PIECEMEAL DISTRIBUTION OF CASH
When any firm, organisation or company goes in heavy losses for many consecutive years , it gets close down. There are a number of factors which result in the close down of the business.
1. Heavy losses for consecutive years.
2. Disputes between the partners.
3. Lack of funds to run the business.
4. Liabilities are more than the assets.
5. Competition in the market.
6. Natural calamities that affect the productivity.
The above factors may force the organizers to close down the business.
The close down of any business is called as Dissolution of a business or partnership firm.
After the dissolution of the firm is declared, it becomes mandatory to sell the assets of the business and pay off the business liabilities. This is a huge process.
A person is appointed for the selling of assets and payment of liabilities. He is called as a liquidator. He charges some commission or remuneration is paid to him. Such a payment made to the liquidator is called as Liquidator's Remuneration.
Some important concepts to be taken into account.
Realisation Expenses
After dissolution of the firm the selling of assets and payment of liabilities is not made immediately or not made on a specified date. There are some assets which have to be repaired to get a good price on it. Such expenses are to be made initially. There are also some expenses which occur unexpectedly, for which an amount has to be kept aside before paying any liability. These type of expenses are called as Realisation Expenses or Dissolution Expenses.
It is a part of Realisation Expense.
Secured Liability
Any liability that has been given a security or pledged or hypothecated by any asset is called as a Secured liability.
When such asset is realised, the amount from this realisation is paid to the secured liability only. If the amount remains after payment of secured liability, then only the amount can be used to pay other liabilities.
Fully secured liability
When the amount realised from the asset provided as security is sufficient to pay the liability is called as fully secured liability. If the amount remains after payment of secured liability, then only the amount can be used to pay other liabilities.
Partially Secured liability
When the amount realised from the asset provided as security is insufficient to pay the liability the the part of liability remains unpaid. It will be then considered as unsecured liability. Such liability that has some part secured and some unsecured is called Partially Secured Liability.
Government Dues
The amount payable to the Government may be Municipal Corporation, State or Central Government in the form of Taxes or electricity bill, water bill, etc., are called as Government Dues.
Third Party Liability
The liability which does not form a part of Govt. Due or is not payable to any partner is called as Third party liability. For example : Mrs. Partner's Loan, Creditors, Bills Payable, All unsecured liabilities, etc.
Partner's Loan
Sometimes a partner provides loan to the firm other than his capital. Such a loan is considered as Partner's Loan. It has to be paid only after the payment of all the third party liabilities.
Priority for payment of liabilities / Sequence of payment of liabilities.
1. Estimated amount to be kept aside of Realisation Expenses or Dissolution Expenses.
2. Government Dues.
3. Third Party Liabilities.
4. Partners' loan
5. Partners' Capitals
The partners' capital has to be paid taking into account the loss they may bear should be in profit sharing ratio. For this there are two methods.
1. SURPLUS CAPITAL METHOD / PROPORTIONATE CAPITAL METHOD.
Once all the liabilities are paid, the remaining amount is refunded to the partners. The amount is to be paid in such a way that the unpaid capital i.e. their Realisation Loss should come in their profit sharing ratio.
The partners' capital is compared with their profit sharing ratio and whosoever shows excess capital will be paid the excess capital amount first.
Steps to calculate of Surplus Capital
1. Write the Capital Balances given as per the Balance Sheet.
2. Divide these Capitals by their own ratios.
3. Taking the least division as base capital multiply it by all the ratios.
4. Subtract the above amount from the capitals. i.e. first step minus third step.
5. Then we get SURPLUS CAPITALS
6. Again repeat the steps with the help surplus capitals.
7. We get is the Absolute surplus.
2. MAXIMUM LOSS METHOD / NOTIONAL LOSS METHOD.
Once all the liabilities are paid, the remaining amount is refunded to the partners. The amount is to be paid in such a way that the unpaid capital i.e. their Realisation Loss should come in their profit sharing ratio.
Steps to Pay the Capital of Partners
1. Take the total of partners' capital.
2. Deduct the available cash from the total of the capitals.
3. We get is the maximum loss which is to distributed to all the partners in profit sharing ratio.
4. Subtract the distributed maximum loss from the capitals.
5. If any partner gets negative amount, it is called deficiency which will be borne by the remaining partners.
6. The partner who is unable to bear the loss will not get any amount.
7. Who ever gets postive amount will be the amount to be paid to that partner.
8. Pay this amount from the available cash to the solvent partner / partners.
9. Subtract the paid amount from the original capital of the partner / partners.
10. Follow the same steps when next amoount is realised.
