CHAPTER - 5

ACCONTING FOR PARTNERSHIP

Definition: - Partnership is a voluntary association of two or more persons to carry on a Business as co-
owners for profit.

A partnership is formed by bringing or combining different people’s capital, talent &experience. Business
opportunities that can’t be conducted alone (closed to the individual) may open up to a p/ship.
The p/ship form of business is common to professional firms like:
 CPA firms
 Law firms
 Medical &dental practices, as well as
 Other small manufacturing, retail and services businesses

Formation of partnership
A partnership is established & carries its operation based on article of partnership, which can be present in a
written form, oral, or implied. To prevent future misunderstandings it is preferable to be written. The article
of partnership refers to the written agreement between the partners. It contains information such as:
 Name, address, & purpose of the business.
 Name, address, & duties of each partner
 Initial amount of investment by each partner
 The methods of sharing profit & loss of the business
 Amount & timing of withdrawal of money by partners
 Provisions for the admission & withdrawal of partner for liquidating the partnership.
 Procedures to be followed at time of liquidation.
Characteristics of partnership
 Ease of formation - a partnership can be created without legal formalities. When two or more
persons agree to become partners, such agreement constitutes a contract & a partnership is
automatically created.
 Voluntary Association-partnership is voluntary associations of individuals. Stating a partnership is
voluntary. A person can’t be forced to join a partnership, & partners can’t be forced to accept another
person as a partner.
 Mutual Agency - each partner is an agent of the partnership. That means each partner can act for the
partnership with the authority to enter into contract for the partnership.
 Limited life- a partnership may be dissolved whenever a new partner is admitted, a partner
withdraws, dies, is capacitated, or bankrupt.
 Unlimited Liability - Each partner is personally & individually liable for all partnership liabilities.
Creditor’s claims took first from partnership assets & then from the personal resources of any
partner, irrespective of that partner’s equity in the partnership.
 Co-ownership of property - When a partner invests a building, inventory, or other property in a
partnership, he or she does not retain any personal right to the assets contributed. The property
becomes jointly owned by all partners. Also, each partner has a claim to the business’s profit.
 Net income and loss are distributed among the partners according to their agreement. In the absence
of such agreement, all partners share equally.

Advantages and Disadvantages

Advantages over Sole-proprietorship:
 More capital, better management skill, talent
 The more owners, the more capital

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  Sharing of risk & loss among partners
 Minimizes competition
Advantages over Corporation:
 Easy & less costly to form & organize
 Less government supervision
 Tax advantage- partnership is not a legal entity-meaning it does not have to pay income tax.
 Sense of belongness
Disadvantages
Operating as a partnership has some disadvantages:
 Limited life - if one of the partners dies or withdraws the partnership is dissolved.
 Unlimited liability – corporations are legal entities & as a result are legally responsible for their
action, but only to the extent of their investments. Under p/ship, however, once the p/ship assets are
used to settle creditors’ claims, personal assets may be required to settle any unsatisfied creditors’
claims.
 Mutual agency- Other partners are responsible for the acts of the action taken by any partner.
 Difficult to transfer interest /ownership.
Partnership Accounting
An adequate accounting system & an accurate measurement of income are needed by every business, but
they are especially important in a partnership b/c the net income is divided among two or more owners. Each
partner needs current, accurate information on profits so that he or she can make intelligent decisions on
such questions as additional investments, expansion of the business, or sale of an interest in the partnership.
Partnership accounting is similar to that in a sole proprietorship, except that separate capital & drawing
accounts are maintained for each partner. These capitals & drawing account show for each partner the
amounts invested, the amounts withdrawn, & the appropriate share of partnership net income.

Forming a partnership
When a partnership is formed, a journal entry is made to record the assets contributed by each partner & the
liability of each partner that are assumed by the partnership. Assets contributed by individual partner are
valued at fair market value on the day they are transferred to the partnership.
To illustrate assume that Abebe & Tesfay agree to combine their proprietorships & form a partnership. The
book & market value of assets invested & liability assumed are as follows:

Book Value Market Value

Abebe Tesfay Abebe Tesfay
Cash Br. 10,000 Br.15, 000 Br.10, 000 Br.15, 000
Offices equip. 8,000 5,000
Accumulated Depreciation. (2,000)
Merchandise inventory 8,500 10,900 10,500 12,000
Account Receivable 15,000 15,000
Allowance for uncollectible (1,600) (2,000)
Building 17,000 30,000
Accumulated depreciation (4,200)
Land 15,000 45,000
Accounts payable 2,500 2,500 (2,500) (2,500)

The values assigned to assets in the accounts of the new partnership may be quite different from the accounts
at which these assets were carried in the accounts of their previous owners (Proprietorship). That is, because
the values have increased (or perhaps decreased) since they were first acquired by the partners.

