Capital Deficiency Correction

Capital Deficiency Correction- Deficiency introduces to debit stability in a partner’s capital account after allocation after allocation of gain or loss. A capital account deficit happens when equity in a business becomes negative. This means that the total amount of liabilities surpasses the total amount of assets. For example, if the total amount of assets is $50,000 and the total liabilities are $65,000, then the capital account deficit is $15,000. 

A number of occurrences can be at the source of a capital deficit. If the company is unique and not yet as profitable as it hopes to be, it may work under a capital deficit as it is still in the construction process. Additionally, if a more organized business has undergone a particularly bad year or quarter, it may briefly be under a capital deficit as it has used all of its surplus capital to keep the business floating during the hard times. Poor money management can also be the cause of a capital deficit. If a company over-orders in supplies or expands prematurely, it could put itself into a position of capital deficit.

In this situation, a business is probably bankrupt, so administrators should take remedial action to turn the capital account back to a certain balance, such as by raising revenues, cutting expenses, and/or providing more capital to the business.

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