34. Capital and Personal Accounts. In a partnership a special account should be opened in the name of each partner to represent his investment (for example, John Smith, Capital). To this account is credited his net investment. When the books are closed, the account is credited with his share of the profits, and debited with his withdrawals.
A personal account should be opened in the name of each partner, to which is debited all withdrawals, either of money or goods. Even when the capital invested is equal, some partnership agreements provide that interest shall be charged on all withdrawals, particularly when the business is of such a nature that goods traded in are likely to be withdrawn by the partners, or when, for any reason, withdrawals are likely to be unequal. The balance of the partner's personal account is closed into his capital account when the books are closed. Before closing this account, it should be credited with interest on capital account and charged with the interest provided on withdrawals.
35. Opening the Books. When the books of a partnership are opened, the essential features of the partnership agreement should be written at the top of the first page of the journal. Next following the partnership agreement, are the entries showing the nature and amount of the investment of each partner, the amounts being posted to the credit of partners' capital accounts.
36. Closing the Books. When the books of a partnership are to be closed, the revenue accounts are closed into trading and profit and loss, the same as in any other form of business organization. The net profit is then apportioned according to agreement, the share of each partner being credited to his capital account. The balance of his personal account is then carried to his capital account; the balance of that account will then show his net investment.
Illustration of Closing Entries. A, B, and C form a partnership, each investing $1,000.00, profits to be shared equally. When the books are closed, the net profits are found to be $909.60. A's personal account shows a debit balance of $46.50; B's personal account shows a credit balance of $100.00; C's personal account shows a credit balance of $52.00. The entries are as follows:
SAMPLE TRANSACTION
37. The first business taken up for consideration under the head of partnerships is a retail shoe business. The stock is kept in three classes: men's, women's, and children's shoes. Purchase and sales books, ruled to segregate transactions of each class, are used. The bank account is kept in the cash book, which is also provided with two columns for discount. All sales, whether for cash or on account, are recorded on sales tickets.
James Benton, Horace Douglas, and Henry Kemp form a partnership under the firm name of Benton, Douglas & Kemp, for the purpose of conducting a retail shoe business in Buffalo, N. Y. The date of the agreement, which is to continue for ten years, is March 1, 1908. James Benton invests $1,000.00 in cash and a stock of shoes inventorying $2,000.00 as follows: men's, $800.00; women's, $700.00; children's, $500.00. Horace Douglas and Henry Kemp each invest $3,000.00 in cash. The three partners are to share equally in the profits and each is to receive a salary of $100.00 per month. The books are to be closed and net profits divided at the end of each three months' period counting from January 1, which brings the first distribution on March 31.