ACCOUNTING FOR PRTNERSHIP withdrawal of a partner or expiration of the term specified in

the partnership agreement.

CHAPTER 1: BASIC CONSIDERATION AND
FORMATION UNLIMITED LIABILITY. All partners (except limited
partners), including industrial partners, are personally liable
DEFINITION for all debts incurred by the partnership. If the partnership
In a contract of partnership, two or more persons bind cannot settle its obligations, creditors’ claims will be satisfied
themselves to contribute money, property, or industry to a from the personal assets of the partners without prejudice to
common fund, with the intention of dividing the profit among the rights of the separate creditors of the partners.
themselves. Two or more persons may also form a partnership INCOME TAXES. Partnerships, except general professional
for the exercise of a profession (Civil Code of the Philippines, partnerships, are subject to tax at the rate of 30% (per R. A.
Article 1767). No. 9337) of taxable income.
An association of two or more persons to carry on, as co- PARTNERS’ EQUITY ACCOUTS. Accounting for
owners, a business for profit (Uniform Partnership Act, partnerships are much like accounting for sole
Section 6). p[proprietorships. The difference lies in the number of
The partnership has a juridical personality separate and partners’ equity accounts. Each partner has a capital account
distinct from that of each of the partners (Civil Code of the and a withdrawal account that serves similar functions as the
Philippines, Article 1768). related accounts for sole proprietorships.

Partnerships resemble sole proprietorships, except that there

are two or more owners of they business. Each owner is called
a PARTNER.
ADVANTAGES AND DISADVANTAGES OF A
PARTNERSHIP: PARTNERSHIP
 Often formed to bring together various talents and
knowledge.
 Generally associated with the practice of law, public ADVANTAGES VERSUS PROPRIETORSHIPS
accounting, medicine, and other professions.
1. Brings greater financial capability to the business.
 Partnership of this nature are called GENERAL
2. Combines special skills, expertise and experience of
PROFESSIONAL PARTNERSHIPS.
the partners.
 On the other hand, services, industries, retail trade,
3. Offers relative freedom and flexibility of action in
wholesale, and manufacturing enterprises may also
decision-making.
be organized as partnership.
ADVANTAGES VERSUS CORPORATIONS

