1.Piecemeal Distribution

As and when money is received from sale of

assets, it is used to pay liabilities. The liabilities

are also paid in stages or gradually. The money, in

short, is distributed piecemeal – in stages and not

in a single shot. This is known as Piecemeal

Distribution.

2.Settlement of Liabilities

In a piecemeal distribution, the amounts realised from assets are used to settle the

liabilities in the following order:

[1] Realisation expenses

[2] Reserve for Unrecorded/Contingent Liabilities

[3] Outside Liabilities

[4] Partners’ loans and [5] Partners’ capitals. Surplus,

if arising at the last stage, is distributed to all partners in their profit sharing ratio.

2.1 Realisation Expenses Realisation expenses are paid or provided for, first.

2.2 Reserve for Unrecorded /Contingent Liabilities

A reserve is created to meet any unrecorded liability or a contingent liability (e.g. bills discounted).

2.3 Outside Liabilities

2.3.1 Types Outside liabilities are the amounts due to outsiders other than

partners such as creditors, banks etc. These include amounts due to even relatives of partners e.g. loan from partner’s wife etc. Outside

liabilities may be broadly classified into

[1] Secured Creditors and [2] Unsecured Creditors.

2.3.2 Secured Creditors

In case of Secured Creditors, the dues are secured by pledge, charge,

hypothecation or mortgage of an asset e.g. bank overdraft secured against

machinery and stock. Secured creditors may be (a) fully secured or (b) partly

secured.

(1) Fully Secured: In case of a fully secured creditor, the amount due is fully

covered by the value of asset pledged etc. On dissolution, such creditors can

fully recover their dues out of the realisations of the secured assets. Thus, on

dissolution the bank can fully recover the amount due on bank overdraft out of

the amounts realised from the sale of the machinery and stock. The surplus, if

any, belongs to the firm.

(2) Partly Secured: Partly Secured Creditors are those liabilities which are only

partly secured against an asset of the firm. In such cases the amount due is

only partly covered by the value of asset pledged etc. On dissolution, such

creditors can only partly recover their dues out of the amounts realised from

such assets. The remaining amount is treated as unsecured creditors and added

to the amount of unsecured liabilities.

2.3.3 Unsecured Creditors

Unsecured Creditors have no specific security at all. Unsecured Creditors are further classified into

preferential creditors and other creditors.

(1)Preferential: Preferential creditors means (a) amounts due to the Government e.g. income tax, municipal taxes etc.

(b) amounts due to the employees e.g. salaries and wages, compensation for termination of services,

contribution to provident fund etc. These amounts are paid first in preference to other unsecured creditors.

(2) Other: Other unsecured creditors are all the remaining outside liabilities of the firm. These also include the balance of partly secured creditors not met out of the

secured asset.

2.3.4 Order of Payment

Outside liabilities are paid in the following order:

(1) Out of the realisation from ‘charged’ (as security) assets, secured creditors are paid first. Balance realisation, if

any is used to pay other creditors. Remaining secured

creditors, if any, are added to other creditors.

(2) Out of the other realisations, preferential creditors are

paid first in the following order: (a) Amounts Due to

Government (b) Amounts Due to employees.

(3) Once all the preferential creditors are paid balance cash

is used to pay the unsecured creditors.

2.3.5 Pro-rata Payment

If the cash is insufficient to pay off all dues, the payment is

made to the concerned creditors (in each category)

proportionately i.e. in the ratio of the outstanding

balances.

2.4 Partners’ Loans

After all the outside liabilities are paid off, the internal liabilities i.e. the partners’ loans are paid off in the next

stage. If the cash is insufficient, payment is made against all partners’ loans proportionately i.e. in the ratio of

outstanding balances.

2.5 Partners’ Capitals After all the outside as well as internal liabilities are paid, the partners’ capitals are paid off in the last stage. If the cash is sufficient, all the capitals can be paid off. But if the balance

is insufficient, payment must be made against all capital accounts prorata or proportionately. If the capital balances are in the profit sharing ratio, there is no problem at all. The payment is made to all partners in the ratio of their capital balances. But if the capitals are not in the profit sharing ratio, payments at each stage must be done in such a

manner that:

(a)The payments are in the ratio of the balances of capitals at each stage and

(b) The payments ensure that the ultimate profit or loss on realisation is distributed among all the partners in their profit

sharing ratio.

3.Proportionate Capital Method 3.1 Meaning

This method is also known as Surplus Capital Method, Highest Relative Capital Method, Excess Capital Method or

Quotient Method. The excess capital (actual capital less capital proportionate to the profit sharing ratio) is paid first. After excess capitals are paid, all capitals are in the profits sharing ratio. Then the payments can be made in the profit

sharing ratio.

3.2 Procedure

3.2.1 Compute Adjusted Capitals Adjusted Capital means the amount due to each partner by

way of capital adjusted for current account balances, reserves, funds, accumulated profits, deferred revenue

expenses not written off etc.

Particulars Rs. Rs.

