PARTNERSHIP

LIQUIDATION
 Dissolution of a Partnership
Dissolution of a Partnership
• Is defined in Article 1825 of the Civil Code of the
Philippines as the change in the relation of the
partners caused by any partner ceasing to be
associated in the carrying out of the business
• Dissolution refers to the termination of the life of
an existing partnership and may be followed by:
1. Formation of a New Partnership
2. Liquidation
Conditions
ConditionsResulting
Resultingto
toPartnership
PartnershipDissolution
Dissolution
• Admission of a New Partner
• Retirement or withdrawal of a partner
• Death, Incapacity or bankruptcy of a partner
• Incorporation of Partnership
 Partnership Liquidation
Partnership Liquidation
• Refers to dissolution of the partnership
leading to the termination of the business
activities carried on by the partnership
• And the winding up of partnership’s business
affairs to going out of business.
 Partnership Liquidation
Partnership Liquidation
Partnership dissolution with liquidation may be
caused by any of the following factors:
• The accomplishment of the purpose for which the
partnership was organized
• The termination of the term/period covered by the
partnership contract.
• The bankruptcy of the firm.
• The mutual agreement among the partners to
close the business.
 TYPES OF LIQUIDATION
TYPES OF LIQUIDATION
Lump-sum liquidation or liquidation by
totals
• This is a type of liquidation whereby the
distribution of cash to the partners is done
only after all the non-cash assets have
been realized, the total amount of gain or
loss on realization is known, and all
liabilities have been paid.
 TYPES OF LIQUIDATION
TYPES OF LIQUIDATION
Liquidation by installment or piece-meal
liquidation
• This is a type of liquidation whereby assets
are realized on a piecemeal basis and
cash is distributed to partners on a
periodic basis as it becomes available, that
is, even before all non-assets are
converted into cash.
 The Liquidation Process
The Liquidation Process
Converting noncash assets into cash
Recognizing gains and losses and liquidating
expenses incurred during the liquidation period

Settling all liabilities

Distributing cash to partners according to
the final balances in their capital accounts
 Rank Order of Payments
Rank Order of Payments
Amounts owed to creditors other than partners

Amounts owed to partners other

than for capital and profits

Amounts due to partners with

respect to their capital interests or profits
 PROCEDURES IN LUMP-SUM
PROCEDURES IN LUMP-SUM
LIQUIDATION
LIQUIDATION
• Sale of non-cash assets
• Distribution or allocation of gain or loss on
realization among the partners according to
their residual profit and loss ratios (salary and
interest factors disregarded) unless
liquidation ratios are specified in the
partnership agreement.
• When realization of assets results in a loss, the
loss is carried to the capital accounts of the
partners as a deduction.
• If a partner’s capital account results in a debit
balance (called capital deficiency), the deficiency
can be eliminated by
• Making additional cash investment, if the
deficient partner is solvent.
• Charging the deficiency as additional
loss to the remaining partners, if the
deficient partner is insolvent.
 PROCEDURES IN LUMP-SUM
PROCEDURES IN LUMP-SUM
LIQUIDATION
LIQUIDATION

• Distribution of cash to creditors

• Distribution of cash to partners. In this
procedure, the provisions of the marshalling of
assets and the exercise of the right of offset are
applied.
 STATEMENT OF LIQUIDATION
STATEMENT OF LIQUIDATION

• Thestatement ofliquidationis a prepared to

summarize the liquidation process.
• It is the basis ofthe journal entries made to
record liquidation.