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Partnership liquidation is the winding up of the business affairs of a partnership; hence the business operation
is completely terminated or ended. Partnership liquidation may be caused by any of the following: (1)
accomplishment of the purpose of the partnership (2) termination of the term/ period covered by the
partnership contract (3) bankruptcy of the partnership (4) mutual agreement among the partners to close the
business.
2. Discuss the various problems encountered in partnership liquidation.
The liquidation of a partnership will give rise to the ff. problems (1) determining the partnership profit or loss
from the beginning of the accounting period to the date of the liquidation and distributing such profit or loss to
the partners (2)closing the partnership books (3) correcting accounting errors in prior periods (4)liquidating the
business.
Capital deficiency -the excess of a partner’s share of losses over his capital credit balance
Deficient partner - a partner with a debit balance in his capital account after receiving his share on the loss on
realization
Insolvent partner - a partner whose personal assets are less than his personal liabilities
Free interest - a partner’s capital interest that is available for cash payment.
Liquidation- the winding up of the business affairs of a partnership
Realization- the process of converting non cash assets into cash
Restricted Interest - a portion a partner’s capital account balance that is restricted for possible losses on
liquidation. It is not, therefore, available for cash payment.
Right of offset - the legal right to apply all or part of partner’s loan to the partnership against capital deficiency
Solvent Partner - a partner whose personal assets are more than his personal liabilities