Chapter-Four

Accounting for partnership

Definition:

A partnership is a voluntary association of two or more people to pursue a business for a profit as
a co-owner. Partnerships are common especially in small retail and service business. Many
professional practitioners, including physicians, lawyers, and accountants, also organize their
practices as a partnerships.

Characteristics of partnerships

Partnerships are an important type of organization because they offer certain advantages with
their unique characteristics.

Characteristics of partnership

1. Limited Life: A partnership legally ceases to exist upon the withdrawal, bankruptcy
or death of an existing partner, the admission of a new partner, or the voluntary
dissolution of the entity.

2. Mutual Agency: Each partner is a fully authorized agent of the partnership. As its
agent, a partner can commit or bind the partnership to any contract within the scope
of the partnership business on its behalf. Thus the acts of each partner bind the
partnership and become the responsibility of all partners.

3. Co-ownership of partnership property: partnership assets are owned jointly by all

partners. Any investment by a partner becomes the joint property of all partners.
Partners have a claim on partnership assets based on their capital account and the
partnership contract.

4. Unlimited Liability: In case of insolvency, each partner is individually responsible

for the liabilities of the partnership, regardless of the amount of equity that the partner
has in the partnership. Thus, if a partnership becomes insolvent, the partners must
contribute sufficient personal assets to settle the debts of the partnership. This feature
is one of the major differences between partnerships and the corporate form of
organization, where shareholders are not personally liable for the company’s debts.
This major disadvantage of unlimited liability can be circumvented by the formation
of a limited partnership, but the acts that allow this type of partnership require that at

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 least one partner be a general partner and that the partnership name not contain any of
the names of the limited partners.

5. Nontaxable entity: a partnership has the same tax status as a sole proprietorship and
is not subject to federal income taxes on its income. The individual partners must
report their distributive share of partnership income on their personal tax returns.

Advantages and Disadvantages of Partnerships

Advantages:

A partnership form of business ownership has the following advantages:

1. Relatively easy and inexpensive to form than a corporation. It only requires the consent
of two or more parties.
2. Has the advantage of being able to bring more capital, more managerial skills, and more
experiences than sole proprietorship. Because a partnership is formed by two or more
persons,
3. Not subject to double taxation i.e. partnership income is distributed to each partner and
only taxed once as a personal income individually.

Disadvantages

Partnership has the following disadvantages:

1. Unlimited liability: - The liability of the partners is not limited to what they have in the
partnership, but it goes to the extent of their personal properties (assets).
2. Limited life: - Partnerships are subject to possible termination due to many uncontrollable
circumstances such as the death of a partner.
3. The transfer of ownership from one partner to another person is difficult unless the
remaining partners approve of this
4. Feature to mutual agency: - if each partner does not exercise his/her good judgment
because of one partner’s act can bind a partnership into a contract.
5. Raising large amounts to capital is more difficult for partnership than for corporation.

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Accounting for Partnership

1. Recording Initial Investments:

A separate entry is made for the investments of each partner in a partnership. The various assets
contributed by a partner are debited to the proper asset accounts. In each entry, the monetary
amounts at which the non cash assets are stated are those agreed upon by the partners. In arriving
at an appropriate amount for such assets, consideration should be given to their market values at
the time the partnership is formed. If liabilities are assumed by the partnership, the appropriate
liability accounts are credited. The partner’s capital account is credited for the net amount.

Illustration:

A, B, and C formed a partnership; A contributed Br. 50,000 in cash and inventory with a fair
market value of Br. 100,000in the partnership; B contributed equipment with a fair market value
of Br. 180,000 and a building with a fair market value of Br. 150,000 in the partnership; C
contributed Br. 100,000 in cash and equipment with a fair market value of Br. 90,000 and in
addition to this ‘C’ transferred a liability of Br. 30,000tothe partnership. The entry to record the
assets contributed and the liabilities transferred by ‘A’, ‘B’, and ‘C’.

Cash--------------------------------------Br. 150,000
Inventory---------------------------------100,000
Equipment--------------------------------270,000
Building-----------------------------------150,000
Accounts Payable---------- 30,000
A, Capital-------------------- 150,000
B, Capital--------------------- 330,000
C, Capital--------------------- 160,000

2. Division of Net income or Net loss

As in the case of a sole proprietorship, the net income of a partnership may be said to include a
return for the services of the owners, for the capital invested, and for economic or pure profit. It
should be noted that division of the net income or net loss among the partners in exact

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accordance with their partnership agreement is of the utmost importance. If the agreement is
silent on the matter, the law provides that all partners share equally, regardless of differences in
amounts of capital contributed, of special skills possessed, or of time devoted to the business.
The partners may, however, make any agreement they wish in regard to the division of net
income and net loss.

