1. Profits may be left in the business instead of being withdrawn.
2. Specific contributions may be made by the partners, which are either to be considered as additions to their capital investment, or are to be treated as more or less temporary loans to the business.
3. A new partner may be taken in, his contribution increasing the partnership capital.
The present chapter deals with original investments and with the first two types of additional capital mentioned above, while the next chapter discusses the admission of new members and the consolidation of partnerships.
Original Contributions.—It sometimes happens that the partnership agreement does not state specifically how much each partner shall invest in the business. For example, the agreement may state that partner A is to contribute certain properties, i.e., place of business and equipment; that B is to contribute a stock of goods, and that the investments of the remaining partners are to consist of cash, the exact amount of which is not stated because it depends upon the valuation to be placed upon the property and merchandise invested by A and B.
After such a valuation has been made and the amounts of the cash contributions have been determined, it may be found that the total investment is more than the business requires; or it may develop that some of the partners do not have sufficient funds available to pay their shares, while others may be able to contribute more than their respective shares. It thus happens that the partnership agreement is not always rigidly enforced, some partners contributing more, and others less, than the agreed amounts. At the time this is looked upon as a temporary arrangement, but it often results in a permanent condition. The partnership agreement should contain provision for such a contingency. If it does not, a later agreement should be made to regulate the relations between the partners.
Adjustment of Capital Contributions.—Whenever a partner contributes more than his agreed share, it is customary to allow him interest on the excess amount, and other partners whose investment may be less than the agreed amount are usually charged with interest. This is obviously an equitable method of meeting the situation.
As a rule, these interest adjustments are handled through the Profit and Loss account, i.e., the partners who invest less than the agreed share are considered to owe interest to the partnership, and those who invest more have an interest claim against the business—not against the other partners individually. The debit or credit balance in the Profit and Loss account resulting from these adjustments is in turn distributed among all the partners in the profit-or-loss-sharing ratios. It should be clearly understood, however, that although these adjustments are made through the Profit and Loss account, there is no element of business profit or expense involved. For this reason, these interest entries should be made direct in the appropriation section of the Profit and Loss, and should never be booked in the regular Interest accounts.
The following illustrations will bring out the different methods of adjustment:
Problem. A, B, and C are equal partners under an agreement to contribute each $15,000. Provision is made that excess contributions are to be credited with interest at 6% and that deficits are to be charged at the same rate. The records show that actual contributions were: A, $18,000; B, $13,000; and C, $11,000.