1. Easier and less expensive to organize.

CHARACTERISTICS OF A PARTNERSHIP
2. More personal and informal.
MUTUAL CONTRIBUTION. There cannot be a partnership
DISADVANTAGES
without contribution of money, property, or industry (i.e. work
or services which may either be personal manual efforts or 1. Easily dissolved and thus unstable compared to a
intellectual) to a common fund. corporation.
2. Mutual agency and unlimited liability may create
DIVISION OF PROFITS OR LOSSES. This essence of
personal obligations to partners.
partnership is that each partner must share in the profits or
3. Less effective than a corporation in raising large
losses of the venture.
amounts of capital.
CO-OWNERSHIP OF CONTRIBUTED ASSETS. All
assets contributed into the partnership are owned by the
partnership by virtue of its separate and distinct juridical PARTNERSHIP DISTINGUISHED FROM
personality. If one partner contributes an assets to the CORPORATION
business, all partners jointly own it in a special sense.
MANNER OF CREATION. A partnership is created by
MUTUAL AGENCY. Any partner can bind the other mere agreement of the partners while a corporation is
partners to a contract if he is acting within his express or created by operation of law.
implied authority.
NUMBER OF PERSONS. Two or more persons may
LIMITED LIFE. A partnership has a limited life. It may be form a partnership; in a corporation, not exceeding fifteen
dissolved by the admission, death, insolvency, incapacity,
(15). A corporation with a single stockholder is
considered a ONE PERSON CORPORATION (Sec. 10, A. GENERAL. All partners are liable to
Revised Corporation Code of the Philippines; in Chapter the extent of their separate properties.
5).
B. LIMITED. The limited partners are
COMMENCEMENT OF JURIDICAL liable only to the extent of their
PERSONALITY. In a partnership, juridical personality personal contributions. In a limited
commences from the execution of the articles of a partnership, the law states that there
partnership; in a corporation, from the issuance of shall be a least one general partner.
certificate of incorporation by the Securities and
Exchange Commission. 3. ACCORDING TO DURATION
MANAGEMENT. In a partnership, every partner is an
agent of the partnership if the partners did not appoint a A. Partnership with fixed term or for a
managing partner; in a corporation, management is vested particular undertaking.
on the Board of Directors.
B. PARTNESHIP AT WILL. One in
EXTENT OF LIABILITY. In a partnership, each of the which no term is specified and is not
partners except a limited partner is liable to the extent of formed for any particular undertaking.
his personal assets; in a corporation, stockholders are
liable only to the extent of their interest or investment in 4. ACCORDING TO PURPOSE
the corporation.
A. COMMERCIAL OR TRADING
RIGHT OF SUCCESSION. In a partnership, there is no
PARTNERSHIP. One formed for the
right of succession; in a corporation, there is right of
transaction of business.
succession. A corporation has the capacity of continued
B. PROFESSIONAL OR NON-
existence regardless of the death, withdrawal, insolvency,
TRADING PARTNERSHIP. One
or incapacity of its directors or stockholders.
formed for the exercise of profession.
TERM OF EXISTENCE. In a partnership, for any
period of time stipulated by the partners; in a corporation, 5. ACCORDING TO LEGALITY OF EXISTENCE
shall have perpetual existence unless its articles of
incorporation provide otherwise (Sec. 11, Revised A. DE JURE PARTNERSHIP. One
Corporation Code of the Philippines). which has complied with all the legal
requirements for its establishment.
CLASSIFICATIONS OF PARTNERSHIPS
B. DE FACTO PARTNERSHIP. One
1. ACCORDING TO OBJECT
which has failed to comply with all the
legal requirements for its establishment.
A. UNIVERSAL PARTNERSHIP OF AA
PRESENT PROPERTY. All contributions
became part of the partnership fund.
KINDS OF PARTNERS
B. UNIVERSAL PARTNERSHIP OF PROFITS.
1. GENERAL PARTNER. one who is liable to the
All that the partners may acquire by their
extent of his separate property after all the assets of
industry or work during the existence of the
the partnership are exhausted.
partnership and the use of industry or work
during the existence of the partnership and the
2. LIMITED PARTNER. one who is liable only to the
use of whatever the partners contributed at the
extent of his capital contribution. He is not allowed to
time of the institution of the contract belong to
contribute industry or services only.
the partnership. If the articles of universal
partnership did not specify its nature, it will
considered a universal partnership of profits.
3. CAPITALIST PARTNER. one who contributes
money or property to the common fund of the
C. PARTICULAR PARTNERSHIP. The object
partnership.
of the partnership is determinate- its sue or fruit,
specific undertaking, or the exercise of a
4. INDUSTRIAL PARTNER. one who contributes his
profession or vocation.
knowledge or personal service to the partnership.
2. ACCORDING TO LIABILITY
 CONTRACT OF PARTNERSHIP. Is void whenever
5. MANAGING PARTNER. one whom the partners immovable property or real rights are contributed and a signed
has appointed as manager of the partnership. inventory of the said property is not made attached to public
instrument.
6. LIQUIDATING PARTNER. one who is designated
to wind up or settle the affairs of the partnership after LIMITED LIABILITY COMPANY. A hybrid form of
dissolution. business for it combines the best features of a partnership and
a corporation. LLC is a form of legal entity that provides
limited liability to its owners.
7. DORMANT PARTNER. one who does not take
active part in the business of the partnership and is
not known as a partner.

8. SILENT PARTNER. one who does not take active

part in the business of the partnership and is not CHAPTER 2: PARTNERSHIP OPERATIONS AND
known as a partner. FINANCIAL REPORTING

FACTORS TO CONSIDER IN ARRIVING AT A PLAN

9. SECRET PARTNER. one who takes active part in FOR DIVIDING PROFITS OR LOSSES
the business but is not kwon to be a partner by
outside parties.
MONEY, PROPERTY, OR INDUSTRY
10. NOMINAL PARTNER OR PARTNER BY
ESTOPOEL. One who is actually not a partner but Partnership profits are realized as a result of putting together
who is represents himself as one. the contributions-money, property, or industry of the partners.
The amount of capital invested by each partner, the amount of
time each partner devotes to the business and other
contributions are the factors being considered in the
formulation of an equitable profit and loss ratio.
ARTICLES OF PARTNERSHIP