Capital A/c (Cr.) as per Balance Sheet xxx

Add: Current Account (Cr.) xxx

Reserves/Funds (credited in PSR) xxx

P & L A/c (Cr.) (credited in PSR) xxx xxx

Less: Current Account (Dr.) xxx

P & L A/c (Dr.) (debited in PSR) xxx

Deferred Revenue Expenses (debited in PSR)

Adjusted Capital Balances

xxx xxx

xxx

3.2.2 Compute Unit Capital

Unit Capital (UC) of a partner means his Adjusted capital divided by his

Share of profit.

3.2.3 Take Lowest UC as Base Capital The next step is to take the lowest Unit Capital as the Base

Capital (BC). This is called the Minimum Capital or the Core Capital.

3.2.4 Compute Proportionate Capital

Proportionate Capital (PC) of a partner is equal to the Base Capital x His Share of Profit.

3.2.5 Compute Excess Capital

Excess Capital of a partner is equal to his Capital Balance Less his Proportionate Capital. In case of the partner whose unit capital is taken as a Base his Proportionate Capital is

equal to his Capital Balance, and hence his Excess Capital is Nil.

3.2.6 Compute Next/Final Excess Capital If there are two partners, there will be only one partner whose capital is

excess; in case of three partners, there may be two partners whose capitals

are in excess, and so on. In case of three partners, the excess capital is to

be computed twice; in case of four partners, it is to be computed thrice and

so on. The computation at first stage (First Excess) is done as explained

above. In the next stages the steps are same, except that, the Excess

Capital in the next stage is equal to Old Proportionate capital Less New

Proportionate capital. The Excess Capital in the last stage is called the

Final Excess or the Absolute Excess Capital.

3.2.7 Order of Payment First, the Final Excess Capital is paid. Next, the

Proportionate Capital in the last stage is paid. Next, the proportionate Capital in the last But one stage is paid and so on. Finally, after all the excess amounts are paid, the balance

cash is paid I the profit sharing ratio of the partners.

Assignment Sums

Q1 A, B and C were in partnership sharing profit & losses in the ratio 3:2:1.

They dissolved the firm on 31-12-2003. On which date their balance sheet

appeared as follows:

Liabilities Rs. Assets Rs.

Creditors 40,000 Cash 10,000

Loan from A 10,000 Debtors 80,000

General Reserve 12,000 Stock 27,000

Capital : A 20,000

B 25,000

C 10,000

1,17,000 1,17,000

The realisation and expenses were as under:

Date Debtors Rs. Stock Rs. Expenses Rs.

Jan,2004 12,000 6,000 1,000 Feb,2004 22,000 1,000 1,500

March,2004 6,000 10,000 1,200

April,2004 18,000 5,000 900

May,2004 15,500 3,000 1,500

It was agreed that available cash and net realisation should be distributed at the end of each month. It was decided in May,2004, that C would take the

remaining debtors at Rs 2,500.

Prepare a statement by proportionate Capital method showing the distribution

of cash. Also show realisation account.

Q2 A, B and C were partners sharing in the ratio of 4:3:1. Their balance sheet

as on 31st March, 2003 was as follows:

Liabilities Rs. Assets Rs.

Creditors 26,250 Building 60,000

Bank Loans (Secured) 8,750 Plant 20,000

Loan from A 10,000 Stock 55,000

Capital : A 70,000 Debtors 60,000

B 30,000

C 50,000

1,95,000 1,95,000

They decided to dissolve the business. The assets are realised gradually and

the net amount were distributed immediately as given below:

Date Assets Realised Rs. Expenses Paid Rs.

May 20,2003 22,000 2,000

July 30,2003 16,800 1,800 Sept 20,2003 38,000 Nil

Nov 15,2003 45,000 5,000

Dec 30,2003 72,000 7,000

Show the distribution of cash and the loss to be borne by the partners.

Objective test

Match the column • Group ‘A’ • A. Income tax payable by a firm as on

the date of dissolution

• B. Balance of partly secured creditors

not met out of the secured asset

• C. Bank loan obtained by

hypothecation of Machinery

• Group ‘B

• ’(1) Secured Creditor • (2) Preferential Creditor

• (3) Unsecured Creditor

Multiple Choice Questions:

(1) Income tax payable by a firm as on the date of dissolution is treated ________

(a) As preferential creditors (b) as secured creditors (c) as unsecured creditors (d) as non-recoverable.

(2) Salaries and wages payable by a firm as on the date of dissolution is treated _______

(a) As preferential creditors (b) as secured creditors (c) as unsecured creditors (d) as non-recoverable.

(3) Unsecured Creditors are paid in the following order-

(a) All creditors pro data (proportionately)

(b) Due to Government, Due to Employees, Other Creditors

(c) Due to Employees, Due to Government, Other Creditors

(d) None of the above

(4) If cash is insufficient to pay off all partners’ loan, payment is made ________

(a) in the profit sharing ratio (b) in the profit sharing ratio (c) in the ratio of capitals (d) None of the above. In the ratio of outstanding loan balances

Answers

• Match the column answers

• A-2 , B-3 , C-1

• MCQ answers

• 1 a , 2 a, 3 c, 4 b