Lesson 23 - Partnership
Liquidation of a Partnership
Liquidation may result from the sale of the business by mutual agreement of the partners, from the death of a partner, or from bankruptcy. Liquidation ends both the legal and economic life of the entity.
Before the liquidation process begins, the accounting cycle for the partnership must be completed for the final operating period, even if the liquidation occurs prior to the partner’s year-end. This includes the preparation of adjusting entries, a trial balance, financial statements, closing entries, and a post-closing trial balance (i.e., the year-end steps in the accounting cycle) all permanent accounts (i.e., assets, contra-assets, liabilities and each partner’s capital) should be open when the liquidation process begins, as the temporary accounts (revenue, expenses and each partner’s drawings) would have been closed to zero..
To liquidate a partnership, it is necessary to:
1 Sell noncash assets for cash and recognize any gain or loss on realization.
2 Allocate any gain or loss on realization to the partners based on their profit and loss ratios.
3 Pay partnership liabilities in cash.
.4 Distribute remaining cash to the partners on the basis of their capital balances.
Each of the steps must be performed in sequence because creditors must be paid before partners receive any cash distributions. Each step must also be recorded by an accounting entry.