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The entries to record the Investments are:
Cash -------------------------------------- 10,000
Office equip ----------------------------- 5,000
Mdse.Inventory ------------------------- 10,500
A/Recievable -------------------- ------- 15.000
Allow for Uncoll accts ------------------ 2,000
A/payable ---------------------------------- 2,500
Abebe, Capital ---------------------------- 36,000
(To record inv`t by Abebe)

Cash--------------------------------------- 15,000
Mdse. inventory ------------------------ 12,000
Building---------------------------------- 30,000
Land ------------------------------------- 45,000
A/payable---------------------------------- 8,500
Tesfay, Capital---------------------------- 102,000
(To record inv't by Tesfay)

After the partnership has been formed, the accounting for its day - to - day trans. is similar to accounting for
trans. of any other type of business organization
The Steps in the accounting cycle described for sole proprietor is equally applicable for a p/ship
Additional investment

Assume that after six months of operation the firm is in need of more cash, and the partners make an
additional inv't of Br 10,000 each. This additional inv't is credited to the capital accounts of the partners.

Dividing Net income or Net Loss

The partners can distribute their p/ship income in any way they want. What they will most likely consider is
the Service performed by each partner, the talent and Capital contributed, and also the length of time in the
p/ship.
They can adjust for differences in time devoted to business and on managerial or technical ability by
providing allowances for Salaries. Partnership Salaries are merely a means to distribute p/ship profits in an
equitable manner; they are not salaries in the legal sense of the word. The partners are owners of the
business and not employees.
Similarly, they can adjust for differences in Capital Contribution by allowing interest on the capital balances.
Interest allowed in this manner is not interest expense on borrowed funds; it is again a means to achieve an
equitable distribution of profit.
In most cases Partners Share earnings (or losses) in one of the following three general ways:
1. An established ratio
2. The Capital investment r/ship
3. Salary and interest allowance, the remainder in an established ratio
Many p/ship have been dissolved b/c partners could not agree on an equitable distribution of income.
Therefore, the method of dividing p/ship income should be stated in the p/ship agreement. In the absence of
an agreement or if the agreement is silent on dividing net income or net losses, all partners share equally.
Income division- Service of partners
One method of recognizing deference in partners' abilities and in amount of time devoted to the business
provides for Salary allowance to partners. Since partners are legally not employees of the p/ship, such
allowances are treated as divisions of net income and are credited to the partners' Capital a/c

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 Illustration 1 assumes that p/ship agreement of Abyot and Tadesse provides for monthly Salary allowance.
Abyot is to receive a monthly allowance of Br. 2,500 (Br. 30,000 annually) & Tadesse is to receive Br 2,000
( Br. 24,000 annually) a month . Any net income remaining after the Salary allowance is to be divided
equally. Assume also that the capital of Abyot &Tadesse is Br. 80,000 & 60,000 respectively while the net
income for the year is Br.75, 000.
Requirement: - prepare a net income division report, and entry to record income summary account .
A report of the division of net income may be presented as a separate statement to accompany the B/sheet
and the I/ statement or to add (include) it at the bottom of the I/statement.

