In stating the liabilities, two columns are provided, the first being headed "book or nominal values" and the second, "expected to rank." The amount shown in the "book or nominal values" column is the amount of the liabilities as shown by the ledger. Since the claims of fully secured creditors have been deducted from the specific assets subject to lien, the amounts of these claims will no‘t be carried into the "expected to rank" column. Since the claims of partially se cured creditors have been deducted from the assets which are their security, the amount of the excess of the claims over the anticipated value of the security is carried in the "expected to rank" column. The total amount of the unsecured creditors will of course appear in the "expected to rank" column. The claims of those who hold a preference under the law will not, of course, appear in the "expected to rank" col umn since they have been deducted from the aggre gate of free assets. The total of the "expected to rank" column contains, therefore, the total of the un secured creditors' claims against which are offset on the other side the net free and available assets. The net free assets are subject to deduction for the ex penses connected with realization and liquidation, the amount of which cannot be foretold. The difference between the total of the unsecured creditors and the total of the free assets, constitutes the deficiency.
It will be obvious that the deficiency stated pertains to debts inasmuch as the statement of affairs is a statement of assets and liabilities only, ignoring the capital. The total deficiency representing the loss not only to the creditors but also to the proprietor is shown by a deficiency account.
9. The deficiency account.—It is usual to accom pany the statement of affairs with a deficiency ac count giving details of the deficiency indicated by the statement. The account should start out from the date at which the last balance sheet of the firm show ing a solvent condition was prepared. The deficiency account will therefore reveal, on the debit side, the initial loss which may be called the operating loss, since it has resulted in the status of insolvency. The account then states on the debit side the anticipated loss incident to realization and liquidation and, on the credit side, any profit incident to realization and liquidation. The balance of the deficiency account should then agree with the net deficit as shown by the statement of affairs. It may be pointed out here that the form and manner of arrangement of both the statement of affairs and the deficiency account vary.
10. Preparation of a statement of affairs for sole proprietorships or partnerships.—The statement of affairs of a sole proprietor will show as assets not only the assets which he has actively employed in the busi ness, but also all his personal assets. This holds true because in law the business of John Doe, pro prietor, is not a separate entity from John Doe him self. In the case of a partnership it must be recalled that the rule of marshalling prevails, and that the personal creditors of the partners must be satisfied out of personal assets and firm creditors out of firm assets and while, as a rule, the partners are individually bankrupt when the firm is bankrupt, this situation may not always prevail and, therefore, any excess from any one of the personal estates of the partners is available for the satisfaction of the claims of the partnership creditors.
11. Theoretical value of the statement.—The reader should remember that the statement of affairs is merely an estimate of what a receiver expects or hopes he will be able to do and the original esti mate is frequently far from correct. The law does not prescribe the manner in which a receiver shall keep his accounts; of course he will charge himself in his accounting with what he takes over and credit himself with what he divests himself of ; his account ing, like that of a. trustee, is an account of charge and discharge. The receiver may continue to use the books of the old undertaking or may open an en tirely new set of books; his convenience dictates his method of procedure but, in any event the books of account are not adjusted to the facts shown in the statement of affairs. When the assets are realized, the cash account will be debited and the particular assets will be credited, and as payments are made to creditors cash will be credited and the appropriate liability account debited. After all of the assets have been realized in cash, any balance remaining in an asset account represents the loss on realization, and any liabilities remaining unpaid reflect a loss to the creditors. If the business is controlled by a sole pro prietor, the accounts remaining open on the books are closed against the proprietor's account. the case of a partnership, losses are charged against the capital accounts of the partners in the ratio in which they share profits and losses, and if no assets remain available for distribution the loss on realization and liquidation will of course equal the balances remain ing in the partners' accounts. In the case of a cor poration, the original capital stock account will be debited for the shares returned by the stockholders for cancellation and the remaining accounts will be adjusted thru the surplus account. For the pur pose of illustrating the different methods that may be employed in preparing statements of affairs and deficiency accounts, attention is called to the follow ing problem which has been solved by two different methods: Jones and Robinson, merchants, are unable to meet their obligations. From their books and the testi mony of the insolvent debtors the following state ment of their condition is ascertained: Prepare a statement of affairs, showing the liabili ties and the assets with respect to their realization and liquidation; also a deficiency account showing such details as would account for the deficiency shown by the statement of affairs.