Capital deficiency & No capital deficiency

Definition (1):

Capital deficiency refers to a debit balance in a partner’s capital account after allocation of gain or loss.

No capital deficiency means all partners have a credit balance after allocation of gain or loss.

Definition (2):

“Capital deficiency means that one or more partner has a debit balance in his/their capital account at the point of final cash distribution. “

“No capital deficiency means that all partners have a zero or credit balance in their capital accounts for the final distribution of cash.”

When a partnership is liquidated, all partners may have credit balances in their capital accounts. This situation is called no capital deficiency. Or, one or more partners may have a debit balance in the capital account. This situation is termed a capital deficiency.

Use of the Terms in Sentences:

  • The capital accounts of the partners are showing a capital deficiency after the liquidation of the partnership.
  • The capital accounts of the partners are showing no capital deficiency after the liquidation of the partnership.
  • Capital deficiency can occur because of liquidation losses, excess withdrawals prior to the liquidation, or continuous losses before liquidation.
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