Net income ----------------------------------------------------- Br. 75,000

Division of net income
Abyot Tadesse Total
Annual 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

Net Income division is recoded as a closing entry even if the partners don't actually withdraw the amounts of
their salary allowance
The entry for dividing net income is as follows:

Dec 31 Income Summary 75,000

Abyot,Capital 40,500
Tadesse,Capital 34,500

If the partners had withdrawn their salary allowance monthly, the withdrawals would have been debited to
their drawing accounts during the year. At the end of the year, the debit balance of Br 30,000 & 24,000 in
their drawing accounts would be transferred as reductions to their Capital accounts.
Income division - services of partners & Investment
Partners may agree that the most equitable plan of dividing income is to provide for (1) salary allowance &
(2) interest on capital investment. Any remaining net income is then divided as agreed.
Illustration2, assume that the p/ship agreement for Abyot & Tadesse Divides income as follows:
1. Monthly salary of Br. 2,500 for Abyot & Br, 2,000 for Tadesse.
2. Interest of 12% on each partner’s capital balance at the beginning of the period
3. Any remaining net income divided equally b/n the partners
The Br 75.000 net income for the Year is divided in the following schedule.
Net income ------------------------------------------------------------------ Br 75,000
Division of net income
Abyot Tadesse Total
Annual salary allowance. Br 30,000 Br. 24,000 Br. 54,000
Interest allowance (12%) 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
The entry to close the Income Summary account is:
Income summary ---------------------------------------- 75,000
Abyot capital --------------------------------------- 41,700
Tadesse capital -------------------------------------- 33,300

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 Income Division - Allowance Exceed Net Income
Some times the net income may be less than the total of the allowance & in such a case the remaining
balance will be a negative amount. This must, then, be divided among the partners as though it were a net
loss.
Illustration3; assuming illustration 2, if the net income is Br. 50,000, show the division of net income
Division of net income
Abyot Tadesse Total
Annual salary allowances Br. 30,000 Br. 24,000 Br. 54,000
Interest allowance (12%) 9,600 7,200 16,800
Total 39,600 31,200 70,800
Excess of allowance over income ____ ___ 20,800
Distribution of excess of allowance
over income-------------------------------(10,400) (10,400) (20,800)
Net income ----------------------- Br.29,200 Br.20,800 Br.50,000

The distribution of net income is recorded as follows:

Income summary ------------------ 50,000
Abyot, capital------------------- 29,200
Tadesse, capital---------------- 20,800
A net loss would be allocated in the same manner authored for net income. The sharing procedure would
begin in the net loss & then allocate salary, interest, & any other specified amts to the pertners.

Partnership Financial Statements

The F/statements of a p/ship & a s.proprietorship are similar. The income statement is identical in format
except that on the p/ship income statement, the income distribution may be presented on the bottom portion
of the statement.
The owner’s equity statement for a p/ship is called the “partners capital statement”.
The Balance sheet of a p/ship differs from that of a proprietorship only in the capital section. A p/ship with
few partners will have a capital account for each partner reflecting the partner’s ending capital balance.
Admission of a partner
One of the characteristics stated earlier was that a P/ship is dissolved whenever a new partner is admitted or
an old partner withdraws. In either case the business can continue, but the partnership is dissolved.
Dissolution - refers to when the legal arrangement among the partners end to exist, but not the business. A
p/ship lasts only as its partners remain in the business. The addition of a new partner or the withdrawal of an
existing member dissolves the P/ship.
A new partner may be admitted in two ways:
1. By purchasing of an interest of one or more existing partners
2. By investing assets in the partnership
1. Admission by purchasing a partner’s interest
When a new partner buys an equity interest from a present member of a partnership, the only change in the
accounts will be a transfer from the capital account of the selling partner to the capital account of the
incoming partner. The total net assets & total capital of the p/ship don’t change.
Illustration 4, assume that the P/ship of Abel, Yonas & Rahel is dissolved when Yonas sells his interest in
the P/ship to Dereje by receiving a cash of Br. 180,000. Abel & Rahel agreed to accept Dereje as a partner.