A partnership may be constituted orally or in writing. In the

latter case, partnership agreements are embodied in the 1. A partner has considerable personal financial
articles of partnership. resources, thus giving the partnership a strong credit
rating. In general, partners have unlimited liability. A
very solvent partner will make the partnership
1. The partnership name, nature, purpose and location. attractive to creditors.
2. The names, citizenship, and residences of the 2. A partner who is well known in a profession or an
partners. industry may contribute immensely to the success of
3. The date of formation and the duration of the the partnership although he may not participate
partnership. actively in the operations of the partnership.
4. The capital contribution of each partner, the
PERFORMANCE METHODS. Many partnerships use
procedure for valuing non-cash investments,
profit and loss sharing arrangements that give some weight to
treatment of excess contribution (as capital or as
the specific performance of each partner to provide partner to
loan) and the penalties for a partner’s failure to invest
provide incentives to perform well.
and maintain the agreed capital.
5. The rights and duties of each partner. BONUS. This allocation of profits to a partner on the basis of
6. The accounting period to be adopted, the nature of performance.
accounting records, financial statements, and audits
by independent public accountants.
7. The method of sharing profit or loss, frequency of
RULES FOR THE DISTRIBUTION OF PROFITS OR
income measurement and distribution, including any
LOSSES
provisions for the recognition of differences in
contributions. The profits or losses shall be distributed in conformity with
8. The drawings or salaries to be allowed to partner. the agreement. If only the share of each partner in the profits
9. The provision for arbitration of disputes, dissolution, has been agreed upon, the share of each in the losses shall be
and liquidation. in the same proportion.
As for the profits, the industrial partner shall receive such PRIOR PERIOD ERRORS. are omissions from and other
share as may be just equitable under the circumstances. If misstatements of the entity's financial statements for one or
aside from his services he has contributed capital, he shall also more periods that are discovered in the current period.
receive a share in the profits in proportion to his capital ||(Civil
Code of the Philippines, Article 1797). A stipulation which
excludes one or more partners from any share in the profits or
losses is void (Article 1799).
DISTRIBUTION OF PROFITS OR LOSSES BASED ON
RULES FOR THE DISTRIBUTION OF PROFITS OR PARTNERS AGREEMENT
LOSSES
in general, profits or losses shall be divided in accordance with
PROFITS the agreement of the partners. The ratio in which profits or
losses from partnership operations are distributed is
 The profits will be divided according to partners
recognized as the PROFITS AND LOSS RATIO.
agreement, what ever is agreed upon that will be their
profits or loss profit sharing ratio. 1. Equally or in another agreed ratio.
2. Based on partners’ capital contributions:
What if there is no agreement after all?
a. Ratio of original capital investments.
 As to capitalist partners, the profits shall be divided b. Ratio of capital balances at the beginning of
according to their capital contribution. (Pro-rated). the year.
c. Ratio of capital balances at the end of the
Kung gaano kalaki ang contribution niya ganon year.
din kalaki ang makukuha niya. d. Ratio of average capital balances.
3. By allowing interest on partners’ capital and the
 As to industrial partners, such share as may be just balances in an agreed ratio.
and equitable under the circumstances, provided that 4. By allowing salaries to partners and the balances in
the industrial partners shall receive such share before an agreed ratio.
the capitalist partners shall divided the profits. 5. By allowing bonus to the managing partners based on
the profits and the balances in an agreed ratio.
it means na bibigyan muna ang industrial partner. 6. By allowing salaries, interest on partners’ capital,
just and equitable (for example dalawa lang kayo) bonus to the managing partner and the balance in an
1/3 normaly for industrial partners (pero dipende agreed ratio (combination of 3 and 5).
parin kase bakaw ala ng matira sa ibang partner).

BASED ON PARTNERS CAPITAL

LOSSES CONTRIBUTION

 The losses will be divided according to partners’ Division of partnership profits in proportion to the capital
agreement. invested by each partner is most likely to be found in
partnerships in which substantial investments in the
Same ratio ang susundin sa losses P/L ratio principal ingredient of success.

