METHOD OF AC COUNTING. In general the method of a partner ship accounting is as follows: T. Ascertain how the firm stands toward all persons not partners.
2. Ascertain what each partner is entitled to charge in account with his copartners, including, (a) what each has brought in, whether as capital or advances, (b) what each should have brought in but has not, (c) what each has taken out more than the others.
3. Apportion profits to be divided, or losses to be made up, and ascertain what each has to pay to the others so as to settle cross claims.
When the accounting is completed the assets are distributed in the following order: i. In paying the debts due third person by the firm.
2. In repaying to each partner his advances.
3. In repaying to each partner his capital.
4. The balance being distributed as profits, and in equal proportion, unless a contrary agreement be shown. (Lindley on Part., 402.) i. Firm Debts. Partnership debts on dissolution must be paid first. The individual partners, or others claiming through them, can in no wise compete with the claims of the firm creditors. (Edison Illuminating Co. v. De Mott, 51 N. J. Eq. i6.) This is because the partnership property is expressly or impliedly contrib uted for partnership purposes, and the assent and de sire for its application to the discharge of firm debts by the partners is presumed. So a levy upon a part ner's share can only be made upon the final surplus, and must yield priority to subsequent levies for debts due the firm. (Jarvis v. Brooks, 27 N. H. 37; Bullock v. Hubbard, 23 Cal. 495; Mechem an Part., Sec. 289.) So, if a partner mortgages or incumbers his interest, it is subject to the claims of firm creditors. And joint creditors of the partners as individuals are not partner ship creditors and cannot participate in the assets of the firm until firm debts are paid. (Forsyth v. Woods, i I Wall. 484.) A partner is a member of the firm, and hence cannot be considered a firm creditor so as to compete with genuine firm creditors. Nor can the creditors of a partner claiming through him compete with the firm creditors. And the only way a partner's interest in the firm can be reached is by distributing the assets in the proper order, paying creditors, repaying advances, etc., until the amount actually due the part ner is determined. (Buchan v. Sumner, 2 Barb., Ch. 165; Mechem on Part., Sec. 292.) If the firm assets are insufficient to pay firm liabili ties the partners arc individually responsible for their payment. And where two classes of creditors have to compete for the separate property of the partner, the separate creditor is given priority over the joint or partnership creditor in the individual property of the partner, unless the joint estate of the partners is worth less. (Hundley v. Farris, 103 Mo. 78; Rodgers v. Meranda, 7 Ohio St. 18o; Harris v. Peabody, 73 Me. 262; in re West, 39 Fed. Rep. 203.) The priority of the partnership creditors being founded upon the equit able rule of the partners' right to have firm debts paid out of the firm property, is not affected by the condi tion of the separate creditors.
2. Accounts Between Partners. If in winding up the affairs of the firm are in the hands of one of the partners for settlement, his responsibility is one of rea sonable diligence. Ordinarily compensation for ser vices in winding up will not be allowed, but this rule is not inflexible. A partner is responsible for losses arising from his misconduct, but not for an honest er ror of judgment.
Capital does not bear interest in partnership settle ments unless it has been so stipulated. But advances or loans made by a partner to the concern do draw in terest, as they are treated as an ordinary debt. Profits left in the firm do not bear interest without agreement. But a partner whose duty it is to account may be charged with interest if he unreasonably retards the settlement of the partnership affairs, and in case of bad faith annual rests may be made, and he be charged with compound interest.
Sometimes a person is obliged to pay a premium for being admitted into a firm. This payment when made becomes the exclusive property of the seller and not of the firm. In case of a dissolution before the time stated in the articles, it may become necessary to repay part of this premium on such equitable terms as will be just in the particular case.
Where there is no partnership in fact, but merely an ostensible partnership as to third persons, as where a person has been held out as a partner, the property in the business is treated in equity as the joint property of the parties held out as partners until all creditors who have relied on the ostensible partnership are paid. But a dormant partner, where there was no ostensible partnership, has no right to have the property applied to firm debts, and the creditors of the firm have no pri orities as against separate creditors.