Sharing Losses.—In the case of insolvency, the partners are compelled to share the losses in the profit and loss ratio, not in capital ratio, and these losses are chargeable against their capital accounts. If the capital account of any of the partners is not large enough to satisfy his share in the losses, a deficit in that partner’s interest results, which is represented by the debit balance in his capital account. This shows the amount which he must contribute to the firm in order that all claims may be satisfied. The rule that profits and losses in liquidation cannot be shared in the same ratio as capitals, unless this ratio is also the profit and loss ratio, is responsible for the fact that upon dissolution one or more partners may have to make additional contributions, while others may not be obliged to do so. This duty of contributing to make up a deficit is inherent in the partnership relation and can be enforced by the copartners.
A few illustrations will set forth the main problems in connection with the liquidation of partners’ capitals:
1. Sharing Losses Equally
| Balance Sheet of A, B & C | |||
| Cash | $10,000.00 | Liabilities | $10,000.00 |
| Other Assets | 60,000.00 | A, Capital | 15,000.00 |
| B, Capital | 20,000.00 | ||
| C, Capital | 25,000.00 | ||
| $70,000.00 | $70,000.00 | ||
A, B, and C share profits and losses equally.
The above balance sheet shows, in summary form, the condition of the firm previous to liquidation, and also indicates the shares of the partners in the net assets as on that date, i.e., the partners share in the net assets in the ratio 15:20:25 or 3:4:5. Dissolution becomes necessary and in the course of liquidation the expenses and losses incurred amount to $15,000. After the net loss of $15,000 is divided equally among the partners, the capitals will amount to, A $10,000, B $15,000, and C $20,000. The result is that the capital ratio has changed from 3:4:5 to 10:15:20, or 2:3:4, and the net assets of $45,000 are to be shared in this new ratio.
2. Capital Deficit
| Balance Sheet of Jones & Smith | |||
| Cash | $10,000.00 | Jones, Capital | $20,000.00 |
| Losses in Liquidation | 15,000.00 | Smith, Capital | 5,000.00 |
| $25,000.00 | $25,000.00 | ||
Jones and Smith share profits and losses equally.
The above balance sheet shows the condition of the firm after liquidation. It is necessary, first, to distribute the liquidation losses among the partners, after which they share in the net assets according to capital ratios. Accordingly, each capital account is debited with an equal share in the loss of $15,000, after which Jones’ capital is $12,500 and Smith’s account shows a debit balance of $2,500. This means that Jones not only gets the entire cash of $10,000, but Smith must contribute $2,500 to the firm and this also goes to Jones.