Question

liquidating distributions of the partnership are required to be made in accordance with the positive capital account balances of the partners. Explain why this is so important.

Answer 1

(1) A positive capital account balance implies amount due to the partner and a negative capital account balance implies amount due from the partner. Hence payment cannot be made in negative capital account balances.

(2) Excess paid capital relative to the profit sharing ratio is to be distributed first. Here positive capital account balance implies excess over that needed as per profit sharing ratio. Hence unless positive capital account balance is paid, payment to other partners cannot be made.

(3) Thus if liquidating distributions of the partnership are to be made to all partners in profit sharing ratio, their capitals must be in profit sharing ratio. Otherwise it leads to unjustice to those who retained their earngs in the firm and unnecessarly benefits those who made heavy drawings from the firm in earlier periods. That is why it is so important to take positive capital account balance for distributions at the time of liquidation of firm.