A · Supplemental Illustration Center
Online-exclusive visual guides
1. The liquidation pipeline
① Realize
Sell the non-cash assets. The difference between proceeds and book value = gain/loss on realization, divided in the P&L ratio.
② Pay outside creditors
Banks, suppliers, the BIR — always first.
③ Pay inside creditors
Loans payable to partners — second, before any capital distribution.
④ Distribute to partners
Based on remaining CAPITAL balances — never the P&L ratio. The ratio already did its job on the realization gain/loss.
The most-failed point in this topic: final cash follows capital balances. Using the P&L ratio at step ④ double-counts the loss-sharing.
2. Capital deficiency — the three-way fork
A partner's capital goes NEGATIVE after the realization loss. What now?
Partner has a loan to the firm → exercise the right of offset: apply the loan against the deficiency first.
Partner is solvent → partner pays cash into the firm to erase the deficiency.
Partner is insolvent → the remaining partners absorb the deficiency in their remaining P&L ratio — then distribute what's left by capital balance.
3. Lump-sum vs installment at a glance
| Lump-sum | Installment | |
|---|---|---|
| Asset sales | One batch — everything sold before any distribution | Piecemeal over months |
| Partner payments | Once, at the end | After each sale — but only per a Schedule of Safe Payments or Cash Priority Program |
| Core caution | Handle deficiencies before final cash | Assume remaining assets are a TOTAL loss before paying anyone |
B · Interactive Workspaces
Practice tools
Tool 1 · Lump-sum liquidation simulator (two partners)
Enter the books and the selling price — get the full settlement, including a deficiency check.
C · Online-Exclusive Assessment