After the adjustments the new balance sheets appear as follows:
| Balance Sheet of A & B | ||||
| Cash | $ 2,500.00 | Notes Payable | $ 5,000.00 | |
| Notes Receivable | 1,000.00 | Accounts Payable | 8,000.00 | |
| Accounts ” | $22,000 | Mortgage on Real Estate | 4,000.00 | |
| Less—Reserve | 2,000 | 20,000.00 | ||
| Merchandise | 9,000.00 | A, Capital | 19,000.00 | |
| Furniture and Fixtures | 2,500.00 | B, Capital | 19,000.00 | |
| Delivery Equipment | 1,000.00 | |||
| Real Estate | 9,000.00 | |||
| Good-Will | 10,000.00 | |||
| $55,000.00 | $55,000.00 | |||
| Balance Sheet of C & D | |||
| Cash | $ 5,000.00 | Notes Payable | $ 5,000.00 |
| Accounts Receivable | 15,000.00 | Accounts Payable | 7,750.00 |
| Merchandise | 8,000.00 | C, Capital | 11,500.00 |
| Furniture and Fixtures | 2,000.00 | D, Capital | 11,500.00 |
| Horse and Wagon | 750.00 | ||
| Good-Will | 5,000.00 | ||
| $35,750.00 | $35,750.00 | ||
It is agreed that C and D’s capitals are each to be taken as representing one-sixth of the capitalization of the new firm, and A and B are each to contribute $4,000 in cash to bring their capitals up to the required amounts.
The opening balance sheet of the consolidated firm will then read as follows:
| Balance Sheet of A, B, C & D | ||||
| Cash | $15,500.00 | Notes Payable | $10,000.00 | |
| Notes Receivable | 1,000.00 | Accounts Payable | 15,750.00 | |
| Accounts Receivable | $37,000 | Mortgage on Real Estate | 4,000.00 | |
| Less—Reserve | 2,000 | 35,000.00 | A, Capital | 23,000.00 |
| Merchandise | 17,000.00 | B, Capital | 23,000.00 | |
| Furniture and Fixtures | 4,500.00 | C, Capital | 11,500.00 | |
| Delivery Equipment | 1,750.00 | D, Capital | 11,500.00 | |
| Real Estate | 9,000.00 | |||
| Good-Will | 15,000.00 | |||
| $98,750.00 | $98,750.00 | |||
CHAPTER XXXVI
PARTNERSHIP PROFITS
Ambiguity of Definition of Profits.—The term “profits” as applied to business is perhaps used with as little uniformity as any term met with. When a concern speaks of its profits, it is difficult to know exactly what is intended, because the meaning of the term depends very largely on the methods of accounting of that particular concern. The reported profits of different firms are not, therefore, a true basis for judging their relative worths. For instance, although the net profits of a single proprietorship and of a partnership are usually determined in the same manner, there is nevertheless variation in the treatment of some items such as salaries, drawings, interest on capital invested, etc. The partnership form, like the single proprietorship, contemplates an investment on the part of the owners not only of capital but also of time and effort. This is one of the differences in working organization between these forms of business and the corporation. Investment in the corporation is of capital only. If services are employed by the corporation, they are paid for and charged as services, salaries, etc.
Compensation for Time and Services.—In the partnership form of organization, the active and direct management of the business is usually vested in the owners. Where this is not the situation, as in a limited partnership, or whenever one or more of the partners does not take an active part in the management of the business, his share of the profit is usually curtailed by the allowance of salaries to the managing partners before any distribution of profits in the agreed ratio is made to the partners. Thus, partnership profits include not only the salaries of the owners but, in general, a recompense for the time and ability of the proprietors. The man who makes an investment in a partnership does so usually because he desires to invest his time as well as his capital. He expects, therefore, to receive not only a fair rate of interest on his money but also pay for the services he renders.
Interest on Investment.—The rate paid for the use of money is dependent both on the money market and on the element of risk involved in the particular investment. In mining ventures, for instance, where there is frequently considerable uncertainty as to the return of the principal, the interest rate is sufficiently high to offset, during the life of the loan, the possible loss of the principal at the end. So an investor in a partnership, because of the greater element of risk in comparison with other and safer investments, requires a higher rate of return in interest than he would ordinarily secure through the investment of his capital in sound securities.