similarly, admission of a new partner dissolves the old partnership. In case of
dissolution, a new partnership must be formed if the operations of the business are to be
continued without interruption.
2. A Partnership has unlimited liability: Each partner is individually liable to the creditors for
debt incurred by partnership. Thus, if the partner is insolvent, the partners must contribute
sufficient personal assets to settle the debts of the partnership.
3. Partners have co-ownership of partnership property: The property invested in a partnership
by a partner becomes the property of all the partners jointly. Upon dissolution of partnership
and distribution of assets, the partners’ claims against assets are measured by the amount of
the balance in their capital accounts.
4. Partners have the right to participate in earning of the partnership: Net income or losses
are distributed according to the partners’ agreements. In the absence of any agreement, all
partners share equally. If the agreement specifies profit distribution, but is silent as losses, the
losses are shared in the same manner as profits.
5. A Partnership is created by a voluntary contract containing all the necessary elements of
any enforceable contract: It is not necessary that this contract be in writing, nor even that its
terms specifically expressed. However, good business practice dictates that the contract be in
writing and should clearly express the intention of the partners.
6. Each partner has the mutual agency authority: One partner will represent the others within
the scope of the business. One partner will be held liable for the risk of another partner(s).
All the partners will share in the benefits that are fetched due to the decision of one partner.

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1.3. Partnership Formation/Recording Investments
In forming a partnership, the investments of each partner are recorded in separate entries. The
assets contributed by a partner are debited to the partnership asset accounts. If any liabilities are
assumed by the partnership, the partnership liability accounts are credited. The partner’s capital
account is credited for the net amount.

To illustrate, assume that Daniel and Petros, owners of competing hardware stores, agree to
combine their businesses in a partnership. Daniel agrees to contribute the following:

Cash ……………………………………………………. Br.7, 200

A/R ……………………………………………………… 16,300
Merchandise inventory …………………………………. 28,700
Allowance for doubtful accounts …………………………. 1,500
Accounts payable…………………………………………. 2, 600
Office equipment……………………………………… Br.2, 500
Store equipment ………………………………………… 5,400

The entry to record the assets and liabilities contributed by Daniel is as follows:
April 1 Cash--------------------------------7,200
Accounts Receivable-------------16,300
Merchandise Inventory----------28,700
Store Equipment-------------------5,400
Office Equipment-----------------2,500
Allowances for Doubtful Accounts--------------1,500
Accounts Payable-----------------------------------2,600
Daniel Capital---------------------------------------56,000
In the preceding entry, the non-cash assets are recorded at values agreed upon by the partners.
These values are normally based on current market values. As a result, the book value of the
assets contributed by the partners normally differs from that recorded by the new partnership.

1.4. Division of Net Income or Net Loss

As in the case of a sole proprietorship, the net income of a partnership may be said to include a
return for the services of the owners, for the capital invested, and for economic or pure profit.
Partners are not legally employees of the partnership, o nor are their capital contributions a loan.
If each of two partners is to contribute equal services and amounts of capital, an equal sharing in
partnership net income would be equitable. But, if one partner is to contribute a larger portion of

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capital than the other, provision for unequal capital contributions should be given recognition in
the agreement for divining the net income. Or, if the services of one partner are much more
valuable to the partnership than those of the other, provision for unequal service contributions
should be given recognition in their agreement.

To illustrate the division of net income and the accounting for this division, two possible
agreements are to be considered. It should be noted that division of their net income or the net
loss among the partners in exact accordance with their partnership agreement is of the utmost
importance. If the agreement is silent on the mater, the law provides that all partners shire
equally, regardless of differences in amount of capital contributed, of special skills possess, or of
time devoted to the business. The partners may, however, make any agreement they wish in
regard to the division of net income and net losses.

