Which of the following statements is true regarding partnership liquidation?

Which of the following statements is true regarding partnership liquidation?
A . Operations can continue after the liquidation, if all partners agree.
B . Partnership liquidation ends both the legal and economic life of an entity
C . Partnership liquidation occurs when there is capital deficiency.
D . When a partnership Is liquidated, each partner pays creditors from cash received

View Answer

Answer: B

Explanation:

Partnership liquidation refers to the process of dissolving a partnership, where all assets are sold, liabilities are paid off, and any remaining assets are distributed among the partners. This process marks the end of the partnership’s legal existence and its economic activities.

Legal and Economic Termination: Upon liquidation, the partnership ceases to exist legally and economically. This means that it can no longer operate or enter into new business transactions. Asset Distribution: The liquidation process ensures that all assets are sold, and the proceeds are used to pay off any outstanding debts. Any remaining funds are distributed to the partners according to the partnership agreement.

Capital Deficiency: While capital deficiency might prompt liquidation, it is not a defining characteristic of the process.

Creditors Payment: Creditors are paid from the partnership’s assets, not directly by the partners unless agreed otherwise or if the assets are insufficient to cover the liabilities.

Reference: "Fundamentals of Partnership Accounting," which details the steps and consequences of partnership liquidation.