A. Income Division Recognizing Services of Partners

As a means of recognizing differences in ability and amount of time devoted to the business,
articles of partnership often provide for the division of a portion of net income to the partners in
the form of a salary allowances.

Illustration:

Assume that the articles of partnership of Abebe and Emebet provide for monthly salary
allowances of Birr 2,500 and Birr 2,000 respectively, with the balances of the net income to be
divided equally, and that the net income for the year is Birr 75,000.

Net income----------------------------------------------------------------------------------Birr 75,000

Division of net income: Abebe Emebet Total

Salary allowance-------------------Birr 30,000 Birr 24,000 Birr 54,000

Remaining income---------------- 10,500 10,500 21,000

Net income-------------------------Birr 40,500 Birr 34,500 Birr 75,000

The division of net income is recorded as a closing entry, regardless of whether the partners
actually withdraw the amounts of their salary allowances. The entry for the division of net
income is as follows:

December 31:
Income summary----------------------------75,000
Abebe, Capital-------------------------- 40,500
Emebet, Capital------------------------ 34,500

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If Abebe and Emebet had withdrawn their salary allowances monthly, the withdrawals would
have accumulated as debits in the drawing accounts during the year. At the end of the year, the
debit balances of Birr 30,000 and Birr 24,000 in their drawing accounts would be transferred to
their respective capital accounts.

B. Income Division Recognizing Services of Partners and Investment

Partners may agree the most equitable plan of income sharing is to allow salaries based on the
services rendered and also to allow interest on the capital investments. The remainder is then
shared in an arbitrary ratio.

Illustration:

Assume that Abebe and Emebet (1) are allowed monthly salaries of Birr 2,500 and Birr 2,000
respectively; (2) are allowed interest at 12% on capital balances at January 1 of the current fiscal
year, which amounted to Birr 80,000 and Birr 60,000 respectively; and (3) divide the remainder
of net income equally.

Net income----------------------------------------------------------------------------------Birr 75,000

Division of net income: Abebe Emebet Total

Salary allowance-------------------Birr 30,000 Birr 24,000 Birr 54,000

Interest allowance-----------------Birr 9,600 Birr 7,200 Birr 16,800

Remaining income---------------- 2,100 2, 100 4,200

Net income-------------------------Birr 41,700 Birr 33,300 Birr 75,000

C. Income Division-Allowances Exceed Net Income

In the illustration presented above, the net income has exceeded the sum of the allowances for
salary and interest. If the net income is less than the total of the special allowances, the
“remaining balance” will be a negative figure that must be divided among the partners as though
it were a net loss.

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Illustration:

Take the above example but change the net income as though it were Birr 50,000.

Net income----------------------------------------------------------------------------------Birr 50,000

Division of net income: Abebe Emebet Total

Salary allowance-------------------Birr 30,000 Birr 24,000 Birr 54,000

Interest allowance-----------------Birr 9,600 Birr 7,200 Birr 16,800

Excess of allow. Over income--- (10,400) (10,400) (20,800)

Net income-------------------------Birr 29,200 Birr 20,800 Birr 50,000

D. Partnership Dissolution

One of the basic characteristics of the partnership form of organization is its limited life. Any
change in the personnel of the ownership results in the dissolution of the partnership. Thus,
admission of a new partner dissolves the old firm. Similarly, death, bankruptcy, or
withdrawal of a partner causes dissolution. Dissolution of partnership is not necessary followed
by the winding up of the affairs of the business. For example, a partnership composed of two
partners may admit an additional partner. Or if one of three partners in a business withdraws, the
remaining partners may continue to operate the business. In all such cases, a new partnership is
formed and new articles of partnership should be prepared.

Admission of a Partner:

An additional person may be admitted to a partnership enterprise only with the consent of the
current partners. An additional person may be admitted to a partnership through either of two
procedures.