1.4.1. Income Division Recognizing Services of Partners

As a means of recognizing differences in ability and in amount of time devoted to the business,
articles of partnership often provide for the division of a portion of net income to the partners in
the form of a salary allowances. The articles may also provide for withdrawals of cash by the
partners in lieu of salary payments. A clear distinction must therefore be made between the
division of net income, which is credited to the capital accounts, and payments to the partners,
which are debited d to the drawing account.

As a basis for illustration, assume that the articles of partnership of Helen and Rahel provide for
monthly salary allowances of Br.2, 500 and Br. 2,000 respective, with the balance of the net
income to be divided equally, and that the net income for the year is Br. 75,000. A report of the
division of net income may be presented as a separate statement accompanying the balance sheet
and the income statement, or it may be added at the bottom of the income statement. If the latter
procedure is used, the lower part of the income statement would appear as follows:

Net Income ……………………………………………………… Br.75, 000

Division of net income: Helen Rahel Total
Salary allowance….............. Br. 30,000 Br. 24,000 Br. 54,000
Remaining income………. 10,500 10,500 21,000
Net Income………………………Br. 40,500 Br. 34,500 Br. 75,000
The division of net income is recorded as a closing entry, regardless of whether the partners
actually withdraw the amounts of their salary allowances. The entry for the division of net
income is as follows:

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Dec. 31 Income Summary---------------------75,000
Helen, Capital--------------------------------------40,500
Rahel, Capital-------------------------------------- 34,500
If Helen and Rahel had withdrawn their salary allowances monthly, the withdrawals would have
accumulated as debits in the drawing accounts during the year. At the end of the year, the debit
balance of Br.30, 000 and Br.24, 000 in their drawing account would be transferred to their
respective capital accounts.

1.4.2. Income Division Recognizing Services of Partners and Investment

Partners may agree that the most equitable plan of income sharing is to allow salaries based on
the services rendered and also to allow interest on the capital investments. The remainder is then
shared in an arbitrary ratio.
To illustrate assume that Helen and Rahel:
1. Are allowed monthly salaries of Br. 2500 and Br. 2,000 respectively.
2. Are allowed interest at 12% on capital balances at January 1 of the current fiscal year,
which amounted to Br. 80,000and Br. 60,000 respectively and,
3. Divide the remainder of net income equally. The division of Br.75, 000 net incomes for
the year could then be reported on the income statement as follows.
Net income----------------------------------------------------------------------------------Br. 75,000
Division of net income Helen Rahel Total
Salary allowance---------------------- Br. 30,000 Br. 24,000 Br. 54,000
Interest allowance------------------------- 9,600 7,200 16,800
Remaining income------------------------ 2,100 2,100 4,200

Net Income----------------------------------- Br. 41,700 Br. 33,300 Br. 75,000

On the basis of the information in the foregoing income statement, the entry to close the income
summary account would be record as follows;

Dec31: Income summary-------------------75,000

Helen, capital-------------------------------------41,700
Rahel, capital--------------------------------------33,300
1.4.3. Income Division –Allowances Exceed Net Income:
In the illustrations presented so far, the net income has exceeded the sum of the allowances for
salary and interest. If the net income is less than the total of the special allowances, the
remaining balance will be negative figure that must be divided among the partners as though it

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were a net loss. The effect of this situation may be illustrated by assuming the same salary and
allowances as in the preceding illustration, but changing the amount of net income to Br.50, 000.
The salary and interest allowances to Helen total Br. 39,600 and the comparable figure for Rahel
is Br.31, 200. The sum of these amounts, Br. 70,800, exceeds the net income of Br. 50,000 by
Br.20, 800. It is therefore necessary to deduct Br. 10,400 (1/2 of Br. 20,800) from each partner’s
share to arrive at the net income as follows:

Net Income-------------------------------------------------------------------------Br. 50,000

Division of Income Helen Rahel Total
Salary allowance-------------------- Br. 30,000 Br. 24,000 Br. 54,000
Interest allowance------------------ 9,600 7,200 16,800
Total------------------------------------- Br. 39,600 Br. 31,200 Br. 70,800
Less: Excess of allowances over income- 10,400 10,400 20,800
[

Net Income------------------------------- Br. 29,200 Br. 20,800 Br. 50,000

In closing Income summary at the end of the year Br. 29,200 would be credited to Helen, capital,
and Br. 20,800 would be credited to Rahel, capital.
Partner Admission and Withdrawal
Many partnerships provide for admitting new partners and for partner withdrawals by amending
the existing partnership agreement. In this way, the company may continue operating without
having to form a new partnership and prepare a new partnership agreement.

