Partnership Accounts-Piecemeal

Distribution
Ms. Meenakshi
Assistant Professor
Commerce Department
Kanya Mahavidyalaya Kharkhoda
 Introduction of Piecemeal Distribution
The assumption that all assets are realized immediately on the
date of dissolution and all the liabilities are paid on that date is
unrealistic. In actual practice, assets are realized gradually and
cash is distributed among different parties as and when
realized. There may be a gap of few months between the
realization of two assets. Hence, final result (profit or loss on
realization) of business is not known till all assets are realized.
In such situation, piecemeal distribution system is adopted.
 As per this system first, all creditors/outside liabilities are
paid, then loans given by the partners are returned and then if
cash is realized further it would be distributed immediately
among partners without waiting for the completion of all
realizations.
Continues…
• The difficulty is how to distribute the available
cash among the partners without
ascertainment of profit or loss on realization.
And the same can not be ascertained until all
assets are realized.
• In such situation, any of the following
methods may be adopted for payment to
partners.
Proportionate Capital
Method/ Surplus Capital Maximum Loss Method
method
Proportionate Capital Method
I In this method, the capitals of partners are adjusted in their
profit sharing ratio. (This is done by taking one partner’s
capital as base.)
II The partner whose capital is in excess of others (after
adjusting in profit sharing ratio) is refunded his excess capital.
III After refunding the excess capitals, the capitals will be
automatically left in profit sharing ratio. After this , the cash
realized from assets will be distributed among all the partners
in their profit sharing ratio.
IV The unpaid balance of the capital accounts will represent loss
on realization and this loss will be exactly in profit sharing
ratio.
Illustration
• A, B and C were in partnership sharing profits and losses of 3:2:1. The
following is their Balance Sheet as at 31st Dec.,2014 on which date they
dissolved the partnership:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Sundry Creditors 25,000 Cash 3,000
A’s Loan 8,000 Debtors 34,800
General Reserve 12,000 Stock 52,500
Capitals : Fixed Assets 91,700
A 94,000
B 20,000
C 23,000 1,37,000

1,82,000 1,82,000

• It was agreed to repay the amounts due to the partners as and when the
assets are realized.
Continues…
Assets realized as follows:

Month Debtors Stock Fixed Assets Expenses

February 4,000 5,000 10,000 800

March 12,000 10,000 32,000 1,200
May 8,000 17,000 20,000 1,500
July 6,000 9,000 22,000 1,000