 If there is no agreement as to distribution of losses

but there is an agreement as to profits, the losses shall FINANCIAL REPORTING
be distributed according to the profits sharing ratio.
PURPOSE OF FINANCIAL STATEMENT

Financial statements are a structured representation with

CORRECTION OF A PRIOR PERIOD ERRORS the objective of providing information about the financial
position, financial performance and cash flows of an
Any business entity will firm to time discoverer rods made in entity that is useful to a wide range of users in making
the measurement of profit in prior accounting period. Good economic decisions. Financial statements also show the
internal control and the exercise of due care should serve to results of the managements stewardship of the resources
minimize the number of financial reporting errors that occur, entrusted to it. To meet the objective, financial statements
however, these safeguards cannot be completely eliminated in provide information about an entity’s assets, liabilities,
the financial statements. equity, income, and expenses, other changes in equity and
cash flows.
OVERALL CONSIDERATION An entity shall present a statement of changes in equity
showing in the statement:
FAIR PRESENTATION AND COMPLIANCE WITH
INTERNATIONAL FINANCIAL REPORTING a. Total comprehensive income for the period showing
STANDARDS (IFRSs). The financial statements shall separately the total amount attributable To the owners
present fairly the financial position, financial of the parent and to minority interest.
performance, and cash flows of the entity. b. For each component of equity, the effects of
retrospective restatement recognize in the accordance
GOING CONCERN. Financial statements should be with IAS #8 accounting policies, Changes in
prepared on a going concern basis unless management accounting estimates and errors.
intends to liquidate the entity or crease trading or has c. The amount of transactions which, with their capacity
realistic option but to do so. as owners showing seperately contributions by end
ACCRUAL BASIS OF ACCOUNTING. An entity shall distributions to owners.
prepare its financial statements, except for cash flow d. For each component of Equity reconciliation.
information, using the accrual basis of accounting. Between the carrying amount at the beginning and at
the end of the period separated disclosing each
MATERIALITY AND AGGREGATION. An entity shall change.
present separately each material class of similar items.
Material items that are dissimilar in nature or function
should be separately disclosed. Statement of financial position.
OFFSETTING. An entity shall not offset assets and After all, the home bonus of the statement of comprehensive
liabilities, income ad expenses unless required or income along with the changes in partners equity for the to
permitted by an IFRSs. youth have been properly presented. The preparation of the
FREQUENCY OF REPORTING AND statement of financial position will present no major difficulty.
COMPARATIVE INFORMATION. At least annually,
an entity shall present with equal prominence each
financial statement in a complete set of financial Statement of cash flows.
statements including comparative information in respect
of the previous period for all amounts reported in the The cash flow statement serves as a basis for evaluating the
current period’s financial statements. entity's liability to generate cash and cash equivalents and the
needs to utilize this cash flows.
CONSISTENCY OF PRESENTATION. An entity hall
retains the presentation and classification of items in the The statement of cash flows provides information about the
financial statements in successive periods unless an cash receipts and cash payments of an entity during a period.
alternative would be more appropriate or an IFRSs It is formal statement that classifieds the cash receives inflows
requires a change in presentation. and cash payments, outflows into operating investing and
financing activities. This statement shows the net increase or
IDENTIFICATION OF THE FINANCIAL decrease in cash during the period, and the cash balance. At
STATEMENTS. An entity shall clearly the financial the end of the period, it also helps project the future net cash
statements and distinguish them from the other flows of the entity.
information in the same published documents.
International financial reporting standards (IFRS) apply
only to the financial statements and not necessarily to the Cash flows from operating activities.
other information presented in an annual report, a
regularly filing or another document. Operating activities generally involve providing services and
producing a delivering goods. Cash flows from operating
activities are generally the cash effects of the transactions and
Statement of comprehensive income. other events that are entered into the determination of profits
or loss. This cash flow can be presented using either the direct
The form of content of the income statement of the or indirect method.
partnership Resemble those of the sole proprietorship.
With the exception of the presentation of division of
profits or losses at the lower proportion of the statement. Direct method. The entities net cash provided by used in
operating activities is obtained by adding the individual
operating cash flows and then subtracting the individual
Statement of changes in equity. operating cash flows.
Indirect method. Derives the net cash provides buy used in Partners equity.
operating activities by adjusting the profit for income and
expense item not resulting for cash transactions. Is that Capital accounts. The capital account of each partner will be
adjustments begins with the profit followed by the addition of credited with a partner's original and additional capital
expenses and charges. That did not entail cash payments, then contributions and debited with any permanent withdrawals.
increases in current assets and decreases in current liabilities The balances of the partners account will not charge
involved in the determination of profit, but which did not frequently. Capital accounts are prepared in this manner are
actually increase or decrease cash or subtracted from profit. free Ferd as its fixed Capital account.