Admission of a New Partner

A new partner may be admitted to a partnership by either of the following ways:

1. Purchasing an interest from one or more of the existing partners
2. Contributing assets to the partnership

When a new partner is admitted by purchasing an interest from one or more of the existing
partners, the total assets and the total owners’ equity of the partnership are not affected. The

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capital (equity) of the new partner is recorded by transferring capital (equity) from the existing
partners.

When a new partner is admitted by contributing assets to the partnership, the total assets and the
total owners’ equity of the partnership are increased. The capital (equity) of the new partner is
recorded as the amount of assets contributed to the partnership by the new partner.

1. Purchasing an Interest from Existing Partners

When a new partner is admitted by purchasing an interest from one or more of the existing
partners, the transaction is between the new and existing partners acting as individuals. The
admission of the new partner is recorded by transferring owners’ equity amounts from the capital
accounts of the selling partners to the capital account of the new partner.

Example: Assume that Tomas and Yoseph agreed to sell one fifth of their interest to John. On
June 1. At the time of admission of John, each partner has a Br. 50,000 capital balances and the
partnership has net assets of Br.100, 000. Assume that John paid Br.10,000 each to the selling
partners for 1/5 interest acquired. This transaction is between Tomas, Yoseph, and John.

The only entry required by TY partnership is to record the transfer of capital (equity) from
Tomas and Yoseph to John, as shown below.

June 1: Tomas, Capital----------------------------10,000

Yoseph, Capital----------------------------10,000
John, Capital------------------------------------------------20,000
After John is admitted to TY partnership, the total owners’ equity is still Br.100, 000. John has a
one-fifth (20%) interest and a capital balance of Br.20, 000. Tomas and Yoseph each own two-
fifths (40%) interest and have capital balances of Br. 40,000 each.

2. Contributing/Investing Assets to a Partnership

When a new partner is admitted by contributing assets to the partnership, the total assets and the
total owners’ equity of the partnership are increased. This is because the transaction is between
the new partner and the partnership.

To illustrate, assume that instead of purchasing a one-fifth ownership in TY partnership directly

from Tomas and Yoseph, John contributes Br. 20,000 cash to TY partnership for ownership
equity of Br. 20,000. The entry to record this transaction is as follows:

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 June 1: Cash-----------------------------20,000
John, Capital--------------------------------20,000
After the admission of John, the net assets and total owners’ equity of the partnership increase to
Br. 120,000, of which John has a Br. 20,000 interest. In contrast, in the prior example, the net
assets and total owners’ equity of the partnership did not change from Br. 100,000.

A. Partner Bonuses
A new partner may pay existing partners a bonus to join a partnership. In other cases, existing
partners may pay a new partner a bonus to join the partnership.

Bonuses are usually paid because of higher than normal profits the new or existing partners are
expected to contribute in the future. For example, a new partner may bring special qualities or
skills to the partnership. Celebrities such as actors, musicians, or sports figures often provide
name recognition that is expected to increase a partnership’s profits.

Existing partners receive a bonus when the ownership interest received by the new partner is
less than the amount paid. In contrast, the new partner receives a bonus when the ownership
interest received by the new partner is greater than the amount paid.

