How deficiency of creditors is paid off?
How deficiency of creditors is paid off?
Deficiency of creditors arises when a firm is unable to pay off the creditors after selling of all the assets and utilizing partner’s private assets. In such a situation there are two procedures that needs to be followed:
1. Transferring deficiency to Partners’ Capital Account:
In this procedure creditors get paid from the cash available with the firm that includes each partner’s individual contribution. The deficiency is transferred to Partners capital account and therefore is managed by all partners as per their profit sharing ratio. In case a partner becomes insolvent, it is regarded as capital loss for the firm. If the partnership deed has no clause for such a situation, then the capital loss needs to be borne by partners who are in solvent state and as per their capital ratio in the firm, as per Garner vs. Murray case.
2. Transferring the deficiency to Deficiency Account:
In this process, a separate account is prepared for creditors. Then for determining the cash obtained from sale of firms and partners private assets, a cash account is prepared. Then after determining the cash available with the firm, creditors and external liabilities are paid, but not in full. The remaining creditors or the deficiency is then transferred to the deficiency account.
Deficiency of creditors arises when a firm is unable to pay off the creditors after selling of all the assets and utilizing partner’s private assets. In such a situation there are two procedures that needs to be followed:
1. Transferring deficiency to Partners’ Capital Account:
In this procedure creditors get paid from the cash available with the firm that includes each partner’s individual contribution. The deficiency is transferred to Partners capital account and therefore is managed by all partners as per their profit sharing ratio. In case a partner becomes insolvent, it is regarded as capital loss for the firm. If the partnership deed has no clause for such a situation, then the capital loss needs to be borne by partners who are in solvent state and as per their capital ratio in the firm, as per Garner vs. Murray case.
2. Transferring the deficiency to Deficiency Account:
In this process, a separate account is prepared for creditors. Then for determining the cash obtained from sale of firms and partners private assets, a cash account is prepared. Then after determining the cash available with the firm, creditors and external liabilities are paid, but not in full. The remaining creditors or the deficiency is then transferred to the deficiency account.