Cash inflows Current accounts. The current account will be credited for
salaries and interest on capital in this case with a debit profit
 receives from sales of goods and performance of and loss appropriation account. It will be there but for interest
services. on drawings at the end of the year it will be debited with the
 Receives from royalties, fees, commissions, and other drawings, account balances. The account should be credited
revenues. with the share in the residual profits. Recent profits to be
divided using the profits or loss ratio is derived by adding
Cash outflows interest on drawings and deducting salaries and interest on
capital to the accounting profit.
 payments, displayers of goods and services.
 Payments to employees - Current accounts can have
 Payments for taxes. either a debit or credit balance. A
 Payments for interest and expense. credit balance will be undrawn
 Payments for other operating expenses. profits while a debit balance will
be drawings more than profits to
Cash flows from investing activities. which the partner is entitled.
 Investing activities includes making and collecting
loans, acquiring, and depositing of investments in
debt or equity securities, and obtaining and selling of Drawing account. A drawing account is maintained for each
properties and equipment and other productive assets. partner. this will be debited for any cash drawings during the
year. The balance of this account is transferred to the partner's
Cash inflows current account at the end of the year.
 Receipts from sale of property and equipment.
 Receipts from sales of investment in debt or equity
securities. Interest on drawings. Some partnership agreements will
 Receipt from collections on notes receivable. provide that partner will be charged interest on any drawings
made during the year. This is to deter partners from drawing
cash outflows. cash from the business.

 Payment to acquire property and equipment.

 Payments to acquired debt or equity securities.
Chapter three dissolution changes in ownership.
 Payments to make loans to other generally in the
form of notes receivable. Causes of dissolution.
Cash inflows from financing activities. Partnership dissolution due to changes in ownership occurs for
varying reasons and the following are the more prevalent:
Financing activities includes obtaining resources from owners
and creditors. - Admission of a partner.
- Withdrawal or retirement of a
Cash inflows
partner.
 Receipts from investments by owners. - Death of a partner.
 Receipts from issuance of notes payable. - Incorporation of the partnership.

Cash outflows Admission of a partner.

 payments the owners, in the form of withdrawals. A new partner can only be admitted into a partnership with the
 Payment to settle notes payable. consent of all the continuing partners. This is based on the
principle of delectus personae: meaning that no one becomes a
member of the partnership without the consent of all the
Members. This is because a partnership is placed on mutual Bonus. it is the amount of capital or equal transferred by one
trust and confidence of the partners. partner to another partner.

Liability of incoming partner for existing obligations. Capital credit. It is the equity of a partner in the new
partnership, and it's obtained multiplying the total agreed
A person admitted as a partner into an existing partnership is capital by applicable percentage interest of the partner.
liable for all the obligations of the partnership incurred before
his admission as though. He had been a partner when such
obligations were incurred. Such liability is limited to his Bonus to old partners.
capital contribution unless otherwise agreed.
A partnership may be exceptionally attractive because of
superior earnings records such that the old partners maybe
purchase of an interest from existing partners. demand a premium for a new partner. This premium increases
the old partners capital interest. This premium is affected
With the consent of all continuing partners, a person may be either by locating a portion of the investment of the new
admitted into an existing partnership by purchasing an interest partner to the old partners. The capital accounts of the old
directly from one or more of the existing partners. Payment is partner are credited for the premium according to their profit
made personally to the other partner from whom the interest is and loss ratio.
obtained resulting to mere transfers among capital accounts.

Bonus to a new partner.

Is this type of admission will only result to a debit to the
capital account of the selling partner for the interest sold and A new partner may be admitted into the partnership because of
credit to the capital account of the buying partner from the his vast financial resources. Extensive Business Network,
INTERREST purchased. The amount debited and credited is distinctive reputation, unique Management and or technical
not affected by the actual price for the equity interest. This skills. The old partners may be willing to give a premium for
type of admission the total assets, total liabilities and the total all of these exceptional qualifications by allowing a capital
partners equity of the partnership are not affected upon credit greater than the perspective partners investment, just to
admission. ensure his. Association with a partnership. This premium will
be treated as a bonus to the equities of the old partners and
credited to the new partner.

Investment of and assets in a partnership.