To illustrate, assume that on March 1 the partnership of Mesfin and Hiwot is considering a new
partner, Alex. After the assets of the partnership have been adjusted to current market values, the
capital balances of Mesfin and Hiwot are as follows:

Mesfin, Capital …………………………………. Br. 20,000

Hiwot, Capital………………………………………. 24,000
Total owners’ equity before admitting Alex…………. $ 44,000

Mesfin and Hiwot agree to admit Alex to the partnership for Br.31, 000. In return, Alex will
receive one-third equity in the partnership and will share equally with Mesfin and Hiwot in
partnership income or losses. In this case, Alex is paying Mesfin and Hiwot Br. 6,000 bonus to
join the partnership, computed as follows:

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 Mesfin, Capital …………………………………. Br. 20,000
Hiwot, Capital…………………………………….. 24,000
Alex’s contribution ………………………………. 31,000
Total owners’ equity after admitting Alex……….Br. 75,000
Alex’s equity interest after admission ………………… x 1/3
Alex, Capital……………………………………….. 25,000
Alex’s contribution …………………..Br. 31,000
Alex , Capital ………………………………25,000
Bonus paid to Mesfin and Hiwot ……….Br. 6,000
The Br. 6,000 bonus paid by Alex increases Mesfins’s and Hiwots’s capital accounts. It is
distributed to the capital accounts of Mesfin and Hiwot according to their income sharing ratio.
Assuming that Mesfin and Hiwot share profits and losses equally, the entry to record the
admission of Alex to the partnership is as follows:

Mar. 1: Cash------------------------------------------31,000
Alex, Capital-------------------------------------------------25,000
Mesfin, Capital-----------------------------------------------3,000
Hiwot, Capital------------------------------------------------3,000
Existing partners may agree to pay the new partner a bonus to join a partnership.
Example: assume that after adjusting assets to market values, the capital balances of Jember and
Sisay are as follows:
Jember, Capital …………………………………Br. 80,000
Sisay, Capital……………………………………….. 40,000
Total owners’ equity before admitting Ellen ……….120, 000
Jember and Sisay agree to admit Ellen to the partnership on June 1 for an investment of Br.
30,000. In return, Ellen will receive a one-fourth equity interest in the partnership and will share
in one-fourth of the profits and losses. In this case, Jember and Sisay are paying Ellen a Br. 7,500
bonus to join the partnership, computed as follows:

Jember, Capital ……………………………. Br. 80,000

Sisay, Capital ……………………………………. 40,000
Ellen’s contribution ……………………………….30,000
Total owners’ equity after admitting Ellen….. Br. 150,000

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 Ellen’s equity interest after admission …………….. x1/4
Ellen , Capital ……………………………… Br. 37,500
Ellen, Capital ……………………...Br. 37,500
Ellen’s contribution…………………… 30,000
Bonus paid to Ellen…………………..Br. 7,500
The Br. 7,500 bonus paid to Ellen decreases Jember’s and Sisay’s capital accounts. It is
distributed to the capital accounts of Jember and Sisay according to their income-sharing ratio.

Assuming that the income-sharing ratio of Jember and Sisay was 2:1 before the admission of
Ellen, the entry to record the admission of Ellen to the partnership is as follows:

June 1: Cash-------------------------------30,000
Jember, Capital-------------------5,000
Sisay, Capital----------------------2,500
Ellen, Capital--------------------------37,500
Liquidation of Partnerships
When a partnership goes out of business, it sells the assets, pays the creditors, and distributes the
remaining cash or other assets to the partners. This winding-up process is called the liquidation
of the partnership. Although liquidating refers to the payment of liabilities, it includes the entire
winding-up process. When the partnership goes out of business and the normal operations are
discontinued, the accounts should be adjusted and closed. The only accounts remaining open will
be the asset, contra asset, liability, and owners’ equity accounts.

The sale of the assets is called realization. As cash is realized, it is applied first to the payment
of the claims of creditors. After all liabilities have been paid, the remaining cash is distributed to
the partners, based on their ownership equities as indicated by their capital account.

