No Capital Deficiency: Pictures & Explanations

No Capital Deficiency

No capital deficiency means that all partners have a zero or credit balance in their capital accounts for final distribution of cash. To illustrate, assume that Zayn, Perez, and Rasheed operate their partnership in BOARDS for several years, sharing income and loss equally. The partners then decide to liquidate. On the liquidation date, the current period’s income or loss is transferred to the partners’ capital accounts according to the sharing agreement. After that transfer, assume the partners’ recorded account balances (immediately prior to liquidation) are:



We apply three steps for liquidation. ① The partnership sells its noncash assets, and any losses or gains from liquidation are shared among partners according to their income-and-loss-sharing agreement (equal for these partners). Assume that BOARDS sells its noncash assets consisting of $40,000 in land for $46,000 cash, yielding a net gain of $6,000. In a liquidation, gains or losses usually result from the sale of noncash assets, which are called losses and gains from liquidation. The entry to sell its assets for $46,000 follows.




Allocation of the gain from liquidation per the partners’ income-and-loss-sharing agreement follows.




② The partnership pays its liabilities, and any losses or gains from liquidation of liabilities are shared among partners according to their income-and-loss-sharing agreement. BOARDS’ only liability is $20,000 in accounts payable, and no gain or loss occurred.




After step 2, we have the following capital balances along with the remaining cash balance.



③ Any remaining cash is divided among the partners according to their capital account balances. The entry to record the final distribution of cash to partners follows.




It is important to remember that the final cash payment is distributed to partners according to their capital account balances, whereas gains and losses from liquidation are allocated according to the income-and-loss-sharing ratio. The following statement of liquidation summarizes the three steps in this section.