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Just before the dissolution, the partners had capital balances of: Br. 180,000; 140,000; and Br. 200,000
respectively.
The entry to record the admission of Dereje is as follows:
Yonas, Capital 140,000
Dereje, Capital 140,000
(To record the transfer of Yonas’s equity interest
to the incoming partner, Dereje)
Illustration 4, Assume, however, rather than buying an interest from Yonas, Dereje gets admission by the
purchase of a 20% interest from each partner by paying cash of Br. 40,000; Br. 35,000; and Br. 45,000
respectively. His admission would be recorded as follows:
Abel, Capital --------------------------------------- 36,000
Yonas, Capital ------------------------------------- 28,000
Rahel, Capital ------------------------------------- 40,000
Dereje, Capital ---------------------------- 104,000
(To record Admission of Dereje)
The price paid for the partnership interest, Br. 180,000 is not recorded. That is a private transaction between
Yonas and Dereje. And thus, after Dereje is admitted to the partnership, the total owner’s equity of the firm
is still Br. 520,000 and it does not also affect the assets or liabilities of the partnership.
2. Admission by investing in the Partnership
The admission of a partner by an investment of assets is a transaction between the new partner and the
partnership. The transaction increases both the net assets and total capital of the partnership.
Illustration 5: Assume that Alem, Hagos and Sara partners have a capital balance of Br.10, 000, 30,000,
and 20,000 respectively. They agree to admit Adane at 25 % (1/4) interest in the partnership with the
investment of Br.20, 000 cash. The entry to record the admission of Adane would be as follows:
Cash------------------------------------------------------20,000
Adane, Capital---------------------------------------------20,000
(To record admission of Adane to a 25 % interest in the Firm)
Does that mean he will share 25% of the profit and loss?
Although Adane has a 25% equity interest in the net assets of the firm, he is not necessarily entitled to
receive 25% of the profit. Once he is admitted, a new article of partnership will be prepared specifying how
profits and losses are to be shared.

When the new partner’s investment is not the same with the equity interest, the difference is considered a
Bonus either to (1) the existing (old) partners or (2) the new partner.
(a) Admission by Investing in the partnership-Bonus to the old partner
A bonus to old partner’s results when the new partner’s capital credit on the date of admission is less than
his/her investment in the firm. The bonus results in an increase in the capital balances of the old partners that
is allocated to them on the basis of their income ratios before the admission of the new partner.
The incoming partner may be willing to pay more cash than the interest equity due to the following reasons:
1. When the partnership is successful or doing quite well
The fair market value of the assets may be higher than the book values at the time of admission.
Illustration 6: assume that Red Sea partnership owned by Nahom and Gizachew has a total capital of Br.
120,000 when Salem is admitted to the partnership. Assume the partner share profit and losses 60% and
40% respectively. Salem acquires a 25% ownership (capital) interest by making cash investment of Br.

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80,000 in the partnership. The procedures for determining Salem’s capital credit and the bonus to the old
partners are as follows:
Partnership capital before Salem is admitted--------Br.120,000
Salem’s investment in the partnership --------------------80,000
Total partnership capital after Salem is admitted----- 200,000

Bonus to old partners = Br.80, 000 - Br.50, 000 (25% * 200,000)

= Br.30, 000
Allocation of bonus:
Nahom = 60% XBr.30,000
= Br. 18,000
Gizachew = 40%X Br.30,000
= Br 12,000

The entry to record the admission of Salem is:

Cash-------------------------------------- -------80,000
Nahom, Capital---------------------------------------18,000
Gizachew, Capital -----------------------------------12,000
Salem, Capital ----------------------------------------50,000
(To record the admission of Salem & bonus to old partners)
(b) Admission by investing in the partnership - bonus to the New Partner
A bonus to a new partner results when the new partner’s capital credit is greater than his or her investment of
assets in the firm. In this case the bonus decreases the capital balance of the old partners based on their
income ratio (Before the admission of the new partner).
A bonus to the new partner occurs due to:
When the new partner possesses resources or special attributes that are desired by the partnership.
Alternatively, the new partner may be a recognized expert or authority in a relevant field.
When recorded book value on the partnership are higher than their market value.
Illustration 8: assume the previous example, except that since the firm is in desperate need of cash, they
agree to admit Salem to a 25% equity interest in the firm upon her investment’s of only Br.20,000 Cash. The
recording of Salem’s Admission to the partnership is based on the following calculation:

Partnership capital before the admission of the new partner ----------------Br.120,000

