treatment to become an active, living plant again. Cancelled stock is like a plant that has been uprooted and left to die. It cannot be used again but must be replaced by an entirely new plant.

It is this latent life that is the important point about treasury stock, as well as the universally recognized advantage of its being available for sale at a discount when necessary. A company that owns treasury stock is in a position to increase its cash capital by selling the stock at once. Of course it has the same privilege with unissued stock, and to that extent there is no difference between treasury and unissued stock. If the stock has been cancelled it will be necessary to take the proper legal steps to increase the capital, if it is desired to replace it-a procedure which takes time and costs money.

It is when it is necessary to sell stock at a discount that the distinction between treasury stock and unissued original stock becomes important. In many states the transfer of property, especially mining claims, is recognized as giving full value for all the stock issued therefor. Having once been paid in full, this stock when acquired in the treasury may be sold at a discount without imposing any liability upon the purchaser.

The truth of the matter seems to be that while it is wrong to call treasury stock an actual asset, it is also wrong to treat it as being the same as either unissued or cancelled stock. There does not seem to be any possible objection to the practice followed by the best accountants of showing treasury stock as a deduction from the total capitalization. In the meantime it is temporarily carried on the books as a debit balance. It is as legitimate to carry a deduction from a liability as a debit balance as it is to carry a credit balance of reserve for depreciation, which is not a liability, but a deduction from a fixed asset.

This covers another point brought up by the article. Treasury stock must be carried at par. When a company pays $210,000 for stock of a par value of $140,000, it has not acquired an asset of $210,000, but has paid off two items of capital liability; $140,000 of capital stock and $70,000 of surplus. If the stock is ever re-issued it must be for its face amount of $140,000, a record of which must therefore be kept, but the surplus to be regained is not fixed. In fact the stock may be distributed at par among the remaining stockholders as a stock dividend and the surplus never be repaid. Therefore it is proper to charge off the $70,000 against the surplus, while the $140,000 is retained on the books. If the stock is sold to outside parties the amount realized above par would be credited to surplus, whether it were more or less that $70,000.

TRANSACTIONS BETWEEN PARTNER AND FIRM

The strange reluctance that many persons show to acknowledge that a man may act in a dual capacity leads to some curious results when applied to the relation that exists between a partner and the firm of which he is a member. This is illustrated in the article entitled Transactions Between Partner and Firm in the JOURNAL OF ACCOUNTANCY for July, in dealing with the borrowing of $20,000 by partner B from the

firm of A & B. It is stated that "if handled in the regular way the amount of the note would be charged to notes receivable, as in the case of a note made by an outsider." To this we absolutely object. It must be charged to an account such as "B note," which will plainly designate its character as a withdrawal for the time being of $20,000 of B's capital, as the article correctly claims that it is. The reason for putting the matter in the shape of a note instead of making a debit to B's capital account is not known to us. It may be that the firm does not at present make 6 per cent, on its capital and is therefore willing to let some one have the use of part of it for a year, when it will presumably be needed in the business again. In any event it is immaterial from an accounting standpoint whether the money is a loan to B or X, Y or Z. It is important from the standpoint of the firm's financial condition, and therefore it is imperative that it be clearly shown that there has been a withdrawal of part of the firm's capital, but that the withdrawal is for a limited time only, since it is represented by a note that is presumably to be repaid, instead of by a reduction of capital which may be permanent. The article hints at this, but does not say that it is obligatory.

The point with which we take issue is the reasoning in regard to the effect of the payment of interest by B. At the end of six months B owes $600 interest. As it is not convenient for him to pay in cash, he authorizes a charge to his capital account. The article then says:

"The concurrent credit in such a case is usually to the interest revenue account, and if this procedure is followed the entries giving effect to this agreement would be:

B capital ...
Interest..

$600.00

$600.00

"The credit to interest is ostensibly a revenue item, but a careful examination of the case discloses the fact that no revenue whatever is involved and that the essence of this transaction is simply an adjustment between the two partners. This can perhaps be best shown by an examination of hypothetical balance-sheets as affected by this transaction alone.

"Let us assume that the balance-sheet just after B borrows the sum of $20,000 stands as follows:

"Ignoring all other possible transactions, and assuming that A and B share income in proportion to respective investments, the item of interest revenue recognized in the above entries might now be divided and credited to the partners' capital accounts. The entries would be:

as follows:

$600.00

$300.00

300.00

"The balance-sheet, as affected only by these entries, would now appear

The

"A comparison of the two balance-sheets shows very clearly that no revenue whatever has been realized since asset and equity totals remain unchanged. The introduction of the interest account is evidently a bit of formal procedure which has nothing to do with actual income. net effect of the whole transaction is an adjustment between the partners: an item of B's equity, $300, is transferred to A's capital account. Total proprietorship, however, is not affected, and hence no profit has been realized. B's equity has declined and A's equity shows a corresponding increase; the partnership as an enterprise, however, has neither suffered a loss nor realized a gain. The debit and credit entries to the interest account might indeed have been omitted; and in this case the transaction would be recorded as follows:

It cannot be too strongly emphasized that a comparison of two balancesheets does not show anything whatever in regard to the intermediate profit or loss. If it did, there would be proof of a loss of $600 if A had withdrawn that much of his capital to offset the amount withdrawn by B. The comparison as given above would also show that "no revenue whatever had been realized," if the firm had made net profits of $10,000 of which A had withdrawn $4,700 and B in one way or another had taken out $5,300. It would also show the same lack of revenue if the loan of $20,000 had not been made to B, but to an outsider X who had paid the interest in cash and B had withdrawn $600, which was charged to his capital account.

