Liquidation - Explained
What is Liquidation?
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What is Liquidation?
Liquidation basically refers to the practice of selling off a company's inventory, or property so that it can get money in return. Mostly, liquidation leads to closure of a business to sell its all stock and other tangible properties. Once all the assets have been sold, the business is shut down.
After the company sells its properties, it uses the money to pay off creditors, or anyone the company owes money to. Selling of these company's properties is taken through by the company's different investors who have their shares in the company or court ruling granting creditors consent to go ahead for liquidation. This happens after a company closes and the assets are sold.
After selling the properties, the earnings are then used to pay banks and other lenders that may lend the company money or maybe have provided goods or services to the company and were to be paid at a later date. The money that remains after the payment of creditors is shared to the companies or individuals who have shares in the company.
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How Liquidation Works?
The liquidation procedure entails;
- Assets are turned into liquid cash. This may be realized by disposing the whole subsidiary to a different company. The same may apply when an investor disposes of certain collateral.
- Settling of debt obligation.
- Disposing assets to pay debts when the firm predicts quitting the business.
Liquidation value refers to price in which a company would sell its properties at a rush due to the need to settle its liabilities. This idea is mostly used in firms that are considered likely to have financial issues or maybe the company is falling.
Company's properties can be depreciated over time to reduce the recorded cost of the asset. Most of these assets include machinery, buildings, and equipment. Company's money and any other properties that are elusive are not sold out since they have no depreciating value.
Cash liquidation distribution refers to the return of remaining money of business to investors after a company's properties have been sold out. The extra money and the money from the assets sold out are then distributed to the appropriate parties according to the company's financial plan.
Liquidation may also be as a result of the closure of a business venture. This basically happens when a certain shareholder in a company wants to sell its property/shares to get money instead. This cans also occur in a situation like if a shareholder wants to switch positions in a company in terms of their investments size and profits. For example, if a shareholder has big shares in the company, he/she can then have the same number of small shares.
When the company decides to sell its properties, then all the activities in the company stops and all the properties are counted and shared out to the different claimant. The guarantor then owns the company and takes over. Anyone owing the company any money is not paid since the paying process never takes place and no one actually is there to pay them. So they just find a way to cancel out the debts.
Back to: Business Transactions