Investment by new partner----------------------------------------------------------- 20,000
Total Capital of new partnership--------------------------------------------------- 140,000
Salem’s interest equity (capital credited):25% XBr.140,000 ------------- 35.000
Bonus to Salem (Br.35,000-Br.20,000)---------------------------------------- 15,000
Allocation of bonus:
Nahom (Br.15,000 X60%)= -------------------------------------------- Br. (9,000)
Gizachew (Br. 15,000 X 40%) =------------------------------------------- (6,000 )
Total-------------------------------------------------------------------------Br. (15,000)
The entry to record the admission of Salem is recorded as follows:
Cash------------------------------------------------------20,000
Nahom, capital-------------------------------------------9,000
Gizachew, capital ---------------------------------------6,000
Salem, Capital---------------------------------------------------35,000
(To record Salem’s admission and bonus)
To acquire an equity interest of Br. 35,000 in the new partnership net assets of Br.140,000, Salem has
invested a cash of only Br.20,000. The Br.15,000 excess allocated to Salem’s capital account is a bonus to
Salem from the existing partners.
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A bonus granted to a new partner is charged to the old partner’s capital account according to the profit
sharing arrangement in effect prior to admission of the new partner.

Revaluation of Assets
If the assets of a partnership don’t approximate the current market value at the time of admitting new partner
or withdrawal of existing partner, the accounts must be adjusted accordingly.
Illustration 9 :- assume in the previous example the balance of building account is Br.50, 000 and the
current replacement value is Br.115, 000. In addition the inventory is written down by Br. 5,000.Assuming
that Nahom and Gizachew share net income in the ratio of 60% and 40%, the revaluation is recorded as
follows:
Building -----------------------------------------65,000
Mdse. inventory---------------------------------- 5,000
Nahom, Capital--------------------------------- 36,000
Gizachew, Capital -------------------------------- 24,000
(To record the revaluation and allocation to partner’s capital accounts)

Withdrawal of a Partner
A partner may withdraw from a partnership voluntarily by selling his or her equity interest in the firm or in
voluntarily by reaching mandatory retirement age or dispute among the partners. Like the admission of a
partner, the withdrawal of a partner, legally dissolves the partnership.
The withdrawal of a partner may be carried out by the following ways:
1. Withdraw by selling the equity interest to another external (outside) party
2. Withdraw by selling the equity interest to another existing partner
3. Withdrawal by receiving cash from the partnership
In the first two ways the transaction is mainly personal. Partnership assets are not involved in any way,
and thus total capital does not change.

Illustration 10: Assume that Hadush, Alem, and Yirga have updated capital balances of Br. 25,000, Br
15,000, and 10,000 respectively after revaluation of assets performed due to the withdrawal of Yirga.
Hadush, and Alem agreed to buy Yirga’s interest by paying each of them a cash of Br. 8,000 in exchange for
one half (1/2)of Yirga’s interest of Br 10,000. The partners share income in the ratio of 3:2:1, respectively.
The entry to record the withdrawal is:
Yirga, capital 10,000
Alem, capital 5,000
Hadush, Capital 5,000
(To record withdrawal of Yirga, and transfer of his interest to other partners)
Note that the net assets and total capital remain the same at Br. 50,000.
Withdraw by receiving cash from the partnership
Payment from partnership assets is a transaction that involves the partnership. Both partnership net assets
and total capital are decreased. The partner may withdraw by receiving cash, which is equal to, less than, or
greater than his capital balance at the time of his withdrawal.
a) Withdrawal at book value
If the partner withdraws by taking cash from the partnership not from the partners, that is equal to the book
value of his equity, the entry would be:
Yirga capital 10,000
Cash 10,000
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 (To record withdrawal of Yirga from the Partnership)

b) Withdrawal at less than book value

The withdrawing partner may be so eager to leave the business that he is willing to take less than his equity
may be because of poor earning of the partnership or he wants to change a place. So, if the cash paid to the
retiring (outgoing) partner is less than his/her equity interest in the partnership, the difference is allocated
(charged) to the remaining partners on the basis of their income ratio.
Illustration11, assume the previous e.g., but in this case the remaining partners agreed to pay Yirga a cash
of only Br. 8,000 from the partnership upon his withdrawal.
Allocation of Br. 2,000 to the remaining partners
Hadush: = 1200

Alem: = 800
2000
The entry to record the retirement/withdrawal is:

