Question

Accounting treatment when all partners are insolvent

Answer 1

If all the partners becomes insolvent , creditors will not be able to get their amounts in full. All the cash available together with whatever can be received from the private estates of the partners will be paid to the creditors after the expenses of realisations have been made. In case of insolvency of all partners, creditors should not be transferred to realisation account; only assets should be transferred to realisation account. Amount realised from the assets should be credited to realisation account. Expenses should be debited to realisation account.The balance should be transferred to their capital accounts in profit sharing ratio. now cash account will be prepared. After recording the amounts which are received from the estates of the partner, the entire cash should be distributed among the creditors ratably. The balances in the account of creditors and in the capital accounts should be transferred to deficiency account. Thus all the accounts will be closed.