The steps in the liquidation process are as follows:

Step 1: Sell the partnership non cash assets. This step is called realization.
Step 2: Distribute any gains or losses from realization to the partners based on their
income-sharing ratio.
Step 3: Pay the claims of creditors using the cash from step 1realization.
Step 4: Distribute the remaining cash to the partners based on the balances in their capital
accounts.

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Example: Assume that Farley, Greene, and Hall share income and losses in a ratio of 5:3:2
(5/10, 3/10, 2/10). On April 9, after discontinuing the ordinary business operations of their
partnership and closing the accounts, the balance sheet of the partnership shows the following
balance.
Farley, Greene, and Hall Partnership
Balance sheet
April 9, 2000
Assets Liabilities and Owner’s equity
Cash Br. 11,000 Liabilities……………. Br. 9,000
Non-cash assets………64,000 Farley, Capital ………….. 22,000
Total ……………….. 75,000 Greene, Capital ………….. 22,000
Hall, Capital …………… 22,000
Total ………………… Br. 75,000
Based on these facts, accounting for the liquidation of the partnership will be illustrated using
three different selling prices for the noncash assets. For the sake of brevity, it will be assumed
for each selling price that all noncash assets are disposed of in a single transaction, and that all
liabilities are paid at one time. In addition, Noncash Asset and Liabilities will be used as account
titles in place of the various asset, contra asset, and liability accounts that in actual practice
would be affected by the transactions.
Gain on Realization:
Assume that Farley, Green, and Hall sell all noncash assets for Br. 72,000. Thus, a gain of Br.
8,000 (Br. 72,000 - Br. 64,000) is realized. The partnership is liquidated during April as follows:
Step 1: Sale of non-cash assets: Br. 72,000 is realized from sale of all the noncash assets.
Step 2: Division of gain: The gain of Br. 8,000 is distributed to Farley, Green, and Hall in the
income-sharing ratio of 5:3:2. Thus, the partner capital accounts are credited as follows:
Farley………………… Br. 4,000 (Br. 8,000 x50%)
Green ………………….. 2,400 (Br. 8,000 x30%)
Hall……………………… 1,600 (Br. 8,000 x20%)
Step 3: Payment of liabilities: Creditors are paid Br. 9,000.
Step 4: Distribution of cash to partners: The remaining cash of Br. 74,000 is distributed to the
partners according to their capital balances as follows:
Farley ……………………………………… Br. 26,000
Green……………………………………………24,400
HaIl……………………………………………. 23,600
A statement of partnership liquidation, which summarizes the liquidation process, follows.

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 Farley, Greene, and Hall
Statement of Partnership Liquidation
For Period April 10 – 30, 19 --
Particulars Cash Non-cash Liabilities Farley Greene Hall
Assets (50%) (30%) (20%)
Balance before Br. 11,000 Br. 64,000 Br. 9,000 Br. 22,000 Br. 22,000 Br. 22,000
realization
Sale of non- + 72,000 - 64,000 -- + 4,000 + 2,400 + 1,600
cash assets and
division of gain
Balance after Br. 83,000 0 Br. 9,000 Br. 26,000 Br. 24,400 Br. 23,600
realization….
Payment of - 9,000 -- - 9,000 --- --- ---
liabilities
Balance after Br. 74,000 0 0 Br. 26,000 Br. 24,400 Br. 23,600
payment of
liabilities
Distribution of - 74,000 -- --- - 26,000 - 24,400 - 23,600
cash to Partners
Final balances 0 0 0 0 0 0
The entries to record the steps in the liquidating process are as follows:

Sale of non-cash assets (Step 1)

Cash----------------------------------------------------72,000
Noncash Asset-------------------------------------------------- 64,000
Loss and Gain on Realization------------------------------------ 8,000
Division of gain (Step 2)
Gain on Realization---------------------------------8,000
Farley, Capital-------------------------------------------------4,000
Greene, Capital------------------------------------------------ 2,400
Hall, Capital-----------------------------------------------------1,600
Payment of liabilities (Step3)
Liabilities--------------------------------------9,000
Cash-------------------------------------------------9,000
Distribution of cash to Partners (Step 4)

