9. Interest on excess or deficit of capital contribit the agreement provides that interest shall be allowed on the excess capital contribution of any partner, and charged on the deficit in capital con tribution, the interest charges and credits are passed thru the regular interest account as a part of the ex pense or revenue from business operation. Thus, if X, Y and Z agree to form a partnership, the first agreeing to contribute $60,000, the second $80,000 and the third $10,000, but instead have actually con tributed $50,000, $50,000 and $20,000 respectively, it is very evident that X has paid in $10,000 less than he should, Y $30,000 less than he should, while Z has exceeded his contribution agreed to by $10,000. Assuming that interest is charged and allowed at the rate of six per cent, and that the partners share profits and losses equally, the capital accounts as adjusted would appear as follows : If, in this case, the profits were distributed in the ratio of 3, 2 and 1 for X, Y and Z respectively, the capital accounts would be stated thus: 10. Treatment of in partnership accounts. Reference has been made to the subject of good will. It is not the intention to discuss good-will ex haustively at this point, except in so far as it con terns partnership accounts. With the sale of a busi ness, the good-will passes to the buyer; the contract of sale may not specify this, but it is implied.
The valuation of the good-will is an important mat ter at the time of the death or retirement of a partner. In a recent English case (Smith vs. Nelson) it was decided that the out-going partner was not entitled to anything for good-will. This decision was the re sult of a poorly constructed clause in the partner ship agreement. The estate of a deceased partner is entitled to its share of the proceeds derived from the sale of the good-will of a business in which the de cedent was a partner.
The occasion for valuing good-will will arise upon the admission of a new member to the firm, or when a going business is bought outright, or upon the dissolu tion of a firm or the retirement of a member. Even tho a firm has a valuable good-will, as evidenced by its prosperity, it would be incorrect to place this good will upon the books. Some merchants make the mis take of valuing their good-will yearly and placing it in the business statements of the partnership.
An interesting case on this subject, which is fre quently cited, is the case of Stewart vs. Gladstone, de cided in England in 1897. A clause in this firm's ar ticles of copartnership provided that the annual accounts should comprise "all particulars that might be susceptible of valuation." One of the partners con tended that it included good-will also. Upon this point the court made the following decision: Then is it a fair construction of these articles to assume that in taking the annual account of the profits of the con cern, the partners were going to put a value upon the good will, so as to allow each partner to take, year by year, out of the partnership the amount of his share of the increase in the value of the good-will? That is really what it comes to. Now, one cannot help feeling that no mercantile man ever dreamt of such a thing. The good-will is not an avail
able asset in the sense that you can draw upon it, or that you can turn it into money, or pay it out to the partners, and I should say with some confidence, not only relying upon my own experience, but having appealed to the Bar in this case, that no one ever saw such a thing in a merchant's accounts.
This conclusion is both good law and plain com mon-sense. It is evident that nothing can possibly be gained by writing up a good-will account, for as suredly no benefit is gained by padding the asset side of a firm's balance sheet, and at the same time in creasing the capital account of the partners.
When one of the partners withdraws, it is neces sary to settle with him for his share of the good-will. Thus, if X, Y and Z form a partnership in which the members are to share profits and losses equally, and afterward they disagree, and X is to retire, be is entitled to payment for his share of the good-will. If it be assumed that the good-will of the firm is valued at $15,000, it is evident that X's share is to be valued at $5,000. The better method to employ in adjusting the account upon retirement of X would be to debit the good-will account for $5,000, or the amount which X's share represents. The amount thereof would be credited to X's capital account. The reason why it is proper to place the good-will upon the books in this instance is that the surviving mem bers of the firm, Y and Z, have purchased the good will of their partner X and have paid him for it. Such good-will, then, is to become the property of Y and Z, and if it is so desired, may be closed out by charging both Y and Z, $2,500 and crediting the good-will account to close it.
11. Retirement of a partner from the firm.—It is not uncommon for one of the members of a firm to retire, and the remaining partners continue the busi ness under the old firm name. The retiring partner will either be paid off in cash or perhaps may take cash and notes for his interest. The remaining part ners buy his share in accordance with whatever agree ment they may have made among themselves.
12. Problem.—The capital account of a partner ship showed the following credits:—W, $2,115; X, $1,692; Y, $1,269; Z, $846. On the retirement from business of W the remaining partners bought his share in proportion to their capital. What amounts would have to be provided respectively by the remain ing partners, and what would then be their respective proportions of the total capital? 13. Interest on drawings.—If it is the intention of the partners to charge interest on the drawing ac counts of the members of the firm, the partnership agreement must provide for it. We cannot imply that it is the intention to charge interest on drawings when the agreement provides that interest is to be credited on the partners' capital accounts. Partners' drawings may be considered from two points of view. The amount withdrawn may be looked upon as a with drawal of the capital, as stated at the beginning of the fiscal period; or drawings may be considered sums properly applied against the profits accruing from day to day, altho not as yet ascertained because a balance sheet has not yet been prepared.