1. Purchase of an interest from one or more of the current partners.

2. Contribution of assets to the partnership.

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Admission by purchase of an interest from one or more of the current
partners:

When an additional person may be admitted to a partnership by purchasing an interest from one
or more of the existing partners, the capital interest of the incoming partner is obtained from
current partners, and neither the total asset nor the total owner’s equity of the business is
affected. The purchase price is paid directly to the selling partners. Payment is for partnership
equity owned by the partners as individuals, and hence the cash or other consideration paid is not
recorded in the accounts of the partnership. The only entry needed is the transfer of the proper
amounts of owner’s equity from the capital accounts of the selling partners to the capital account
established for the incoming partner.

Example: assume that partners Kebede and Belay have capital balances of Br. 50,000 each. On
June 1, each sells one fifth of his respective equity to Teklay for Br. 10,000 in cash. The
exchange of cash is not a partnership transaction and thus is not recorded by the partnership. The
only entry required in the partnership accounts is as follows

Kebede, Capital------------------------10,000
Belay, Capital-- ------------------10,000
Teklay, Capital------------------ 20,000
Admission by Contribution of Assets: - Instead of buying an interest from the current partners,
the incoming partner may contribute assets to the partnership. In this case both the assets and the
owner’s equity of the firm are increased.

Illustration: - Assume that X and Y are partners with capital accounts of Br. 35,000 and Br.
25,000 respectively. On June 1, Z invests Br. 20,000 cash in the business, for which she is to
receive ownership equity of Br. 20,000. The entry to record this transaction is as follows:

Cash----------------------------------------20,000
Z, Capital----------------- 20,000
With the admission of Z, the total owners’ equity of the new partnership becomes Br. 80, 0000.

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Revaluation of Assets: If the partnership assets are not fairly stated in terms of current
market value at the time a new partner is admitted, the accounts may be adjusted accordingly.
The net amount of the increases and decreases in asset values are then allocated to the capital
accounts of the old partners according to their income-sharing ratio.

Illustration:

Assume that in the above illustration for the X and Y partnership the balance of the merchandise
inventory account had been Br. 14,000 and the current market price had been Br. 17,000. Prior to
Z’s admission, the revaluation would be recorded as follows, assuming that Donald and Gerald
share net income equally.

Merchandise inventory----------------3,000
X, Capital------------------ 1,500
Y, Capital------------------- 1,500
Goodwill: When a new partner is admitted to a partnership, goodwill attributable either to the
old partnership or to the incoming partner may be recognized. Although there are various
methods of estimating goodwill, such factors are the respective shares owned by the partners and
the relative bargaining abilities of the partners will influence the final determination. The amount
of goodwill agreed upon is recorded as an asset, with a corresponding credit to the appropriate
capital accounts.

Illustration 1:

Assume that on March 1 the partnership of Marsha and Helen admits William who is to
contribute cash of Br. 15,000. After the tangible assets of the old partnership have been adjusted
to market value prices, the capital balances of Marsha and Helen are Br. 20,000 and Br. 24,000.
The parties agree, however, that the enterprise is worth Br. 50,000. The excess of Br. 50,000
over the capital balances of Br. 44,000 (Br. 20,000 + Br. 24,000) indicates the existence of Br.
6,000 of goodwill. This Br. 6,000 should be divided between the capital accounts of the original
partners according to their income sharing agreement.

The entries to record the goodwill and the admission of the new partner, assuming that the
original partners share equally in net income, are as follows:

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1. To record the recognition of goodwill to the old partners
Goodwill-------------------------------------6,000
Marsha, Capital-------------------- 3,000
Helen, Capital---------------------- 3,000

2. To record the admission of a new partner

Cash-------------------------------------15,000
William, Capital---------------- 15,000

Illustration 2:

Assume that Helina is to be admitted to the partnership of Semhal and Haron for an investment
of Br. 30,000. If the parties agree to recognize Br. 5,000 of goodwill attributable to Helina, the
entry to record her admission is as follows:

Cash-----------------------30,000
Goodwill------------------5,000
Helina, Capital----- 35,000

Withdrawal of a Partner

When a partner retires for some reason wishes to withdraw from the firm, one or more of the
remaining partners may purchase the withdrawing partner’s interest and the business may be
continued without apparent interruption. In such cases, settlement for the purchase and sale is
made between the partners as individuals, in a manner similar to the admission of a new partner
by purchase of an interest, and thus is not recorded by the partnership. The only entry required
by the partnership is a debit to the capital account of the partner withdrawing and a credit to the
capital account of the partner or partner’s acquiring the interest.