Yirga capital 10,000

Hadush, capital 1200
Alem, Capital 800
Cash 8000
(To record withdrawal of Yirga and bonus to remaining partners)
c) Withdrawal at more than book value
An amount paid to a retiring partner in excess of the balance in his/her capital account is treated as a bonus
to the withdrawing partner. The bonus is charged against (debited to) the continuing partners’ capital
account, in proportion to their relative profit and loss sharing ratio.
The excess money given (bonus) to the retiring partner may arise from:
I. The fair market value of the partnership assets is more than their book value
II. There is unrecorded goodwill resulting from the partnership’s superior earnings records; or
III. The remaining partners are nervous to remove the partner from the firm
Illustration 12, assume now that Yirga received Br. 15,000 in cash from the partnership in full settlement
of his equity in the firm. His withdrawal will then be recorded by the following entry.
Bonus = Br. 15,000 – Br. 10,000 = Br. 5,000

Allocation of the bonus to the remaining partners on the basis of their income ratio:
Hadush: = 3000

Alem: = 2000
5000
The withdrawal of Yirga from the partnership and bonus given to him is recorded as follows:
Yirga, capital 10,000
Hadush, capital 3,000
Alem, capital 2,000
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 Cash 15,000

Death of a partner
Similar to admission and withdrawal of a partner, death of a partner also results into dissolution of a
partnership. When a partner dies, it is necessary to adjust partnership accounts to measure net income or loss
for the fraction of the year up to the date of death, and then closed to determine the partners’ capital balances
on that date. And, the surviving partners may agree either to:
1. Purchase the deceased partner’s equity from their personal assets, or
2. Use partnership assets to settle with the deceased partner’s estate
Admission of a new partner or withdrawal or death of an existing partner dissolves the partnership.
However, the business may continue operating with no apparent change to outsiders such as customers and
creditors.
Liquidation of a partnership
Liquidation – is the process of terminating a business by selling the assets of the firm, paying liabilities, and
distributing any remaining assets (cash) to the partners. Liquidation occurs because of:
o Mutual agreement of the partners
o Death of a partner
o Bankruptcy – legal action initiated by creditors of partnership
o Achievement of goals
o Expiry of time period

Liquidation process of a partnership includes four basic steps:

1. Sell non-cash assets – this is called realization and the difference between book value and the cash
proceeds is termed the gain or loss on realization.
2. Allocate the gain or loss on realization to the partners according to their profit and loss sharing ratio.
3. Pay partnership liabilities in cash – creditors must be paid before partners receive any cash
4. Distribute the remaining cash to the partners based on their capital balances.

Illustrative example
Assume that the partnership of Abel, Yonas, and Sara is liquidated as per the agreement reached among the
partners. Assume also that the partners share profit and losses in the ratio of 3:1:1. After the books are
adjusted and closed, the general ledger contains the following balances.
SA&Y
Balance sheet

Assets Liabilities and Owner’s equity

Cash Br. 10,000 Liabilities Br.30,000

Non cash assets 90,000 Abel, capital 40,000
Yonas, capital 20,000
_______ Sara, capital 10,000
Total assets Br. 100,000 Total liab. & Cap. Br. 100,000

We will use the SA&Y partnership data to illustrate accounting for liquidation in three situations:
1. Sale of non cash assets at a gain
2. Sale of non cash assets at a loss and any deficient partner is unable to clear the deficiency
3. Sale of non cash assets at a loss and any deficient partner clears his/her deficiency
1. Sale of non cash assets at a gain
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To illustrate assume the partnership sells its non-cash assets (shown on the balance sheet at Br. 90,000) for
cash of Br. 150,000
The process of liquidation can be summarized in a partnership liquidation schedule, which also helps in the
determining the amount of cash to be distributed to the partners.
SA&Y
Partnership liquidation schedule
July 15,2002

Cash + Non cash Liabilities Abel, Yonas, capital Sara,

Assets = + capital + + capital
Balance Before realization Br.10,000 Br.90,000 Br.30,000 Br.40,000 Br.20,000 Br.10,000
Sale of assets and distribution of +150,000 (90,000) - +36,000 +12,000 +12,000
gain
Balance after realization 160,000 0 30,000 76,000 32,000 22,000
Payment of liabilities (30,000) - (30,000) - - -
Balance after payment of liability 130,000 0 0 76,000 32,000 22,000
Distribution of cash to partners (130,000) - - (76,000) (32,000) (22,000)
Final balance 0 0 0 0 0 0

a. The entry to record the sale and allocation of the gain is:
July 15 Cash 150,000
Non-cash assets 90,000
Abel, capital 36,000
Yonas, capital 12,000
Sara, capital 12,000
(To sell non-cash assets in liquid and allocate gain to partners)
b. To record the payment of partnership liabilities
July 15 Liabilities 30,000
Cash 30,000
(To pay liabilities to creditors)

c. To record distribution of cash to partners

July 15 Abel, capital 76,000
Yonas, capital 32,000
Sara, capital ………22,000
Cash 130,000
(To disburse cash to partners in liquidation)

