How deficiency of
creditors is paid off?
How deficiency of creditors is paid off?
At the time of
dissolution of a firm, the amount received from the sale of firm's
assets are utilised to pay the creditors. If the sale receipts fall
short, then partners' private assets are used for settling the dues
of the firm's creditors. Even if some portion of the amount due to
creditors is left unpaid, then there arises deficiency of creditors.
There are generally two procedures to be followed to treat the
deficiency of creditors.
1. Transferring
deficiency to the Deficiency Account
2. Transferring
deficiency to the Partner's Capital Account
In the former
procedure, a separate account is prepared for the firm's creditors.
Then in order to ascertain the firm's cash balance accruing from the
sale of the firm's assets and partners' private assets, Cash Account
is prepared. After ascertaining the cash availability with the firm,
the creditors and the external liabilities are paid proportionately
(partially). The remaining unpaid creditors or the deficiency is
transferred to the Deficiency Account.
In the latter
procedure, creditors are paid by the cash available with the firm
including the partners individual contribution. The deficiency or
unpaid creditors amount is transferred to the Partner's Capital
Account. Thus the deficiency of the creditors is borne by all the
partners in their profit sharing ratio. If any partner becomes
insolvent and is unable to bear the deficiency, then this will be
regarded as a capital loss to the firm. If the partnership deed is
silent about such capital loss in the facet of insolvency of a
partner, then according to the Garner v/s Murray case,
such capital loss need to be borne by the solvent partners in their
capital ratio.
At the time of dissolution of a firm, the amount received from the sale of firm's assets are utilised to pay the creditors. If the sale receipts fall short, then partners' private assets are used for settling the dues of the firm's creditors. Even if some portion of the amount due to creditors is left unpaid, then there arises deficiency of creditors. There are generally two procedures to be followed to treat the deficiency of creditors.
1. Transferring deficiency to the Deficiency Account
2. Transferring deficiency to the Partner's Capital Account
In the former procedure, a separate account is prepared for the firm's creditors. Then in order to ascertain the firm's cash balance accruing from the sale of the firm's assets and partners' private assets, Cash Account is prepared. After ascertaining the cash availability with the firm, the creditors and the external liabilities are paid proportionately (partially). The remaining unpaid creditors or the deficiency is transferred to the Deficiency Account.
In the latter procedure, creditors are paid by the cash available with the firm including the partners individual contribution. The deficiency or unpaid creditors amount is transferred to the Partner's Capital Account. Thus the deficiency of the creditors is borne by all the partners in their profit sharing ratio. If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm. If the partnership deed is silent about such capital loss in the facet of insolvency of a partner, then according to the Garner v/s Murray case, such capital loss need to be borne by the solvent partners in their capital ratio.