Farley, Capital-------------------------------26,000
Greene, Capital------------------------------24,400
Hall, Capital----------------------------------23,600
Cash-------------------------------------------------------74,000
Loss on Realization, No Capital Deficiencies

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Assume that Farley, Green, and Hall sell all noncash assets for Br. 44,000. Thus, a loss of Br.
20,000 (Br. 64,000 -Br. 44,000) is realized. The liquidation of the partnership is as follows:

Step 1: Sale of assets: Br. 44,000 is realized from the sale of all the noncash assets.
Step 2: Division of loss: The loss of Br. 20,000 is distributed to Farley, Green, and Hall in the
income-sharing ratio of 5:3:2. Thus, the partner capital accounts are debited as follows:
Farley ………………… Br. 10,000 (Br. 20,000 x 50%)
Green ……………………… 6,000 (Br. 20,000 x30%)
Hall ……………………… 4,000 (Br. 20,000 x 20%)
Step 3: Payment of liabilities: Creditors are paid Br. 9,000.
Step 4: Distribution of cash to partners: The remaining cash of Br. 46,000 is distributed to the
Partners according to their capital balance as follows:
Farley………………………….. Br. 12,000
Green ………………………………. 16,000
Hall ………………………………. 18,000
The steps in liquidating the partnership are summarized in the statement of partnership
Liquidation as follows:

Farley, Greene, and Hall

Statement of Partnership Liquidation
For Period April 10 – 30, 19 --
Particulars Cash Noncash Liabilities Farley Greene Hall
Assets (50%) (30%) (20%)
Balance before Br. 11,000 Br. 64,000 Br. 9,000 Br. 22,000 Br. 22,000 Br. 22,000
realization
Sale of noncash + 44,000 - 64,000 -- - 10,000 -6,000 -4,000
assets and
division of gain
Balance after Br. 55,000 0 Br. 9,000 Br. 12,000 Br. 16,000 Br. 18,000
realization….
Payment of - 9,000 -- - 9,000 --- --- ---
liabilities
Balance after Br. 46,000 0 0 Br. 12,000 Br. 16,000 Br. 18,000
payment of
liabilities
Distribution of - 46,000 -- --- - 12,000 - 16,000 - 18,000
cash to Partners
Final balances 0 0 0 0 0 0
The entries to record the liquidation are as follows:
Sale of non-cash assets (Step 1)
Cash---------------------------------------------44,000
Loss on Realization-------------------------- 20,000
Non-cash Assets------------------------------------------ 64,000
Division of loss (Step 2)
Farley, Capital------------------------------------10,000
Greene, Capital----------------------------------- 6,000

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 Hall, Capital-------------------------------------- 4,000
Loss on Realization---------------------------------------------20,000
Payment of liabilities (Step3)
Liabilities-------------------------------------9,000
Cash------------------------------------------------------9,000
Distribution of cash to Partners (Step 4)
Farley, Capital------------------------------------------12,000
Greene, Capital --------------------------------------- 16,000
Hall, Capital------------------------------------------- 18,000
Cash------------------------------------------------------------ 46,000
Loss on Realization, Capital Deficiency

In the preceding illustration, the capital account of each partner was more than sufficient to
absorb the appropriate share of the loss from realization. The partners shared in the distribution
of cash to the extent of the remaining credit balance in their respective capital accounts.
However, the share of the loss chargeable to a partner may be such that it exceeds that partner’s
ownership equity. The resulting debit balance in the capital account, called a deficiency, is a
claim of the partnership against the partner. Pending collection from the deficient partner, the
partnership cash will not be sufficient to pay the other partners in full. In such cases, the
available cash should be distributed in such a manner that, if the claim against the deficient
partner cannot be collected, each of the remaining capital balances will be sufficient to absorb
the appropriate share of the deficiency.

