PARTNERSHIP PROBLEMS AT ORGANIZATION 1. The importance of properly drawn articles of copartnership.—The partnership relation is a fruit ful source of litigation. Many of the disputes that arise between the members of a firm might, however, be avoided if the articles of copartnership included certain clauses dealing with the accounts. In an ar ticle on this subject which appeared in the Journal of Accountancy, Mr. Leo Greendlinger, C. P. A., recommended that the partnership agreement contain the following accounting clauses: (a) That proper books of entry be kept.
(b) That the entries be made by each partner.
(c) That the books and partnership documents be kept at the place of business and be open for the inspection of all the partners.
(d) That the books be kept under the direction of the acting partner.
(e) That all checks, drafts, acceptances, etc., be signed by the acting partner, except in the case of his sickness or absence.
(f) That all drafts, acceptances, or securities be made or taken in the name of the firm.
(g) That real estate purchased be bought by the acting partner in trust for the firm.
(h) That . . . Bank be used by the firm.
(i) That the cash book be made up . . . (state time— monthly, quarterly, etc.) (j) That the cash collected be deposited daily.
(k) That all moneys received by each partner be duly paid in.
(1) That a general accounting be made yearly or half yearly.
(m) That the inventory and the balance sheet be signed by each partner and be conclusive.
(n) The ledger, among other accounts, shall contain : (1) An account for each partner's partnership obligation, which shall be debited with the amount the partner obligates himself to put in the business, and credited with what he actually puts in.
(2) A drawing account for each partner, to keep sepa rately his withdrawals.
(3) If there be advances made by any partner to the firm as a temporary loan, an account kept under the title, "A.B.'s Loan to Firnf Account." (4) Before a division of profits be declared, the profit-and loss account shall be debited with depreciation at a fair rate on the fixed capital subject to depreciation, and depreciation account shall be credited with same. The depreciation ac count shall in the balance sheet be always treated as an offset to the fixed capital, subject to depreciation.
(5) There shall also be two reserve accounts—one, the reserve account for doubtful debts, and the other, the gen eral reserve account. The former shall be credited with . . . % of the debts due the firm and remaining unpaid at the time of closing up the accounts, as a contingent fund to meet bad debts ; and the latter, the general reserve account, shall be credited with . . . % of the balance remaining in the profit:and-loss account, and the profit-and-loss account debited.
(6) Extraordinary profits and losses, i.e., such as do not usually occur, but are accidental, shall, as they arise, be car ried to the general reserve account. The remaining profit and loss shall now be duly divided and carried into each part ner's drawing account. (Credit side.) The drawing ac count to be then closed and the balance carried to each partner's capital account.
2. Other important provisions.—In addition, the author would recommend that the articles state whether or not interest is to be allowed on capital contributed by all the partners, or only on the deficit or excess capital contributions, or whether any interest at all is to be allowed on capital. If interest is to be charged on withdrawals, a clause to that effect must appear in the partnership agreement. Since the death of a partner works a dissolution of the firm, the partnership agreement should provide against the abrupt termination of the business at a time when dissolution on account of death would result in un usual loss. If, for example, a member of a firm of silk merchants should die in the middle of a season, the consequent dissolution of the firm might work a serious loss to all the partners. This contingency is usually provided for by inserting in the articles of copartnership a provision to the effect that if death occurs it shall be considered to have occurred at the end of the season or at the end of the current fiscal period. The method to be employed in valuing the good-will of a business at the death or retirement of a member of a firm ought to be stated. The profit and-loss-sharing ratio should invariably appear.