Summary
Summary Assignment 2
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- Institution
Summary of 7 pages for the course Financial Accounting at Unisa (STEP BY STEP GUIDE)
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The Liquidation account:Simultaneous Liquidation:
A single liquidation account is prepared to determine the overall net profit or loss from liquidating the
entire partnership.
Piecemeal Liquidation:
Several liquidation accounts are prepared to determine the net profits or losses from liquidating different
portions of the partnership.
The methods for preparing liquidation accounts vary based on preference and circumstances.
Two methods for preparing liquidation accounts in the case of a simultaneous liquidation are discussed
next.
Method 1:
1. Closing Accounts:
• Close all asset accounts (except the bank account), contra-asset accounts (like
accumulated depreciation and allowance for credit losses), and liability accounts to a
liquidation account.
2. Recording Transactions:
• Record the liquidation of assets and settlement of debts in the liquidation account.
• Also, record any additional income received or expenses paid during the liquidation
process in the liquidation account.
3. Calculating Net Profit/Loss:
• Determine the net profit or loss from the liquidation process by balancing the liquidation
account.
• This balance reflects the overall outcome of the partnership's liquidation.
4. Allocation to Partners:
• Close the balance of the liquidation account to the capital accounts of the partners
based on their profit-sharing ratio.
5. Handling Asset Liquidation:
• Reflect any profit or loss from asset liquidation in the liquidation account.
• This is calculated as the difference between the carrying amount of the asset (recorded
on the debit side of the liquidation account) and the selling price (recorded on the credit
side of the liquidation account).
, Example (Method 1)
• Vehicle Liquidation:
• A vehicle with a carrying amount of R20,000 is closed off (debited) to the liquidation
account.
• The vehicle is sold for R18,000.
• On the sale date:
• The liquidation account is credited with R18,000.
• The bank account is debited with R18,000.
• The difference between the vehicle's carrying amount (R20,000) and the sale proceeds
(R18,000) results in a loss of R2,000, which is reflected in the liquidation account.
• Settlement Discount:
• The trade payables control account of R15,000 is closed off (credited) to the liquidation
account.
• It's settled in full by a cash payment of R13,500.
• On the settlement date:
• The liquidation account is debited with R13,500.
• The bank account is credited with R13,500.
• The difference between the credit entry of R15,000 and the debit entry of R13,500 in the
liquidation account reflects a settlement discount received of R1,500.
• Loss and Discount Entries:
• The loss of R2,000 and the settlement discount received of R1,500 are not recorded as
separate entries in the liquidation account.
• Balancing the Liquidation Account:
• The total on the debit side of the liquidation account is R33,500.
• The total on the credit side of the liquidation account is R33,000.
• The difference (R33,500 - R33,000 = R500) represents the balancing amount, which
appears on the credit side of the liquidation account.
• Interpretation of Balancing Amount:
• Since the balancing amount is on the credit side, it reflects a net loss in the liquidation
process.
• Closure of Net Loss:
• If these entries represent the entire liquidation of the partnership, the net loss of R500 is
closed off in the accounts accordingly.
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