Capital Deficiency in Liquidation: I

Consider a partnership between Anna and Ben, who share profits and losses equally. Anna’s capital before liquidation is one hundred thousand dollars, and Ben’s is twenty thousand dollars.
The partnership sells its noncash assets, with a book value of three hundred thousand dollars, for two hundred thousand dollars, resulting in a loss of one hundred thousand dollars.
Since the partners share losses equally, each bears fifty thousand dollars. Anna’s capital reduces to fifty thousand dollars, while Ben’s falls to negative thirty thousand dollars.
When a partner’s capital becomes negative during liquidation, it is called a capital deficiency.
Next, the partnership pays its liabilities of one hundred eighty thousand dollars, leaving twenty thousand dollars in cash.
Since Ben’s capital is negative thirty thousand dollars, he must contribute this amount to eliminate the deficiency.
After his contribution, the total cash balance increases to fifty thousand dollars.
This is equal to Anna’s capital account balance. So, the remaining cash is distributed to her.
Ben receives no distribution. His contribution only removes his negative balance.
Settling capital deficiencies is necessary before closing the partnership.