Illustration 1:

Alemu is to retire/withdraw from the partnership of Teshale, Alem, and Semira. The capital
balances of the partners are as follows: Alem, Br.200, 000, Theshale, Br. 100,000; and Semira,
Br.100, 000. Alem has sold his interest to Theshale for Br. 200,000. Hence, the only entry
required by the partnership to record the withdrawal of Alem is follows:

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 Alem, Capital-------------------------------200,000
Theshale, Capital------------------- 200,000

N.B: when a partner withdraws him/her from the partnership by selling his/her interest to one or
more of the existing partners, the capital interest of the outgoing partner is given to the current
partners purchasing the interest, and the total asset nor the total owner’s equity of the business is
affected.

However, if the settlement with the withdrawing partner is made by the partnership, the effect is
to reduce the assets and the owner’s equity of the firm. To determine the ownership equity of the
withdrawing partner, the asset accounts should be adjusted to current market prices. The net
amount of the adjustments should be divided among the capital accounts of the partners
according to the income sharing ratio. In the event that the cash or the other available assets are
insufficient to make complete payment at the time of withdrawal, a liability account should be
credited for the balance owed to the withdrawing partner.

Illustration 2:

Alem is to retire/withdraw from the partnership of Alem, Theshale, and Semira. The capital
balances of the partners are as follows: Alem, Br. 200,000, Theshale, Br. 100,000; and Semira,
Br. 100,000. Their net income/net loss sharing ratio is 2:1:1 respectively. At the time of the
valuation of assets at their market prices, the partners agreed that the merchandise inventory
should be increased by Br. 10,500 and the allowance for doubtful accounts should be increased
by Br. 2,100.

Required: - Present entries to record;

1. The adjustment of the assets to bring them into agreement with market prices.
2. The withdrawal of Alem from the partnership if (a) Alem receives the full amount in cash
(b) Alem agreed to accept an interest bearing note of Br. 150,000 in partial settlement of
his ownership equity and the remainder of his claim to receive in cash.

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Solution:

1. Merchandise inventory--------------------------------10,500
Alan, Capital------------------------------------ 4,200
Theodor, Capital------------------------------- 2,100
Smith, Capital---------------------------------- 2,100
Allowance for doubtful accounts--------- 2,100

2. (a)Alem, Capital-----------------------------204,200
Cash---------------------------------- 204,200
(b) Alem, Capital--------------------------204,200
Notes payable------------------ 150,000
Cash------------------------------- 54,200

Death of a Partner

The death of a partner dissolves the partnership. In the absence of any contrary agreement, the
accounts should be closed as of the date of death, and the net income for the fractional part of the
year should be transferred to the capital accounts. The balance in the capital account of the dead
partner is then transferred to a liability account until the law orders to whom should the dead
capital should be given.

LIQUIDATION OF PARTNERSHIP

Liquidation refers to the process of a wind-up of a business firm. When a partnership goes out
of business, it usually sells the assets (i.e. non cash assets). The sale of non cash assets is called
realization. During the process of realization, any gain or loss resulted from the sale of non cash
assets is shared among the partners based on their income sharing agreement. As cash is realized,
it is applied first to the payment of the claims of creditors. After all liabilities have been paid, the
remaining cash is distributed to the partners, based on their ownership equities as indicated by
their capital accounts.

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Illustration

The partnership of Dawit, Alemu, and Almaz share income in a ratio of 5:3:2, after discontinuing
the ordinary business operations of their partnership and closing the accounts, the following
summary of the general ledger is prepared:

Cash-------------------------------------Br. 11,000
Non cash assets----------------------- 64,000
Liabilities-------------------------------Br. 9,000
Dawit, Capital-------------------------22,000
Alemu, Capital------------------------22,000
Almaz, Capital------------------------22,000
Total-------------------------------Br. 75,000 Br. 75,000
Based on these facts, accounting for the liquidation of the partnership will be illustrated using
three different selling prices for the non cash assets.

