AFAR: A Fastrack of Partnership Liquidation


The phase of partnership operations begins after dissolution and ends with the termination of partnership activities referred to as “winding up the affairs".


A. Procedures for minimizing inequities among partners.

      1. Sharing Gains and Losses. When a partnership is liquidated, the books should be adjusted and have closed the net profit or loss for the period in the manner they have agreed in the partnership agreement.

      2. Advance planning when the partnership is formed.

      3. Rules on setoff- Partnership Loans (Receivable) to the partners

      4. Rules on set off- Partner (Payable) loans to the partnership—depends upon the situation.

-Legal doctrine of setoff- whereby a deficit balance in partner’s capital account may be set off against any balance existing in his/her loan account.
     5. Liquidation expenses. The certain cost incurred during the liquidation process should be treated as a reduction of the proceeds from the sale of the non-cash assets. Other liquidation costs should be treated as expenses.

     6. Marshalling of assets. This doctrine is applied when the partnership and/or one or more of the partners are insolvent.

     7. Distribution of cash or other assets to partners.

B. Lump-sum Liquidations

- Is one in which all assets are converted into cash within a very short time, creditors are paid, and a single, lump-sum payment is made to the partner’s for their capital interest.

   1. Realization and distribution of gain or loss to all partners on the basis of profit and loss ratio.

   2. Payment of liquidation expenses, if any.

   3. Payment of liabilities to third parties.

   4. Elimination of capital deficiencies.

   5. Payment to partners(in order)

     a. loan accounts

     b. capital accounts


         Liquidation in installment is a process of realizing some assets, paying creditors, paying the remaining available cash to partners, realizing additional assets, and making additional cash payments to partners.

   1. Distribute no cash
2. Distribute cash

  A. Schedule of Safe Payments

     A.1. Assume total loss on all remaining noncash assets. Provide all possible losses, including potential liquidation costs and unrecorded liabilities.

Possible Loss= amount of unrealized noncash assets + amount of cash withheld (i.e. unrecorded unpaid expenses, and anticipated liquidation expenses)

    A.2. Assume that partners with a potential capital deficit will be unable to pay anything to the partnership (assume to be personally insolvent)    

  • Hypothetical or assumed deficit balance is allocated to the partners who have credit balances using profit and loss ratio. This portion is the maximum potential loss on noncash assets.

  • Any capital deficiencies that may result in other partners as a result of a maximum loss on noncash assets.
  • Schedule of Safe Payments is an effective method of computing the number of safe payments to partners and preventing excessive payments on any partners.
  • It is inefficient if numerous installment distributions are made to partners.

  • It is deficient as a planning device because it does provide information, but it can be overcome by preparing a cash distribution plan at the start of the liquidation process.

   B. Cash Priority Program

   1. Ranking the Partners

   2. Total interest(equity) account=balance of the capital account + loan receivable(-)/loan payable (+) to the partner

   3. Loss Absorption Power/Abilities/Potential/Maximum Loss Absorbable= Total interest account/Profit and Loss assigned ratio

   Vulnerability Rankings

     The lowest absorption abilities are the most vulnerable to partnership losses.

   Limitation of Cash Priority Program

    1. The program is operable only after outside creditors have been paid in full.

    2. Reflects only the order in which cash distribution to partners will be made if cash is available to distribute

    3. The sequence of distribution of cash in the program coincides with the sequence that would result if cash were distributed using the schedule of safe payments

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