1|Page       DISTRIBUTION G CASH AMONG PARTNERS                                      NIKET PATEL         UNIT: 4 PIECEMEAL...
2|Page        DISTRIBUTION G CASH AMONG PARTNERS                                       NIKET PATEL    -     Maximum loss m...
3|Page        DISTRIBUTION G CASH AMONG PARTNERS                                      NIKET PATEL    -     With this, we g...
4|Page       DISTRIBUTION G CASH AMONG PARTNERS                                 NIKET PATEL         This suggests that:   ...
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DISTRIBUTION OF CASH AMONG PARTNER

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THIS UNIT IS ALL ABOUT THE DESCRIPTIVE FOR THE WORK DONE WHEN CASH IS TO BE DISTRIBUTED AMONGS THE PARTNER AFTER THE BUSINESS

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DISTRIBUTION OF CASH AMONG PARTNER

  1. 1. 1|Page DISTRIBUTION G CASH AMONG PARTNERS NIKET PATEL UNIT: 4 PIECEMEAL DISTRIBUTION OF CASH AMONG PARTNERS  INTRODUCTION In the previous chapter, we have seen how cash received is distributed on dissolution of partnership firm, But in this case there was as assumption that all assets are sold at same time and from the sale proceeds all liabilities are paid and the balance is paid to partners. But in practice such thing does not happen. Assets are sold gradually and cash is not realized in limp sum. So on dissolution of the firm, cash is to be distributed piecemeal i.e. by installments depending on cash received.  MEANING OF PIECEMEAL DISTRIBUTION OF CASH: If all the assets are realized immediately on dissolution of the firm, then all the liabilities may also be paid off and the partners will receive the amounts due to them on capital accounts at that time. But In practice, assets are sold gradually and the book debts are collected gradually. Hence it is not possible to pay off all liabilities at a time and pay off the partners their dues from the firm. The cash received of assets has, therefore, to be distributed in a particular order laid down by law which is as under: (1) The dissolution expense and outside liabilities are to be paid first. (2) Out of the surplus, the partner’s loan, if any, has to be returned. If two or more partners have advanced loans, and the surplus is not enough to repay these loans is full, then loans are returned ratably. (3) Lastly, the partners are paid what is due to them on capital accounts. If the partners capital are in their profit sharing ratio, then the surplus cash is paid to them in the profit sharing ration ratio as and when it is received, if the cash received finally is not sufficient to return the full capital of the partners, then the loss they have to bear would be in their profit sharing ratio. If the capitals of the partners are not in the profit sharing proportion, the question of distributing cash in a piecemeal manner becomes difficult. One way out, is to wait till all the assets are sold off and then to ascertain the loss on realization, which would be transferred to their capital Accounts. This will give us the final capital balance which would be returned to them in full. Even this is not practicable as the partners are not generally ready to wait till the last rupee is realized. The cash has to be distributed among the partners as and when they are received.  METHODS OF PIECEMEAL DISTRIBUTION OF CASH: The following two methods are generally used for such piecemeal distribution: - Surplus capital method or Proportionate Capital Method.
  2. 2. 2|Page DISTRIBUTION G CASH AMONG PARTNERS NIKET PATEL - Maximum loss method. • SURPLUS CAPITAL METHOD : Under this method, cash is first paid to a partner who has surplus capital as compared to other partner’s capital on the basis of their profit sharing ratio. It must, in the first instance, be found out as to who has the least amount of capital on the basis of his share in the profit. He would not be paid anything towards capital in the beginning. Now, the capitals of the remaining partners must be compared and it must be ascertained as to which partner has surplus capital, compared to his share in the profit, the surplus would be returned to him. It means that last two partner’s capitals would then be in their profit sharing ratio. In the next, step the surplus capitals of these two partners as compared to the partner having the least capital would be returned to them in their profit sharing proportion. This would bring down the capitals of all the partners in their profit sharing ratio. Whatever cash is received thereafter must be distributed among all the partners in their profit-sharing ratio. (1) In order to find, out which partner has the least capital in proportion to his share in the profit, capitals of all partners must be divided by his share or profit. This will give the figures, which all show more or less capital in proportion to their share of profit. E.g. there are three partners A,B, and C who share profits in the ratio of 2/5, 2/5, and 1/5 their capitals are Rs. 40,000 Rs. 20,000 and Rs 15,000. The assets realized Rs. 35,000. In this case if we apply the above formula, we get the following result: Partners A B C 1) Actual capital 40,000 20,000 15,000 2) Profit sharing ratio 2 2 1 3) Capital factor =20,000 =10,000 =15,000 The above figure shows that B has the lowest capital of all the three. So in the first instance, nothing will be paid to B. (2) After finding out the capital factor, let us prepare the statement showing surplus capital, the steps in this statement are as below: - First write down the actual capitals of all partners. - Then below these figures write proportionate capitals of all partners, which will be subtracted from actual capital.
  3. 3. 3|Page DISTRIBUTION G CASH AMONG PARTNERS NIKET PATEL - With this, we get surplus capitals of the partner with lower capital factor. - Now we write down the proportionate surplus capitals of these two partners in their profit sharing ratio. The basis will be surplus capital of the partner with lower capital factor. We deduct this form their excess capital as found out in (iii) - This will give the excess capital of the partner having highest capital Then the procedure of distribution will be: a) First pay excess capital to the partner having highest capital factor, as found out in (v) above. b) Then Return the excess capitals of two partners as found out in (iii) above. c) Now all the partners will get money in their profit sharing ratio. • MAXIMUM LOSS METHOD: The order of payment, here, remains the same as in the first method, i.e. the outside liabilities are paid first, partner’s loan the next and the remaining cash to be distributed among the partners. Only the method of calculating the cash to be distributed among the partners differs from the first one. On receipt of each installment of cash, it is presumed that the remaining assets are worthless and no further cash is going to be received. The maximum loss at each installment is arrived at on this assumption. The maximum loss is the difference between the total capital and the cash received for that installment. The maximum loss is the difference between the total capital and the cash received for that installment. The maximum loss thus arrived at is distributed among the partner in their profit sharing ratio and deducted from their capitals, and the capital balance left is the payable among to each partner out of that installment. E.g. A and B share profits in proportions of 2:1 their capital balances were Rs. 10000 and Rs. 6000. If Rs. 4000 is realized from sale of the some asset, show its distribution. Let us presume that no further installment is going to be received. Total capital is Rs. 16,000 and the cash received Rs.4, 000 suggesting that there is a maximum loss of Rs. 12,000 which would be distributed between A and B and the remaining amount would be paid to them. A B Capital 10,000 6,000 Less: Max Loss in ratio of 2:1 8,000 4,000 Installment distributed 2,000 2,000
  4. 4. 4|Page DISTRIBUTION G CASH AMONG PARTNERS NIKET PATEL This suggests that: (1) First write down the total capitals of all partners. (2) Deduct them from the amount of installment received (3) The difference between the two is the maximum loss, which is to be distributed among partners in their profit sharing ratio. (4) By deducting this share of maximum loss from capitals of each partners, we get distribution of installment.

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