Accounting for the Liquidation of a Partnership
Accounting for the liquidation of a partnership involves four steps as follows:
- Sell non cash assets for cash.
- Allocate any gain or loss on the sale of non cash assets to each partner using the income ratio.
- Pay any liabilities of the partnership.
- 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:
| 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.
| 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:
| 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:
| 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.
| 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:
| 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.
| 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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.