Liquidation of a Partnership - difference between book...

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Liquidation of a Partnership The liquidation of a partnership terminates the business. It involves selling the assets of the firm, paying liabilities, and distributing any remaining assets to the partners. Liquidation may result from the sale of the business by mutual agreement of the partners, from the death of a partner, or from bankruptcy. In contrast to partnership dissolution, partnership liquidation ends both the legal and economic life of the entity. From an accounting standpoint, liquidation should be preceded by completing the accounting cycle for the final operating period. This includes preparing adjusting entries and financial statements. It also involves preparing closing entries and a post-closing trial balance. Thus, only balance sheet accounts should be open as the liquidation process begins. In liquidation, the sale of noncash assets for cash is called realization . Any
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Unformatted text preview: difference between book value and the cash proceeds is called the gain or loss on realization . To liquidate a partnership, it is necessary to: 1. Sell noncash assets for cash and recognize a gain or loss on realization. 2. Allocate gain/loss on realization to the partners based on their income ratios. 3. Pay partnership liabilities in cash. 4. Distribute remaining cash to partners on the basis of their capital balances . Each of the steps must be performed in sequence. Creditors must be paid before partners receive any cash distributions. Each step also must be recorded by an accounting entry. When a partnership is liquidated, all partners may have credit balances in their capital accounts. This situation is called no capital deficiency . Or, at least one partner’s capital account may have a debit balance. This situation is termed a capital deficiency ....
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