A person may be admitted into a partnership by investing cash Withdrawal of retirement of partner.
or other assets in the business. The assets are invested in
partnership and not given to the individual partners. The A partner may withdraw or retire from a partnership for
investment will increase the total assets and total partners various reasons. Disputes with other partners, old age and
equity. pursuits for better opportunities are among the possible
explanations. The withdrawal of the partner dissolves the old
partnership. This type of the solution may be accomplished by
either of the following ways:
Definition of terms.
1. By selling his equity interest, one or more of the
Total contributed capital. It is the sum of the capital balances remaining partners.
of the old partners and the actual investment of the new 2. By selling his equity interest to an outsider.
partners. 3. By selling his equity interest to a partnership.

Sale of interest to a partner or an outsider.

Total agreed capital. It is the total capital of the partnership When a partner's interest is sold to another partner or an
after considering the capital credits given to each of the outsider, the withdrawal of the partner is paid from the
partners. Under the bonus method, total agreed capital is equal personal assets of the buyer. Accounting for this sale is similar
to the capital contributed capital. Though the capital credits to to admission by purchase of interest. The total assets of the
each partner may be equal to, Great three that are less than his partnership are not affected by the consideration involved.
capital contribution. They required entry will not be a debit to the seller's capital
account for his capital balance and a credit to a buyer's capital into profit or loss ratio of the partners. In some cases,
account for the same amount. substantial loss on realization may yield for partner a capital
deficiency, which is the excess of the partners share or losses
If there are times when a partners withdrawals in the middle of over the partners capital credit balances. This deficiency will
the accounting. In such a case, the book of a partnership certainly affect the partners interest. The sum of his capital, an
should be updated to determine the retiring partners capital loan accounts in the partnership.
balance. Profits or losses should be measured from the last
closing of the books to the date of withdrawal and distributed
according to their profits and loss sharing agreement.
Rules in settling accounts after the solution.

The following rules are subject to revisions by the agreement

Sales of interest to the partnership. of partners, either in the original partnership agreement or in
the dissolution agreement. Civil Code of the Philippines.
With a drawing partner sales, his interest to the partnership, Article 1839.
the partnership is paid from the assets of the partnership. He
may receive an amount the equal greater than or less than then
the balance of his capital account. The effect of withdrawal is
to reduce the assets and the owners equity of the partnership. Assets of the partnership.

The assets of the partnership consist of the following:

Death of a partner. 1. Partnership property (all assets.)

2. Additional contributions of the partners needed for
The death of a partner dissolves a partnership when the death payment of all liabilities consistent with the
of reporter does not result into liquidation, the accounting discussion below.
procedures to be followed are similar to those discussed in the
withdrawal of a partner. The deceased partner may be Other preference (Pag hindi sapat)
considered have retired from the partnership. At his heirs or The assets of General Partnership should be apply in the
estate can expect to receive the amount of his interest from the following order:
business. If they meant to, the estate of the deceased, can that
be made immediately. The balance in the capital account of 1. Those owing the outside creditors. (Third party
the deceased partner should be transferred to a liability. creditors.)
Accounts payable to the state. 2. those owing the inside creditors in the form of loans
or advances for business expenses by the partners.
3. Those owing to the partners with respect to their
Incorporation of a partner. capital contributions.
4. Those only the partners with respect their share of
A partnership maybe decides to incorporate after evaluating profits.
the various advantages of having a corporate form of a
business organization. After the necessary, I just think and The second preference above gives the partners with the loan
closing entries, the assets and liabilities of a partnership are accounts the option to exercise his rights of offset. This
transferred to the Corporation in exchange for shares of stock. privilege is the legal right of their partner to apply part of all
The shares received by the partnership are distributed to the of his loan account balance against his capital deficiency
partners based on their equity interest in the books of resulting from losses in the realization of the partnership
Corporation, the receipts of transferred assets and liabilities assets.
will be recorded along with the issuance of the share capital to
the incorporators. The former partners.
Insufficient partnership assets.

