 In this presentation, we will take a look at a situation where a partner leaves a partnership and is paid something greater than the capital account. Here's going to be our chart of accounts here, our trial balance where we have the cash as the only asset, we've got the liabilities in orange, we've got the capital accounts and then we have no revenue and expenses. Remember that's important not to have the revenue expenses in essence being a post closing trial balance so that the capital accounts then represent the true capital accounts as of a point in time after having all temporary accounts closed out to them. In other words, the assets minus the liabilities will equal the equity section broken out between the owners, the partners. So we're going to say that M is going to leave the partnership here and it's going to get paid in this case in this time more than the capital account. And you might say, well, why would that happen if the assets minus the liabilities equals the capital accounts and the capital account for M is 151.200. Why would they get paid more than that? And it could be that that there's some things on the trial balance that aren't at fair market value. So especially things like equipment, possibly intangible things, possibly like goodwill in the partnership that's not represented on the trial balance. Especially something like goodwill, it might be thought that the partnership actually has higher value than what's being reflected, possibly because the equipment is valued more, possibly because there's some intangible to the partnership such as goodwill that is not being reflected. So in essence, there's kind of like a negotiation process between the partners to decide what would be the appropriate amount to pay a partner who leaves the partnership. So in this case, we're going to say that the partnership is actually worth more and M is going to receive 200,000 cash. So the partnership is going to pay the partner M who's leaving 200,000, decreasing the cash of the partnership. And we know that M's got to be off the books and M's on the books for a capital account of 151.200. So we're going to bring that down to zero. And then we have a difference of whatever that difference is, what do we got? Let's fully calculate it out here. We've got the 200,000 minus 151.200 of the 48,800. Now that's going to have to be allocated between the two remaining partners, B and L, and it's going to be reducing their capital accounts, which isn't really good for them, of course. It's reflecting the partnership, owing them less money. Now if the three partners had an equal sharing, we could just split that equally, but we're going to say here that the partnership original agreement was a three, two, five split. And so we know that if we add that up, five, six, seven, eight, nine, ten, that's up to ten. So then we would take a ratio of three to ten, two to ten, five to ten to break out between M, B, and L, respectively. We can't, however, use the same, I mean, the two partners remaining are B and L. So we can't use, however, the two tenth and five tenths of that 48,000 to allocate because that doesn't add up to 100%. So this interest is gone. What we could do is say, okay, we're left with two and five, which add up to seven, and then take two sevenths and five sevenths. So that should work. So what we're going to do is we're going to say that we have the difference of 200,000 minus 151,200 equals 48,800. And then we're going to multiply that times two over divided by seven. And that'll be the 13,942 or 43 about. It's going to be a debit reducing the capital accounts. And then the second one, of course, we could say it's just whatever needs to be remained. But we can also say 200,000 minus 151,200, 48,800, that same amount, times five over seven. That'll give us the 34,857. So 34,857. So that's what we have. And if we were to add this up, then the debits 151,200 plus the 13,942 plus the 34,857 add up to the 200,000. Posting this out, we see that the cash is going to go down by 200,000 to 350,000. We see that the capital account for M is going to go down to zero. It's that 151,200 going down by 151,200 to zero. And then B's capital account is going to go from 124,200 down by 13,943 to 110,257. And then L's capital account is at 264,600 goes down by 34,857 to 227,229,743. So if we look at our totals here, we see that the cash is going down. We see that the capital account is going down to zero. The difference then being allocated to the two remaining partners between the cash received and the capital that's being taken off the books, reducing the partnership agreement, these two partners, the remaining partners, capital accounts, because we paid out more than the capital account for the partner leaving. Note, what we're not doing is having like a gain or loss here on the sale that then closes out as we close out net income. Because it's not really part of net income. These two partners are kind of making a sale of the partnership in a way because this partner is leaving for less than the partnership. So they kind of have a loss basically on the sale of the partnership percentage, partnership share. But it's not revenue or expense to the partnership because the partnership is not generated or losing revenue. So although it does affect the capital accounts, reducing the capital accounts in this instance, it's not part of net income.