Example: assume that Farley, Greene, and Hall sell all of the noncash assets for Br.10, 000,
incurring a loss of Br.54, 000 (Br. 64,000 - Br.10, 000). It is readily apparent that the part of the
loss allocable to Farley, Br. 27,000 (50% of Br. 54,000), exceeds the Br.22, 000 balance in
Farley’s capital account. This Br.5, 000 deficiency of Farley’s is a potential deficiency to
Greene and Hall and must be tentatively divided between them in their income-sharing ratio of
3:2:1 (3/5 and 2/5). The capital balances remaining represent their claims on the partnership
cash. The computations may be summarized in the following manner.

Farley Green Hall Total

(50%) (30%) (20%)
Balances before realization Br. 22,000 22, 000 22,000 Br. 66,000
Division of loss on realization - 27,000 -16,200 -10,800 - 54,000
Balances after realization - 5,000 5,800 11,200 12,000
Division of potential additional
Deficiency…………………. 5,000 - 3,000 -2,000 ---

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Claims to partnership cash 0 2,800 9,200 12,000

The various transactions that have occurred thus far in the liquidation are summarized in the
following statement:

Farley, Greene, and Hall

Statement of Partnership Liquidation
For Period April 10 – 30, 19
Particulars Cash Non- Liabilities Farley Greene Hall
cash (50%) (30%) (20%)
Assets
Balance before Br. 11,000 Br. 64,000 Br. 9,000 Br. 22,000 Br. 22,000 Br. 22,000
realization
Sale of noncash + 10,000 - 64,000 -- - 27,000 - 16,200 - 10,800
assets and division of
gain ……..
Balance after Br. 21,000 0 Br. 9,000 Br.5,000(Dr) Br. 5,800 Br. 11,200
realization….
Payment of liabilities - 9,000 -- - 9,000 --- --- ---
Balance after Br. 12,000 0 0 Br.5,000(Dr) Br. 5,800 Br. 11,200
payment of liabilities
Distribution of cash - 12,000 -- --- --- - 2,800 - 9,200
to Partners
Final balances 0 0 0 Br.5,000(Dr) Br. 3,000 Br. 2,000
The entries to record the liquidation are as follows:
Sale of non-cash assets (Step 1)

Cash-------------------------------------------------10,000
Loss on Realization--------------------------------54,000
Non-cash Assets--------------------------------------------- 64,000
Division of loss (Step 2)

Farley, Capital------------------------------------------ 27,000

Greene, Capital------------------------------------------16,200
Hall, Capital--------------------------------------------- 10,800
Loss on Realization------------------------------------------------------54,000
Payment of liabilities (Step3)
Liabilities---------------------------------------- 9,000
Cash-------------------------------------------------- 9,000
Distribution of cash to Partners (Step 4)
Greene, Capital-----------------------------------2,800
Hall, Capital---------------------------------------9,200
Cash--------------------------------------------------------------12,000

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The affairs of the partnership are not completely wound up until the claims among the partners
are settled. Payments to the firm by the deficient partners are credited to that partner’s capital
account. Any uncollectible deficiency becomes a loss to the partnership and is written off
against the capital balances of the remaining partners. Finally, the cash received from the
deficient partner is distributed to the other partners according to their ownership claims.
To continue with the preceding illustration, the capital balances remaining after the Br. 12,000
cash distributions are as follows. Farley, Br. 5,000 debit, Greene, Br. 3,000 credit, Hall Br.
2,000 credit. The various steps in the final settlement and the entries for the partnership under
three different assumptions as to the final settlement are illustrated as follows:

Assumption1: Farley pays Br.5, 000 of the deficiency to the partnership.

