 In this presentation, we will take a look at a situation where a partner leaves the partnership and receives cash less than the amount in the capital account. Here's the trial balance we will be using. We have the assets in green, the liabilities in orange, and then the equity accounts. We have no revenue and expenses, in essence this being a post-closing trial balance. And therefore, we can just say that we have the assets minus the liabilities, equaling the equity reflected by the capital accounts. Here we're going to have a partner leaving. So M is going to be the partner leaving and we're going to receive M is going to receive cash less than the amount in the partnership capital account. Why might this be? You may ask, well, it could be that we have to revalue. It's really kind of a negotiation process for the partner leaving, even though there's money in the capital account. So it could very well be, for example, that the capital account or the equity section doesn't represent the fair market value of the partnership. For example, equipment or something may be on the books and have a higher value than we think it could actually be sold for. And therefore, the value of the capital account may not reflect assets minus liabilities on the partnership, but may be different due to things being on the balance sheet at cost rather than at fair market value. There also could be things like goodwill or something like that that may not be there. And there also may be considerations such as the fact that M is leaving suddenly and in order to do that may be going to receive less on the on the leaving due to that factor. So our journal entry then is going to be first, we're going to say that cash is received. Now the cash, we're going to say, I mean, the cash is paid. So the cash is going to be paid for 100,000 to M, although M has a 151,200 capital account. So cash is going to go down, cash has 550 and it's going to go down by that 100,000. Then we're going to say that M's capital account is going to go down by the 151. These are the two things we know that have to happen. So M's capital account go down by the 151 because that's what it's on the books for and M's leaving. Therefore it has to be back down to zero. And then cash is going to go down by the 100,000. So there's a difference then, of course, of the 51,200. What are we going to do with that? Well, it's not going to be revenue or expense. It's not going to be on the income statement. In essence, the other two partners are going to have to deal with that. So B then is going to have a capital increase of the 14,629 and L is going to have a capital account increase of 36,571. Note of course the breakout here is not an even breakout because we're saying that the original profit sharing, and this is going to be a bit tricky, was three, two, five. That's going to be our profit sharing between M, B, and L. And so five, six, eight, nine, ten, that adds up to ten. So for example, then the L had prior to M leaving five over 10 or 50% interest or profit sharing within the partnership. The problem is that if M leaves, then we can't use this same ratio because it's not going to add up to 100%. We have to allocate that loss or that gain. It should be up to 51,200 to the other partners. We're going to increase their capital account by that amount, but we're only left with these two left over. So we can recalculate this as two, five. Those are the only two partner percentages left over, which is going to add up to seven. So that means that we have two over seven and five over seven for our partnership percentages. So if we were then to take the 51, which is the 121,200 minus D100, we can then say, well, let's do the math on the whole thing, which can say 121,200, 151, 151,200 minus 100,000 means we have the 51,200 that we have to allocate to B and L. We will do so by two sevenths to B, so I can say times two divided by seven. And that's how much we're going to allocate to B. We've rounded it here, of course. And we can do the same thing for L. We can say that same 151,200 minus the 100,000 gives us the 51,200 times five, this five here, divided by seven. And that will give us the 36,571, and that will be the proper allocation then. So that will be an allocation that works. It adds up to 100. That's what we need in order for the 100,000 credit, this 100,000, plus the 36,571, plus the 14,629 to equal the 151,200. So if we post this out then, we've got cash was at 151, or 550,000 minus 100,000 to 450,000. We've got M's capital account, here's M's capital at 151,200. We took it all the way down to zero because M is leaving. And then the other two are getting kind of a bonus, they're getting a gain because really M sold the capital account pretty much left for less than the actual earnings in the capital account, which will increase B and L's capital. So we had the 124,200 going up by the 14,629 to a capital balance of 138,829. And then we've got L's capital starting at 264,600 going up by 36,571 in the credit direction to 301,171. So here's our end result, we have M is gone, cash goes down by the 100,000, we're still in balance because we allocated that difference to B and L, no effect on the income statement, no effect on revenue and expenses. Although it's kind of like, you know, this is kind of like it's a gain to B and L because they basically got an increase in their capital accounts, they're going to, it shows here that they're owed kind of more money by the partnership due to selling or buying out the partner here for less than the amount in the capital account. But that's not the same as the partnership earning revenue by generating revenue from normal sales and normal operations. So rather than putting this down on the income statement and then closing it out to B and L's capital accounts, we would typically not record it on the income statement because it's not showing performance of partnership activities, it's showing the buying and selling of partnership equity partnership interest.