1. Gain on Realization

Dawit, Alemu, and Almaz sell all non cash assets for Br. 72,000, realizing a gain of Br. 8,000
(Br. 72,000 - Br. 64,000). The gain is divided among the capital accounts of the partners in the
income sharing ratio of 5:3:2. The liabilities are paid, and the remaining cash is distributed to the
partners according to the balances in their capital accounts. A statement of partnership
liquidation, which summarizes the liquidation process, is presented hereunder:

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 Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Capital
Dawit Alemu Almaz
Cash + None cash Assets= Liab. + (50%) + (30%) + (20%)
Balance before realization...11,000 64,000 9,000 22,000 22, 000 22,000
Sale of non cash assets &
Division of gain………….. +72,000 -64,000 - +4,000 +2,400 +1,600
Balance after realization… 83,000 -0- 9,000 26,000 24,400 23,600
Payment of liabilities…….. -9,000- -9,000 - - -
Bal. after payment of liab. 74,000 -0- -0- 26,000 24,400 23,600
Distrib.of cash to part…... -74,000 - - -26,000 -24,400 -23,600
Final balances……………. -0- -0- -0- -0- -0- -0-

The entries to record the several steps in the liquidation procedure are as follows:

1. To record the sale of non cash assets

Cash-------------------------------------72,000
Non cash assets------------------ 64,000
Loss & gain on realization--- 8,000
2. To record the division of gain
Loss & gain on realization-------8,000
Dawit, Capital------------------- 4,000
Alemu, Capital------------------ 2,400
Almaz, Capital------------------ 1,600
3. To record the payment of liabilities
Liabilities------------------------------9,000
Cash------------------------------- 9,000

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 4. To record the distribution of cash to partners
Dawit, Capital-----------------------26,000
Alemu, Capital----------------------24,400
Almaz, Capital----------------------23,600
Cash-------------------------- 74,000
2. Loss on Realization; No Capital Deficiencies

Assume that the foregoing example, Dawit, Alemu, and Almaz dispose all of non cash assets for
Br. 44,000, incurring a loss of Br. 20,000 (Br. 64,000 - Br. 44,000). The various steps in the
statement of partnership liquidation are presented hereunder:
Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Capital

Non cash Dawit Alemu Almaz

Cash Assets = Liab. + (50%) + (30%) + (20%)

Balance before realization... 11,000 64,000 9,000 22,000 22, 000 22,000

Sale of non cash assets &

Division of loss.………….. +44,000 -64,000 - -10,000 -6,000 -4,000

Balance after realization… 55,000 -0- 9,000 12,000 16,000 18,000

Payment of liabilities…….. -9,000- -9,000 - - -

Bal. after payment of liab.. 46,000 -0- -0- 12,000 16,000 18,000

Distrib.of cash to part…... -46,000 - - -12,000 -16,000 -18,000

Final balances……………. -0- -0- -0- -0- -0- -0-

The entries to record the several steps in the liquidation procedure are as follows:
1. To record the sale of non cash assets
Cash-------------------------------------44,000
Loss & gain on realization--------20,000
Non cash assets------------------ 64,000

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 2. To record the division of loss

Dawit, Capital------------------- 10,000

Alemu, Capital------------------ 6,000
Almaz, Capital------------------ 4,000
Loss & gain on realization-------20,000
3. To record the payment of liabilities

Liabilities------------------------------9,000
Cash------------------------------- 9,000
4. To record the distribution of cash to partners

Dawit, Capital-----------------------12,000
Alemu, Capital----------------------16,000
Almaz, Capital----------------------18,000
Cash-------------------------- 46,000

3. Loss on Realization; Capital Deficiency

Assume that the foregoing example, Dawit, Alemu, and Almaz dispose all of non cash assets for
Br. 10,000, incurring a loss of Br. 54,000 (Br. 64,000 - Br. 10,000). The various steps in the
statement of partnership liquidation are presented hereunder:
Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Capital
Non cash Dawit Alemu Almaz
Cash Assets = Liab. + (50%) + (30%) + (20%)
Balance before realization... 11,000 64,000 9,000 22,000 22, 000 22,000
Sale of non cash assets &
Division of loss………….. +10,000 -64,000 - -27,000 -16,200 -10,800
Balance after realization… 21,000 -0- 9,000 -5,000 5,800 11,200
Payment of liabilities…….. -9,000- -9,000 - - -
Bal. after payment of liab...12,000 -0- -0- -5,000 5,800 11,200
Distrib.of cash to part…... -12,000 - - - -2,800 -9,200
Final balances……………. -0- -0- -0- -5,000 3,000 2,000

