LEGAL VIEW OF PARTNERSHIP.

(1) According to the interpretation of the legal definition of partnerships, it has no survivorship as between the partners themselves but has survivorship in regard to third persons.

(2) The ownership of the partnership property is a joint tenancy, e. g. each partner owns the whole of the partnership, and consequently may dispose of the property in any way he sees fit.

(3) The exact intention of the partners, as shown by their continued approval, will control the provisions of the written articles.

(4) A person holding himself out as a partner, or suffering his name to be used in a partnership, becomes liable to third persons, who may have been induced thereby to grant credit to the firm, provided, however, that the following three elements are present:

(a) Express or implied holding out.

(b) Reasonable reliance by the second party. (c) Parting with value.

Professor Hardcastle, in his pamphlet on "Partnership," as well as in various articles upon this subject contributed by him from time to time, calls attention to certain points to be noted in drawing up Articles of Co-partnership, a summary of which follows:

IN GENERAL:

(1) That the partners shall be true and just to each other. (2) That they shall diligently employ themselves, or apportion their services, which to take the managing part, and which the other parts.

(3) That they shall promptly communicate all partnership transactions to each other.

(4) That they shall not engage in any other business. (5) That they shall employ the firm's property for the exclusive benefit of the firm.

(6) That they shall not engage the firm's credit for their private use.

(7) Nor buy any kind of merchandise or goods, beyond a certain amount, without the consent of the others.

(8) That they shall not transact any business that is against the wishes of the majority of the members composing the firm.

(9) Nor lend money of the firm.

(10) Nor file petitions in bankruptcy.

(II) Nor draw bills or accept drafts, except in the usual course of business.

(12) Nor extend excessive credit without the consent of the others.

(13) Nor speculate in stocks or otherwise, except in such speculations as pertain to the business.

(14) That they shall not become bondsmen or sureties.

(15) That they shall not assign their interests in the business. (16) Nor withdraw their capital or any part thereof. (17) Nor do anything by which the firm's property may be taken in execution.

ACCOUNTING CLAUSES:

(18) That proper books of entry be kept.

(19) That the entries be made by each partner.

(20) That the books and partnership documents be kept at the place of business and be open for the inspection of all the partners.

(21) That the books be kept under the direction of the acting partner.

(22) That all checks, drafts, acceptances, etc., be signed by the acting partner, except in the case of his sickness or absence. (23) That all drafts, acceptances, or securities be made and taken in the name of the firm.

(24) That real estate purchased be bought by the acting partner in trust for the firm.

(25) That the ..

Bank be used by the firm.

(26) That the Cash Book be made up

monthly, quarterly, etc.).

in.

(27) That the cash collected be deposited daily.

(state time

(28) That all moneys received by each partner be duly paid

(29) That a general accounting be made yearly or halfyearly.

(30) That the inventory and the balance-sheet be signed by each partner and be conclusive.

(31) That the ledger, among other accounts, shall contain

(a) An account for each partner's partnership obligations, which shall be debited with the amount the partner obligates himself to put in the business, and credited with what he actually puts in.

(b) A drawing account for each partner to keep separately
his withdrawals.

(c) If there be advances made by any partner to the firm
as a temporary loan, an account should be kept
under the title "A. B.'s Loan to Firm Account."
(d) Before a division of profits be declared the profit and
loss account shall be debited with say 10 per cent.
on diminishing balances on the fixed capital subject
to depreciation, and depreciation account to be
credited with same. The depreciation account shall
in the balance-sheet be always treated as an offset
to the fixed capital subject to depreciation.
(e) There shall also be two reserve accounts-one, the
reserve accounts for doubtful debts, and the other
the general reserve account. The former shall be
credited with .. per cent. 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
per cent. of the

balance remaining in the profit and loss, and the
profit and loss account debited.

(f) Extraordinary profits and losses, i. e. such as do not usually occur, but are accidental, shall, as they arise, be carried to the general reserve account. The remaining profit and loss should now be duly divided and carried into each partner's drawing account (credit side). This account, drawing account to be then closed and balance carried to each partner's capital account.

The subject of goodwill has already been touched upon by the writer in a previous number of THE JOURNAL, yet a few remarks on this important asset will not be amiss. The goodwill of a firm, under which commonly is meant the benefit arising from the connection and reputation of the firm, be it personal or trade,

passes with a sale of the business as a whole to the vendee. The contract of sale may not specify this, but it is impliedly assumed.

In drawing up articles of co-partnership, care must be taken with regard to the clause treating of goodwill. In a recent English case (Smith vs. Nelson) on account of a poorly constructed clause in the partnership agreement, it was decided that the outgoing partner was not entitled to anything for goodwill.

It is needless, perhaps, to say that the subject of goodwill will arise only when a business is bought outright or a new partner is admitted. It is absurd for a merchant to assume that the goodwill of his business has any value unless he has paid for such goodwill; yet there are merchants that think that goodwill should be valued in the yearly business statements of the partnership. The following case will illustrate this extreme and also the Court's ruling on this false notion.

The case mentioned is Stewart vs. Gladstone (England, 1897) and relates to the making out of annual accounts. A clause in their articles of co-partnership stated that the annual accounts. were to comprise "all particulars that might be susceptible of valuation," and the contention of one of the partners was that it includes goodwill also. The presiding justice remarked:

Then is it a fair construction of these articles to assume that, in taking the annual accounts of the profits of the concern, the partners were going to put a value upon the goodwill, so as to allow each partner to take year by year out of the partnership the amount of his share of the increase in the value of the goodwill? That is really what it comes to. Now one cannot help feeling that no mercantile man ever dreamt of such a thing. The goodwill is not an available asset in the sense that you can draw upon it, or that you can turn it into money, or pay it out to the partners, and I should say with some confidence, not only relying upon my own experience, but having appealed to the Bar in this case, that no one ever saw such a thing in a merchant's

accounts.

While it is quite common to list an immaterial asset in a business statement, there is no doubt that such listing of a nonexisting or overvalued goodwill is not only immaterial, but imaginary. From the view point of accounting, there is no more justification for such a procedure than there is for listing any asset which has no existence.

In the case of Camden vs. Stuart, 144 U. S. 104, the United

States Supreme Court held that goodwill is a legitimate asset where it is actually existent, but it must not be something shadowy; it must be capable of pecuniary estimation.

In this connection it is worthy of notice that often the question arises whether goodwill, after having once been properly entered in the book at its cost price, should be continued at that figure, or whether it should be periodically revalued or written off. Opinions differ as to the course to be pursued. Pixley, Cooper and Guthrie represent a type of English accountants who favor regularly writing off the goodwill placed on the books; while Dicksee, Caldocott and James, representing another type of English accountants, argue that it be continued at its original figure regardless of changes in its pecuniary value. It is, perhaps, better to follow the former class and write off, considering it as a kind of premium paid for the privilege of earning profits.

(To be continued.)