by Lakeshore Bookkeeping Services
(Prince George, BC, Canada)
The question came up a while back on how to close the books of a partnership. I had to do a bit of research.
I am going to be honest here. I have never actually done a closing of a partnership ... except in class assignments when I was taking CGA courses ... but I didn't want to lose my notes on the subject ... so I'm posting them on the website.
Referencing my accounting text book "Fundamental Accounting Principles 8th Edition" by Larson, Nelson, Zin, and Carroll, here is my understanding of what needs to be done.
On the date you close the books, the partnership is in effect liquidated.
(1) Begin by transferring all the income from operations to the partner capital accounts in accordance with the partnership agreement AND close the partner drawing accounts to their respective capital accounts as well.
(2) Record the sale of the non-cash assets and record any gains or losses to an account that is often called Losses and Gains from Liquidation.
(3) Clear the Losses and Gains from Liquidation account to the partner capital accounts in accordance with the partnership agreement of net income sharing. Do NOT allocate this based on the balance of each capital account.
(4) All that should be left on the balance sheet is cash, liabilities and the partner capital accounts. Distribute the cash to the proper parties. Creditors get paid first with the partners getting the remaining cash ... which should equal their capital account balances.
(5) If there is a net loss to one or all of the partners ... i.e. there is no cash left to pay them out, the partner(s) whose capital account(s) is/are deficient should pay cash into the partnership to cover the deficit.
If only one partner owes money and cannot settle the debt upon closing, the partner should at some time in the future pay the other partners their share of the outstanding debt.
For the partners who have been "shorted", it is considered a personal debt to be borne by them in the ratio of their capital balance immediately prior to liquidation ... UNLESS their partnership addresses this situation. If the agreement does cover this type of situation, you must follow the agreement.
(6) The income / loss for the period is reported the same way you would at any year end ... each unincorporated partner's share of the profits / losses is reported and allocated on the T2125. Each incorporated partner's share of the profits / losses is reported through their corporation.
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