2. Sale of non cash assets at a loss: deficient partner unable to clear his deficiency
The sale of non-cash assets at a loss may result in a debit balance in a partner’s capital account. This
situation is called a capital deficiency because the partner’s capital balance is insufficient to cover his share
of the partnership’s loss.
To illustrate Assume that the market value of the non-cash assets of the business is far less than book value.
In liquidation, the partnership sells these assets for Br. 30,000. Assume also that the deficient partner has no
any personal asset to clear his/her deficiency.
SA&Y
Partnership liquidation schedule

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 July 15,2002

Cash + Non cash Liabilities Abel, Yonas, Sara,

Assets = + capital + capital + capital
Bal. Before realization Br.10,000 Br.90,000 Br.30,000 Br.40,000 Br.20,000 Br.10,000
Sale of assets and sharing of loss + 30,000 (90,000) - -36,000 -12,000 -12,000

Bal. after realization 40,000 0 30,000 4,000 8,000 ( 2,000)

Payment of liability 30,000 (30,000) - - -
Bal. After payment of liability. 10,000 0 0 4,000 8,000 ( 2,000)
Absorbing of Sara’s deficit by - - - (1,500) (500) 2,000
Abel & Yonas
Balance 10,000 0 0 2,500 7,500 0
Distribution of cash to partners (10,000) - - (2,500) (7,500) 0
Final Balance 0 0 0 0 0 0

a) The entry to record the sale of assets and allocation of the loss is:
July 15 Cash 30,000
Abel, Capital 36,000
Yonas, Capital 12,000
Sara, Capital 12,000
Non cash assets 90,000
(To sell non-cash assets in liquidation and allocate loss to partners)
b) To record the settlement of liabilities
July 15 Liabilities 30,000
Cash 30,000
(To pay liability to creditors)
c) To allocate Sara’s deficiency to the other partners

July 15 Abel, capital 1500

Yonas, Capital 500
Sara, capital 2000
(To record absorption of deficit in Sara’s capital account by Abel & Yonas)

d) To record distribution of cash to partners

July 15 Abel, Capital 2500

Yonas, capital 7500
Cash 10,000
(To disburse cash to partners in liquidation)
1. Sale of non cash assets at a loss and any deficient partner clears his/her deficiency
A partner may clear his/ her deficiency by contributing cash or other asset to the P/ship.
Suppose in the previous e.g. Sara clears her deficiency by paying a cash of Br. 2,000 to the P/ship, the
schedule would have been prepared in the following manner.

SAXT
Partnership Liquidation Schedule
July 15, 2002

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 cash+ non cash Liabilities+ Abel Yanas Sara,
Assets= Capital+ Capital+ Capital
Bal. before realization Br.10,000 Br.90,000 Br.30,000 Br.40,000 Br,20,000 Br.10,000
Sale of Assets & + 30,000 (90,000) - (36,000) (12,000) (12,000)
sharing of loss
Bal. after realization 40,000 0 30,000 4,000 8,000 (2,000)
Sara’s Contribution to + 2,000 - - - +2,000
clear her deficiency
Balance 42,000 0 30,000 4,000 8,000 0
Payment of liability 30,000 (30,000) - -

Balance after pmt. of 12,000 0 0 4,000 8,000 0

liability
Distribution of cash to (12,000) 0 (4,000) (8,000)
partners
Final Balance 0 0 0 0 0 0

The journal entries to record Sara’s contribution and the distribution of cash to the partners are:

July 15 Cash ------------------------------------------------- 2,000

Sara, Capital---------------------------------- 2,000
(Sara’s cont. to clear her capital deficiency in liquidation)
15 Abel Capital ------------------------------------ 4,000
Yonas, capital ------------------------------------ 8,000
Cash ----------------------------------- 12,000
(To disburse cash to partners in liquid)

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