The maximum possible loss method
Under this method, a table is set up to compute the amounts payable to each partner. The results of the computation may be then posted into the capital and other relevant accounts. The computation works on the basis that capital accounts take the following form:
In the initial stages, the cash received may be little, and this may result in a large ‘Maximum possible loss’. When this is divided amongst partners in profit sharing ration and deducted from capitals, the resultant figure is negative debit. Assuming a maximum possible loss situation, the partner with a negative figure will be deemed bankrupt, and the negative figure uncollectible. This will be divided amongst the other partners in profit sharing ratio or the ratio in which capitals are held. It will depend upon whether the ruing in Garner Vs Murray is to be excluded or applied. Whichever the case, the table will now take the following form:
It is important to realize that the loss in the table is not real; it will only become real if no further cash is collected. The loss is only for the cash collected this far.