3. Difference between the accounts of a business controlled by a sole proprietor and those of a partner ship.—With the exception of the opening. entries and the closing entries at the end of a fiscal periOd, the accounting principles are the same for a business under a sole proprietor as for a partnership. It is necessary to show the subdivisions of the proprietor ship at the beginning, in order that each partner's equity in the net assets may be properly stated. The division of the net profits at the end of the fiscal pe riod will be governed by the articles, and the capital accounts at the end of each period will reflect the status of the individual members of the firm. There may be further differences in the accounts of the in dividual partners, such as, for example, a difference in the salary paid, dependent, perhaps, upon whether or not a partner gives his entire time to the business; and also differences which arise from the fact that one partner may have contributed more capital than the other partner to the venture, or may have loaned money to the business. Therefore, before the final distribution of net profits is made to the partners, ad justments are often necessary in consideration of dif ferences in capital investment, amount of time de voted to the business and the skill or ability of the individual partners.
4. Opening entry for partnership books.—Follow ing the suggestion contained in the article of Mr. Greendlinger quoted above, the books of the partner ship should be opened by an entry which will charge each partner's personal account for the amount which he has agreed to contribute, at the same time crediting his capital account therewith. Thus, if A and B, in forming a partnership, agree to contribute respectively, $100,000 and $80,000, the opening entry would be framed in the following manner: A (Personal Account) $100,000 B (Personal Account) 80,000 To A, Capital Account $100,000 B, Capital Account 80,000To charge each partner for the amount of his agreed con tribution and to credit the respective partner's capital ac count therewith.
5. Subsequent entries.—Rach partner should then be credited with the sum total of the assets which he puts into the business, and the individual asset ac counts on the books of the partnership debited there with. If we assume that A contributed sundry as sets valued at $80,000 and that B paid in $80,000 in cash the following entry would be made: Sundry Assets (itemized) $80,000 To A (Personal Account) $80,000 To credit the latter for the assets turned over by him in part payment of his capital contribution Cash $80,000 To B (Personal Account) $80,000 For cash paid in by him, being full payment of his capital contribution.
The effect of this procedure would be to place upon the books an account which will reflect the deficiency in the capital contribution of any of the partners. A's personal account reveals the fact that he has failed to put in the agreed amount and in justice to his partner he should be charged with interest on the deficit. The assets contributed by the individual members become, of course, the property of the firm, and it is therefore important that a definite value be assigned at once to any assets other than cash con tributed by a partner, and that the agreed value be reflected in the opening entry. The reason for this is, that any increase or decrease in value subsequent to the date of acquirement by the firm, will benefit the partners or be charged to their accounts, in the ratio in which they are sharing profits and losses. Thus, if one of the partners brought in certain se curities to the firm as a part of his capital contribu tion which, on the date of the formation of the part nership had a value of $2,000 and, if the value of the securities should rise subsequently and the firm should sell them for the sum of $4,000, the profit amounting to $2,000 would be distributed among the partners in the ratio in which they had agreed to share profits and losses.
6. Division of profits and share in the partnership purchase of an interest in the profits must be distinguished from the purchase of a share in the business. No confusion will arise if cor rect principles are followed. To illustrate, X is the owner of a business and sells to Y, a one-half in terest in the business for $5,000, on the basis of the following balance sheet: It is clear that X is disposing of his asset, good will, in addition to the tangible assets which the busi ness possesses. If we introduce the value of X's good-will in the balance sheet, the result is expressed in the following statement: Since Y is buying one-half of X's interest, his pay ment for that interest will be a private matter be tween X and Y and will not be reflected in the books of the new firm. The entry to be made on the books of X will be a debit to the capital account of X and a credit to the capital account of Y to the amount of $5,000. The opening balance sheet of the new firm would then be as follows: If it was desired to eliminate the asset, good-will, the balance sheet of the new firm would appear as follows: The result would be the same if Y had paid .X per sonally the sum of $5,000 and an adjustment made in the books of X by crediting Y and debiting X with $3,000, the excess of $2,000 representing Y's pay ment for his share of the good-will of the busi ness.