It might appear as if this latter condition could be paralleled by the simple expedient of having B pay his interest in cash, even if he afterwards withdrew $600 of his capital in money. But our author will not allow this, for he says, assuming that B did not withdraw anything:

"Even if B had actually paid in cash the amount of the interest due $600, at the end of six months, it is doubtful if this should be considered a revenue transaction from the point of view of the partnership. Certainly such a transaction has no reference to earnings or operation in the usual sense. There is, in this case, an actual increase in total assets; but if the concurrent credit is made to interest this means that the partnership has actually earned $600, and since B has a half interest in all income the amount of $300 must ultimately find its way to his capital account as

a credit. As far as B is concerned, then, the amount of $300 is virtually transferred from one pocket to another-from outside interests to the partnership and really represents new investment. A has actually earned $300, however, as a result of permitting $10,000 of his funds to be used by B for six months. But has the partnership as an enterprise earned anything?

"The foregoing brief discussion would seem at least to indicate that there is good reason for viewing all transactions between partner and partnership as of a distinct type, and that to avoid misconceptions all such transactions might well be handled through special accounts."

This shows the curious results that follow from the unwillingness to allow B, the borrower, to have a status independent of B, the partner. There does not seem to be the same objection to having cash perform two functions. The half of the $600 which goes to A is revenue, but the other half of the same sum is new investment for B. Again, B personally pays $600 interest, of which our author says that A received $300 as a result of permitting B to use $10,000 of A's funds. This is not strictly true, because B borrowed $20,000 from the firm, not $10,000 from each of two partners, as we will show later. But allowing the point for the time being, it must be conceded that B paid the other $300 to some one for the use of the other $10,000. If not, what did he pay it for? The fact that $10,000 of B's money was lent to some one entitles B to the interest on it. That B pays $600 out of one pocket and receives $300 in another pocket does not prove anything except that the two pockets represent two entirely different personalities from an accounting standpoint. B, as a partner, is deprived of the use of his share of the $20,000; he is in exactly the same position as A, and he is equally entitled to a recompense. That he has to get it out of his own payment of interest does not change the situation.

That B did not borrow $10,000 from each of the two partners would be clear if the division of profits were on the basis of A 60 per cent. and B 40 per cent. In that case A would receive $360 and B only $240, which means that B was obliged to pay A interest at the rate of 7.2 per cent., but received only 4.8 per cent. on his own half.

Let us take an analogous case. B is a contractor who uses a large amount of the material dealt in by the firm of A & B, of which he is an equal partner. He carries out a contract on which he makes $25,000. On the material which he bought from A & B the firm makes a profit of $10,000. Everybody agrees that A is entitled to $5,000 as a profit of the firm, but those who agree with our author claim that B could not have also made the same profit, because he was himself the source from which the profit came. Or if one does not so claim, he should, to be consistent. What is B to do? He knows that he has received from the firm $5,000 in money or credit that he did not put into it. His commonsense tells him that as a member of the firm he has made that much profit in spite of the fact that he as a contractor was the cause of the profit, but he is told that common-sense is not recognized as a guide by some accountants and that he must open a special account for the $5,000.

After due deliberation he decides to credit the amount to an account called "manna," on the ground that it must have dropped from heaven, since there appears no earthly way of accounting for it.

Everyone recognizes the fact that a person who deals with a corporation in which he holds stock is acting in a dual capacity, but there are too many who cannot see that the same principle holds good in the case of a person and the firm in which he is a partner.*

A GOOD SUGGESTION

Editor, Students' Department:

SIR: The writer a few days ago started to index THE JOURNAL OF ACCOUNTANCY since Volume 1, No. 1, and has a suggestion to offer fellow students. Let them do likewise, and I venture to state that they will not complete an index without having virtually been forced to stop "by the wayside" as it were, to read various interesting and timely articles. A student will come across articles and hints that he did not dream existed in these valuable volumes. Try it.

Miles City, Montana.

Yours very truly,

W. O. HOAG.

This is an excellent idea. In making such an index it is better to err on the safe side by listing every subject discussed, although not the main subject of an article. In fact the subsidiary subjects are the most important ones to be noted, since the main subjects can be found without much trouble in the indexes in each volume.

A card index is the best, because it can be added to indefinitely. The same card can be used for all the references to any one subject. Even if a person does not possess all the volumes such an index would be valuable. With even a few volumes it is often difficult to trace some article, still more some portion of an article, which one may wish to consult.

STOCK NOT FULLY PAID

Editor, Students' Department:

SIR: Will you kindly define "stockholder." In other words, is a person a stockholder from the date of subscription or from the date when stock certificate is issued?

Is a stockholder entitled to dividends on the par value of his stock accrued from the date of subscription, or is he only entitled to such dividends from the date when the stock is fully paid?

Is it legal for directors of a corporation to pay dividends, or to allow them to accrue to subscribers on the par value of the stock subscribed for but not fully paid?

There is no Missouri statute covering this point.

Kansas City, Missouri.

Yours very truly,

J. C. M.

A stockholder is a person who owns an undivided equity in the net assets and profits of an incorporated company. At the date of his subscription he merely acquires the right to become a stockholder. He be

*The above was written before the correspondence in regard to the stock discount appeared, but was crowded out by the discussion of the examination questions. It is published now to put us on record, although to a certain extent it duplicates Mr. Boyle's letter.-Editor, Students' Department.