Liquidation is the process of winding up a business or partnership by selling its assets to pay off creditors. It results in the distribution of any remaining assets to the partners based on their equity interests.
5 Must Know Facts For Your Next Test
Liquidation involves converting all non-cash assets into cash.
Creditors are paid first during liquidation, followed by partners based on their capital accounts.
Any gain or loss from the sale of assets is allocated among partners according to their profit and loss sharing ratio.
The final cash distribution to partners follows after all liabilities have been settled.
Partnership dissolution through liquidation requires proper journal entries to record asset sales, liability payments, and distributions.
Review Questions
What is the order of priority for paying off debts in a liquidation?
How are gains or losses from asset sales allocated among partners during liquidation?
What entries must be made to properly dissolve a partnership through liquidation?
Related terms
Dissolution: The termination of a partnership agreement, leading to the winding up of its affairs.
Capital Account: An account showing the net investment of each partner in the partnership.
Profit and Loss Sharing Ratio: The agreed-upon ratio in which partners share profits and losses.