# Liquidation of a Partnership

## Accounting for the Liquidation of a Partnership

Accounting for the liquidation of a partnership involves four steps as follows:

1. Sell non cash assets for cash.
2. Allocate any gain or loss on the sale of non cash assets to each partner using the income ratio.
3. Pay any liabilities of the partnership.
4. Distribute the remaining cash to the partners using the capital ratio.

As an example, suppose a partnership has two partners, partner A and partner B who share net income and net losses equally (income ratio 1:1), and have capital balances of 50,000 and 60,000 respectively.

The partnership has cash of 20,000, non cash assets of 140,000, liabilities of 50,000. The partnership is liquidated and non cash assets are sold for 100,000.

### Step 1: Sell non cash assets for cash

The non cash assets of 140,000 are sold for 100,000 making a loss on sale of 40,000.

The double entry bookkeeping journal to record the loss on sale of non cash assets would be as follows:

Liquidation of a Partnership – Sales of non cash assets journal
Account Debit Credit
Cash 100,000
Non cash assets 140,000
Loss on sale 40,000
Total 140,000 140,000

### Step 2: Allocate loss on the sale to each partner using the income ratio

The loss on sale of the non cash assets is then allocated to each partner using the income sharing ratio.

Liquidation of a Partnership – Allocation of Net Loss on Sale
Partner A Partner B Total
Opening balances 50,000 60,000 110,000
Loss on sale -20,000 -20,000 -40,000
Total 30,000 40,000 70,000

The double entry bookkeeping journal to record the allocation of the loss to each partner would be as follows:

Liquidation of a Partnership – Allocation of loss on sale journal
Account Debit Credit
Capital – A 20,000
Capital – B 20,000
Loss on sale 40,000
Total 40,000 40,000

### Step 3: Pay any liabilities of the partnership

After the sale of the non cash assets, the cash available to the partnership is the opening balance of 20,000 plus the cash from the disposal of the non cash assets of 100,000 which equals a total of 120,000. This cash is used to settle the liabilities of 50,000 leaving remaining cash of 120,000 – 50,000 = 70,000 to be distributed.

The double entry bookkeeping journal to record the payment of the liabilities would be as follows:

Liquidation of a Partnership – Payment of liabilities journal
Account Debit Credit
Liabilities 50,000
Cash 50,000
Total 50,000 50,000

### Step 4: Distribute the remaining cash to the partners using the capital ratio.

The remaining cash of 70,000 is paid out to the partners using the capital ratio.

Liquidation of a Partnership – Distribution of remaining cash
Partner A Partner B Total
Opening balances 30,000 40,000 70,000
Remaining cash -30,000 -40,000 -70,000
Total 0 0 0

The double entry bookkeeping journal to record the distribution of the remaining cash to each partner would be as follows:

Liquidation of a Partnership – Distribution of remaining cash journal
Account Debit Credit
Capital – A 30,000
Capital – B 40,000
Cash 70,000
Total 70,000 70,000

The four steps are summarized in the following allocation table.

Liquidation of a Partnership – Summary Allocation
Cash Non Cash Liabilities Partner A Partner B
Opening balances 20,000 140,000 -50,000 50,000 60,000
Sell non cash 100,000 -140,000 -20,000 -20,000
Pay liabilities -50,000 50,000 0
Remaining cash -70,000 -30,000 -40,000
Total 0 0 0 0 0

After the distribution of the remaining cash and the posting of the journals, the partnership has zero assets and liabilities and can be liquidated.

Liquidation of a Partnership May 23rd, 2018