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The entries to record the liquidation to this point are as follows:
1. To record the sale of non cash assets
Cash-------------------------------------10,000
Loss & gain on realization--------54,000
Non cash assets------------------ 64,000
2. To record the division of loss
Dawit, Capital------------------- 27,000
Alemu, Capital------------------ 16,200
Almaz, Capital------------------ 10,800
Loss & gain on realization-------54,000
3. To record the payment of liabilities
Liabilities------------------------------9,000
Cash------------------------------- 9,000
4. To record the distribution of cash to partners
Alemu, Capital----------------------2,800
Almaz, Capital----------------------9,200
Cash-------------------------- 12,000

N.B: The affairs of the partnership are not completely wound up until the claims among the
partners are settled. Payments to firm by the deficient partner are credited to that partner’s capital
account. Any uncollectible deficiency becomes a loss to the partnership and is written off against
the balances of the remaining partners. Finally, the cash received from the deficient partner is
distributed to the other partners according to their ownership claims.

Assumption 1:

Dawit pays the entire amount of the Br. 5,000 deficiency to the partnership (no loss).

The receipt of the Br. 5,000 paid by Dawit to the partnership and the distribution of the Br. 5,000
to the partners are indicated in the following statement of partnership liquidation.

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 Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Capital

Non cash Dawit Alemu Almaz

Cash Assets = Liab. + (50%) + (30%) + (20%)

Balance…………………….. -0- -0- -0- -5,000 3,000 2,000

Receipt of deficiency…… +5,000- 0- - +5,000 - -

Balance………………..… 5,000 -0- -0- -0- 3,000 2,000

Distrib.of cash to part…... -5,000- - - -3,000 -2,000

Final balances……………. -0- -0- -0- -0- -0- -0-

The entries to record the final settlement are as follows:

1. To record the receipt of deficiency

Cash--------------------------------------5,000
Dawit, Capital--------------------- 5,000
2. To record the distribution of cash to partners
Alemu, Capital---------------------------3,000
Almaz, Capital---------------------------2,000
Cash----------------------------------- 5,000

Assumption 2:

Dawit pays Br. 3,000 of the deficiency to the partnership, and the remainder is considered to be
uncollectible (Br. 2,000 loss)

The receipt of the Br. 3,000 paid by Dawit to the partnership, the division of the Br. 2,000 loss,
and the distribution of the Br. 3,000 to the partners are indicated in the following statement of
partnership liquidation.

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 Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Capital
Non cash Dawit Alemu Almaz
Cash Assets = Liab. + (50%) + (30%) + (20%)
Balance…………………….. -0- -0- -0- -5,000 3,000 2,000
Receipt of deficiency…… +3,000 -0- - +3,000 - -
Balance………………..… 3,000 -0- -0- -2,000 3,000 2,000
Division of loss………… - - - +2,000 -1,200 -800
Balance----------------------- 3,000 -0- -0- -0- 1,800 1,200
Distrib.of cash to part…... -3,000 - - - -1,800 -1,200
Final balances……………. -0- -0- -0- -0- -0- -0-

It should be noted that the Br. 2,000 loss was divided between Alemu and Almaz in their income
sharing ratio of 3:2. The entries to record the final settlement are as follows:

1. To record the receipt of part of deficiency

Cash--------------------------------------3,000
Dawit, Capital--------------------- 3,000
2. To record the division of loss
Alemu, Capital---------------------------1,200
Almaz, Capital---------------------------800
Dawit, Capital---------------------- 2,000
3. To record the distribution of cash to partners
Alemu, Capital---------------------------1,800
Almaz, Capital---------------------------1,200
Cash----------------------------------- 3,000

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Assumption 3:

Dawit is unable to pay any part of the Br. 5,000 deficiency (5,000 loss)

The division of the Br. 5,000 loss indicated in the following statement of partnership liquidation.

Dawit, Alemu, and Almaz

Statement of Partnership Liquidation

For period of xxxx

Capital

Non cash Dawit Alemu Almaz

Cash Assets = Liab. + (50%) + (30%) + (20%)

Balance…………………….. -0- -0- -0- -5,000 3,000 2,000

Division of loss………… - - - +5,000 -3,000 -2,000

Final balances……………. -0- -0- -0- -0- -0- -0-

It should be noted that the Br. 5,000 loss was divided between Alemu and Almaz in their income
sharing ratio of 3:2. The entries to record the final settlement is as follows:

1. To record the division of loss

Alemu, Capital---------------------------3,000
Almaz, Capital---------------------------2,000
Dawit, Capital---------------------- 5,000

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