Farley, Greene, and Hall
Statement of Partnership Liquidation
For Period April 10 – 30, 19 --
Particulars Cash Non-cash Liabilities Farley Greene Hall
Assets (50%) (30%) (20%)
Balances 0 0 0 Br.5,000(Dr) Br. 3,000 Br. 2,000
Receipt of + Br. 5,000 --- --- + 5,000 --- ---
deficiency
Balances Br. 5,000 0 0 0 Br. 3,000 Br. 2,000
Distribution of - 5,000 --- --- --- - 3,000 - 2,000
cash to Partners
Final balances 0 0 0 0 0 0
The entries to record the final settlement are as follows:

Receipt of deficiency

Cash-----------------------------------------5,000
Farley, Capital-----------------------------------------5,000

Distribution of cash to Partners

Greene, Capital -----------------------3,000
Hall, Capital---------------------------2,000
Cash--------------------------------------------------5,000
After the two transactions above are completed, all of the partnership’s assets will have been
distributed, the liabilities paid, and the partner’s capital balances reduced to zero.

Assumption2: Farley pays Br. 3,000 of the deficiency to the partnership and the remaining is to
considered to be uncollectible (Br.2, 000).

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The receipt of the Br. 3,000 paid by Farley to the partnership, the division of the Br. 2,000loss,
and the distribution of the Br. 3,000 to the partners are indicated in the following statement of
partnership liquidation.

. Farley, Greene, and Hall

Statement of Partnership Liquidation
For Period April 10 – 30, 19 --
Particulars Cash Non-cash Liabilitie Farley Greene Hall
Assets s (50%) (30%) (20%)
Balances 0 0 0 Br.5,000(Dr) Br. 3,000 Br. 2,000
Receipt of part of + Br. 3,000 --- --- + 3,000 --- ---
deficiency
Balances Br. 3,000 0 0 2,000 (Dr) Br. 3,000 Br. 2,000
Division of loss --- 0 0 + 2,000 - 1,200 - 800
Balances 3,000 0 0 0 1,800 1,200
Distribution of - 3,000 --- --- --- - 1,800 - 1,200
cash to Partners
Final balances 0 0 0 0 0 0

It should be noted that the Br. 2,000 loss was divided between Green and Hall in their income
sharing ration of 3:2 (3/5 and 2/5). The entries to record the final settlement are as follows.

Receipt of part of deficiency

Cash ---------------------------------3,000
Farley, Capital----------------------------------------3,000
Division of loss
Greene, Capital--------------------1,200
Hall, Capital------------------------- 800
Farley, Capital---------------------------------2,000
Distribution of cash to Partners

Greene, Capital----------------------------1,800
Hall, Capital--------------------------------1,200
Cash---------------------------------------------------- 3,000
After the three transactions above are completed, all of the partnership’s assets will have been
distributed, the liabilities paid, and the partners’ capital balances reduced to zero.

Assumption 3: Farley is unable to pay any part of the $ 5,000 deficiency (Br. 5,000 loss)

The division of the Br.5, 000 losses is indicated in the following statement of partnership
liquidation.

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 Farley, Greene, and Hall
Statement of Partnership Liquidation
For Period April 10 – 30, 19 --
Particulars Cash Non-cash Liabilities Farley Greene Hall
Assets (50%) (30%) (20%)
Balances 0 0 0 Br.5,000(Dr) Br. 3,000 Br. 2,000
Division of loss --- --- --- +5,000 - 3,000 - 2,000
Final balances 0 0 0 0 0 0

The Br. 5,000 loss was divided between Greene, and Hall in their income sharing ratio 3:2 (3/5
and 2/5). The following entry, which reduces the partnership account, balances to zero, records
this final step in the liquidation.
Division of loss
Greene, Capital------------------------------------3,000
Hall, Capital--------------------------------------- 2,000
Farley, Capital-----------------------------------------------5,000
It should be noted that the type of error most likely to occur in the liquidation of a partnership is
an improper distribution of cash to the partners. Errors of this type result from confusing the
distribution of cash with the division of gains and losses on realization.

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