Prepare a statement showing how the distribution should be made according

to Surplus Capital Method..
Solution
• Cash Available each Month

Month Debtors + Stock + Fixed Assets –Expenses = Cash Available

Feb 4,000 5,000 10,000 800 18,200

March 12,000 10,000 32,000 1,200 52,800
May 8,000 17,000 20,000 1,500 43,500
July 6,000 9,000 22,000 1,000 36,000
Calculation of Surplus or excess capital
A B C
Partners’ Profit Sharing ratio 3 2 1
Capitals as per Balance Sheet (Rs.) 94,000 20,000 23,000
Add : General Reserve (12,000) in 3:2:1 6,000 4,000 2,000
Actual Capitals 1 ,00,000 24,000 25,000
Capitals in profit Sharing ratio i.e.3:2:1
(taking B’s capital as base )
B’s capital 24,000
Total capital = 24,000 *6/2=72,000
72,000 divided in 3:2:1 36,000 24,000 12,000
Surplus Capitals 64,000 --------- 13,000
Capitals of A and C in profit sharing
ratio i.e. 3:1 (taking C’s capital as base)
13,000 *4/1=52,000
Rs. 52,000 divided in 3:1 39,000 13,000
Ultimate surplus capital to be refunded 25,000 ----------- ----------
first
Statement showing piecemeal distribution of Cash
Date/ Particulars Cash Creditors A’s Loan A B C
Month
Jan Balances as per 3,000 25,000 8,000 94,000 20,000 23,000
balance sheet
Add: Gen. Reserve --- --- --- 6,000 4,000 2,000
(12,000 in 3:2:1)
Balances 3,000 25,000 8,000 1,00,000 24,000 25,000
Jan Cash in hand paid
to creditors -3,000 3,000 --- ---- --- ---
Balances --- 22,000 8,000 1,00,000 24,000 25,000
Feb Gross Realization 18,200 --- --- --- --- ---
Feb Paid to creditors - 18,200 -18,200 --- --- --- ---
Balances --- 3,800 8,000 1,00,000 24,000 25,000
March Gross Realization 52,800 ---- ---- ---- ----- ----
March Paid to creditors -11,800 - 3,800 -8,000 ---- ----- ----
and A’s Loan
Balances 41,000 ---- ---- 1,00,000 24,000 25,000
March Paid to A, his -25,000 ---- ---- - 25,000 ----- ----
surplus capital
Balances 16,000 ---- ---- 75,000 24,000 25,000
continues…..
Date/ Particulars Cash Cr A’s A B C
Month Loan
March Balances 16,000 75,000 24,000 25,000
paid to A & C in the
ratio of 3:1 -16,000 -12,000 ---- - 4,000
Balances --- 63,000 24,000 21,000
May Gross Realization 43,500 ----- ----- -----
Paid to A & C in the
ratio of 3:1 to bring
their capital
proportionate to B -36,000 -27,000 ----- -9,000
7,500 36,000 24,000 12,000
Balances
Balance distributed
to all partners in -7,500 - 3,750 - 2500 - 1250
their profit sharing
ratio 3:2:1 ---- 32,250 21,500 10,750
Balances 36,000 ----- ----- -----
Gross realization -36,000 -18,000 - 12,000 -6,000
Rs.36,000,
distributed in 3:2:1 ----- 14,250 9,500 4750
Balance Left
(Loss on realization)
Maximum Loss Method
• An alternative method of piecemeal distribution amongst
partner is to calculate the maximum possible loss on every
realization after the outside liabilities and the partners
loan has been paid off.
• The amount available for distribution is compared with the
total amount of capital payable to the partners and
maximum loss is ascertained on the assumption that in
future assets will not fetch any amount.
• The maximum possible loss is deducted from the capital
balances of the partners in their profit and loss sharing
ratio.
• The balance left in the capital account after deducting the
maximum possible loss will be the amount payable to the
partner.
Which method should be adopted
• If it is not specifically mentioned in the
question as to which method is to be adopted,
then any of the two methods may be adopted.
• But, if it is clearly stated in the question to
apply the rule of Garner vs. Murray or
distribution of cash is to be made assuming
that no further realization of assets will be
made, maximum loss method will be used.
Illustration
Taking the same problem which has been solved by
applying surplus capital method ,show the distribution
of cash under Maximum loss method.
Solution: Cash available each month
Month Debtors + Stock + Fixed Assets - Expenses = cash available

Feb 4,000 5,000 10,000 800 18,200

March 12,000 10,000 32,000 1,200 52,800
May 8,000 17,000 20,000 1,500 43,500
July 6,000 9,000 22,000 1,000 36,000
Statement showing piecemeal distribution of Cash
Date/ Particulars Cash Creditors A’s A B C
Month Loan
Jan Balances as per 3,000 25,000 8,000 94,000 20,000 23,000
balance sheet
Add: Gen. Reserve --- --- --- 6,000 4,000 2,000
(12,000 in 3:2:1)
Balances 3,000 25,000 8,000 1,00,000 24,000 25,000
Jan Cash in hand paid to
creditors -3,000 3,000 --- ---- --- ---
Balances --- 22,000 8,000 1,00,000 24,000 25,000
Feb Gross Realization 18,200 --- --- --- --- ---
Feb Paid to creditors - 18,200 -18,200 --- --- ----- ---
Balances --- 3,800 8,000 1,00,000 24,000 25,000
March Gross Realization 52,800 ---- ---- ---- ----- ----
March Paid to creditors and -11,800 - 3,800 -8,000 ---- ------ ----
A’s Loan
Balances 41,000 ---- ---- 1,00,000 24,000 25,000
March Maximum loss
(1,08,000 in 3:2:1)
{1,00,000+24,000+25
,000 = 1,49,000} -54,000 -36,000 -18,000
[1,49,000-41,000
=1,08,000] 46,000 -12,000
7,000
continues…..
Month Particulars Cash Cr. A’s A B C
Loan
March Balances +46,000 -12,000 +7,000
B’s deficiency borne by A
and C in their capital ratio
i.e.1,00,000: 25,000 or 4:1 - 9,600 +12,000 -2,400
41,000 36,400 ---- 4,600
Thus, payment of 41,000
to A & C ------- 63,600 24,000 20,400
Balance due 43,500 --- --- ------ ------
May Gross Realization
Maximum loss 64,500 in
ratio 3:2:1
(63,600+24,000+ 20,400 =
1,08,000) -32,250 -21,500 -10,750
{1,08,000-43,500 =64,500} 43,500 31,350 2,500 9,650
Thus, Payment of 43, 500
to A ,B & C ---- 32,250 21,500 10,750
Balance Due 36,000 ------ ------ -----
July Gross realization
Final loss 28,500 in 3:2:1 -14,250 -9,500 -4,750
(32,250+21,500+10,750=
64,500)
{64,500-36,000=28,500} 36,000 18,000 12,000 6,000
Payment to A,B & C
THANKS