Realizing on the sinking fund and with it paying off the bonds, we would have still remaining a credit of $100,000 to reserve for bonds, with no bonds outstanding and therefore no necessity for the reserve. The only way it can be disposed of is by a credit to profit and loss but no explanation has ever been vouchsafed as to why it was ever charged to profit and loss at all. Tipson says that when bonds are paid "The sinking fund account then becomes a surplus," but he neglects to say what magic is responsible for "the sea change into something rich and strange." If our $100,000 reserve for bonds is a liability on June 30, what weird transformation has taken place during the silent watches of the night to make it appear as a surplus on July 1? The conclusion is irresistible that it has always been a surplus and that it was an error of accounting principle to call it anything else. The contention is put forward that if it is left in the surplus account, there will be a temptation to declare dividends against it. The answer to this is, that since so much money has been tied up in the sinking fund there is none left with which to pay a dividend based on this portion of the surplus, a financial and not an accounting reason as we have already seen. This is also shown by the fact that if, in any way, perhaps by the sale of some of the assets, the company should be put in funds sufficient to pay a dividend that would reduce the total accumulated surplus below the amount dedicated to the purchase of sinking fund bonds, it would be perfectly competent for the board of directors to declare and pay such a dividend.

The surplus account should show the total undivided net earnings of the company to date, regardless of the manner in which the funds realized from this total surplus are represented in the assets, whether in cash, in new plant or in sinking fund bonds.

If any further argument were needed to show that no reserve account should be set up against a sinking fund for the redemption of bonds, it may be found in the consideration of the real nature of the bonds. There is no essential accounting difference between bonds and ordinary bills payable secured by the deposit of collateral. The bonds run for a longer time and are more formal in character so that they may be easily transferred, but they are both promsies to pay at a future time and nothing

else. No one would think of charging the partial payments on a six month's note to revenue and there seems no adequate reason why such charge should be made when the note is divided into bonds and runs for perhaps forty times six months.

It might seem as if this were only a question of names with no practical bearing whatever, but it is really of vital interest to the stockholder in estimating the book value of his stock. For instance, in the balance sheet for December 31, 1907, published by the United States Steel Corporation, there appears among the liabilities an item of bond sinking fund with accretions $31,503,976.45, while the undivided surplus appears as $122,645,243.62. A note states that this sinking fund is represented by bonds held by the trustees and not treated as assets, and yet the bonds outstanding are shown reduced from the original amounts by the deduction of the exact amount of the bonds so held. It has usually been considered that the reduction of a liability was the equivalent of an asset, but this corporation does not seem to take this view.

If a stockholder inquires as to the profits accumulated by this corporation up to the date of this balance sheet, it seems manifestly unfair to say that they are only $122,000,000 and to ignore the $31,000,000 which differ from the rest of the surplus only in being empirically offset by specific assets instead of being represented by the general excess of all the assets above the capital and active liabilities. If the capital of the subsidiary companies is included in the capital of the corporation, the book value as shown by the balance sheet in its present form would be a little over 114, whereas the actual value should be nearly 11734. If the corporation could be liquidated without expense and the full book value of the assets realized, it cannot be denied that each stockholder would receive the larger value per share, therefore the larger value must be the true book value of the stock.

In order to meet the views of those who claim that a portion of the surplus corresponding to the sinking fund has been rendered unavailable for dividends owing to the financial exigencies of the situation, and yet preserve the true nature of the surplus, it would be entirely proper to divide the surplus account into two parts, fixed surplus, representing the portion whose pro

ceeds had been locked up in the sinking fund, and free surplus which is available for dividends, both from a financial and an accounting standpoint. The balance sheet which has been quoted would then stand as follows:

A statement which would give the true condition of affairs from any standpoint.

The advisability of calling a credit account a fund instead of a reserve is merely a question of the correct use of English words and has no real bearing on any accounting principle.

Partnerships.

BY LEO GREENDLINGER, M.C.S.

Instructor of Accounting in New York University School of Commerce, Accounts and Finance.

PART II.

What has already been remarked about partnerships should serve as a guide to a careful understanding of the intricate and peculiar relation in which one places himself by forming a partnership. The sole object of its existence being to make and share profits, it necessarily follows that the difficulties that partners may encounter will not be so much in the management of affairs, neither in the over-extension of credits by one or another of the partners, but in the settlement of their own accounts, partnership settlements. By partnership settlement we mean the adjustment of the financial standing of partners at the close of business e. g. finding the monetary interest of net capital, or net insolvency of each partner, at the time the statement is made, and the adjustment thereof on the books of account. That is the time when trouble arises, especially so when there are losses. In most of the partnership agreements the legal points are the only ones that are, to some extent, well taken care of, while the business points are nearly always lacking.

In very few cases, one might say exceptional cases, does a partnership agreement contain accounting clauses. Yet any accountant can recall numerous confusions that are caused by not having a proper opening entry at the formation of a partnership— an entry which should embody all the essential features of the agreement, as far as the account-keeping is concerned.

The books of account should show the proper valuation of existing assets at the time of the formation of the partnerships; otherwise the firm is likely to have imaginary profits, as is illustrated in the case of Robinson v. Ashton, L. R. 20 Eq. 28. The Court stated:

In the absence of special agreement, the rise or fall in the value of

fixed capital or real estate belonging to a partnership is as much profit or loss of the partnership as anything else.

The absurdity of such a decision is self-evident. We can not show any profit or loss not actually realized on our books, because we can not show anything that is not a fact, unless a trade has been made. To illustrate the preposterousness of such reasoning we will take the following instance:

A is in partnership with B, and on January 1, 1907, they buy a parcel of real estate for $5,000.00. In December, 1907, when closing their books, this parcel is worth only $3,000.00. Their profit and loss account will have to show a loss of $2,000.00 Next year the value of real estate rises to $8,000.00, showing a profit for this year of $5,000.00. Offsetting the loss of $2,000.00 of last year against the gain of $5,000.00 of this year, there still remains an imaginary net profit of $3,000.00. In accordance with the above quoted decision, if there were no other profits or losses, and A, would, at this stage, desire to retire from the partnership, he would be entitled to $1,500.00, his equal share of the profits; while as a matter of fact there was no profit at all. There can not be a profit or a loss made, unless there is a purchase and a sale.

Perhaps one of the greatest drawbacks in partnerships is the fact that business men often misunderstand financial and business statements; first, because of a lack of knowledge to understand the nomenclature of the statements and their exact meaning; second, because of incomplete articles of co-partnership. Thus they often say that they have an interest in a business. This may mean that they have an interest in the capital as having loaned money, or that they have an interest in the profits as part of their salaries. It may also, and most of the time does, mean an interest in both capital and profits, as partners. Agreements with employees are quite often drawn loosely and it is difficult to determine whether the employee is a partner or not.

The writer has already in a previous article demonstrated that business men, sometimes at least, do not quite comprehend what are and what are not profits. To some merchants the term depreciation is strange, and, consequently, is never used in connection with their profit and loss statements. This is true not only of business men, but also of our legal talent. In the case