In case when the partnership assets are insufficient to settle

Chapter 4 liquidation. outside liabilities, the partners should make additional
Definition contributions in the partnership. Any partner who contributed
in excess of his share in this liability has a right to collect the
The liquidation of a partnership is the winding up of its supposed additional contributions from the other partners.
business activities characterized. By sale of all non cash
assets. Settlement of all liabilities and distribution of their
remaining cash to the partners. The conversation of non cash Preference of partnership creditors and partners separate
assets into the cash. Is referred as to realization. This may creditors.
either result again or last on realization. An should be divided
The creditors of the partnership should have the priority in B. If the deficient partner is solvent, then should
payments over those of the partners, separate creditors. As invest cash to eliminate this deficiency.
regards the partnership properties. On the other hand, the (Additional cash investment.)
creditors of the partners are preferred with respect to separate C. If the division partners is insolvent, then the
or personal properties of the partners. other partners should observe his deficiency.
(Absorption of deficiency by other partners.)
4. Payments to partners in the order of priority.
Distribution of separate properties of an insolvent partner. a. Loan accounts
b. capital accounts.
If a partner is insolvent, his personal properties should be
distributed as follows:

1. With those owing the separate creditors. Installment liquidation

2. If those owing the partnership creditors. under this method, realization of non cash assets is
3. Those owing the partners by way of additional accomplished over the extended period of time. It is the
contributions when the assets of the partnership were process of selling some assets, paying the creditors, paying the
insufficient to settle all obligations. remaining cash to the partners. Realizing additional assets and
Methods of partnership liquidation making additional payments to the partners. The liquidation
will continue until all the non cash assets have been realized
The following methods may be used when a partnership is and all available cash distributed to the partnership, creditors
liquidated: and partners.
1. Lump sum method. Installment payments to the partners are appropriate if
Under this method, all noncash assets are realized necessary. Safeguards are used to ensure that all the
and are related gains or losses distributed, and all partnership creditors are paid in full and that no partner is paid
liabilities are paid before a single final cash more than the amount to which he would be entitled after all
distribution is made to the partners. losses on realizations of assets are known:
2. Installment method.
Under this method, realization of noncash assets is 1. Realization of non cash assets and distribution of
accomplished over an extended time when cash is gain or loss and realization among the partners based
available. Creditors may be partially or fully paid. on their profits and loss ratio.
Any excess may be distributed to the partners in 2. Payment of likwidation expense and adjustment of
accordance with a program of safe payments or cash unrecorded liabilities. Both of these items will be
priority programs. This process persist until all the distributed among the partners in their profits and
non cash assets are sold. loss ratio.
3. Payment of liabilities to outsiders.
4. Distribution of available cash based on a schedule of
safe payments, which assumes possible losses should
Lump sum liquidation.
do the inability of the partnership to dispose of part
Under this method all of non cash assets are realized and all or all the remaining non cash assets and failure of the
liabilities are settled before a single final cash distribution is partners will capital deficiencies. To make additional
made to the partners. The procedures bellow may be followed contributions, payments to partners can also be made
in lump sum liquidation: on a cash priority program.

1. Realization of all non cash assets and should be usine A partners restricted interest represents the portion of the
of gain or loss on realization among the partners partners interest which should remain available to absorb
based on their profits or loss ratio. possible future losses. Restricted interests are provided for
2. Payment of liabilities. assumed non sale of remaining non cash assets for the
3. Elimination of partners capital deficiencies. If after assumed insolvency off deficient partner.
distribution of loss and realization, a partner inquiries
When all of this restricted interests are satisfied, the resulting
a capital deficiency. Example. Partner's share of
balance would be referred to as a free interest. Which are
realization loss exceeds his capital credit. This
simply the mounts to be paid to the partners. This payment
deficiency must be eliminated by using one of the
should be first applied to loan, then the capital in accordance
following methods in order of priorities:
with the rules on the other order of preference in liquidation.
A. If deficient partner has a loan balance and then
exercise of the rights of offset.

Cash priority program.

This RIPA tissues procedure can be avoided with the
introduction of an alternative device is called the cash priority
program. This program. Is square prepared at the start of the
liquidation process will help the partners project when they
can Expect. To be included in the cash distribution. If the
program is prepared, any amount of cash received from the
realization of the partnership assets may be paid immediately
to the partnership creditors and later the partners as a specified
in the program.

Loss absorption balances.

Ripperda sense the maximum losses that partners can be

absorbed without reducing the equity below 0. The partners
with the biggest capital exposure or last. Absorption balance
should be prioritized in the cash distribution. A partner with a
relatively low cost absorption balance can be wiped out by
material realization loss.