Guarantee of Profits
Guarantee means the surety of a particular amount of profits to a partner by one or more partners, where the burden of guarantee is borne by the partners providing guarantee.
If however, the amount of profit as per profit sharing ratio comes out to be equal to or more than the amount of guarantee; actual profits are paid to that partner.
The burden of guarantee means the deficiency is borne by the partners giving the guarantee, in the same profit-sharing ratio or some specified ratio.
Different cases of Guarantee:
Following are different commonly found cases of guarantee:
(1) Guarantee to one partner by all other partners.
(2) Guarantee to one partner by only one other partner.
(3) Guarantee by other partners, deficiency borne in a particular ratio.
(4) When a partner provides a guarantee of a minimum income to the firm and the firm provides a guarantee to a partner for a specified amount of profits.
(1) Guarantee to one partner by all other partners.
A, B and C are partners sharing profits and losses in the ratio of 2: 2: 1. A and B have guaranteed that C’s share in any year shall not be less than ₹ 20,000. The net profit for the year ended March 31, 2024, amounted to ₹ 60,000. Prepare Profit and Loss Appropriation Account.
Dr. Profit and Loss Appropriation Account. Cr.
| Particulars | ₹ | Particulars | ₹ |
| To A’s capital To B’s Capital To C’s capital | 20,000 20,000 20,000 | By Net Profit | 60,000 |
| 60,000 | 60,000 |
Working notes (hints):
C’s share is 1/5 of 60,000, which is less than ₹ 20,000, so he must be paid ₹20,000. The remaining profit ₹40,000 must be shared equally by the remaining partners in their profit-sharing ratio.
(2) Guarantee by one partner to only one other partner.
If however, in the first case only A provides guarantee to C, then this account would be as under, showing the amount of share of profits differently.
Dr. Profit and Loss Appropriation Account. Cr.
| Particulars | ₹ | Particulars | ₹ |
| To A’s capital To B’s Capital To C’s capital | 16,000 24,000 20,000 | By Net Profit | 60,000 |
| 60,000 | 60,000 |
Working notes (hints):
C’s share is 1/5 of 60,000, which is less than ₹ 20,000, so he must be paid ₹20,000. B remains unaffected and receives his profit as 2/5 share i.e.₹24,000. Then a receives ₹16,000, bearing the burden of guarantee alone.
(3) Guarantee by other partners, deficiency borne in a particular ratio.
A, B and C are partners sharing profits in the ratio of 3:2:1. C is given a guarantee that his share of profit, in any year will not be less than ₹ 10,000. The profits for the year ending March 31, 2024, amounts to ₹ 54,000. Shortfall if any, in the profits guaranteed to C is to be borne by A and B in the ratio of 2:1. Prepare Profit and Loss Appropriation Account.
Dr. Profit and Loss Appropriation Account. Cr.
| Particulars | ₹ | Particulars | ₹ |
| To A’s capital To B’s Capital To C’s capital | 27,000 18,000 10,000 | By Net Profit By A’s capital By B’s capital | 54,000 667 333 |
| 55,000 | 55,000 |
Working notes (hints):
C’s share in this case as per profit sharing ratio comes out to be ₹9,000 which is less than guarantee amount by ₹ 1,000, so he must be paid ₹10,000.The deficiency of ₹1,000 must be debited to A’s capital and B’s capital in the ratio 2:1.Then the account is to be balanced by transfer of profits to A’s capital and B’s Capital in their mutual profit sharing ratio i.e.3:2.
(4) When a partner provides a guarantee of a minimum income to the firm and the firm provides a guarantee to a partner for a specified amount of profits.
A, B and C are in partnership, sharing profits in the ratio of 3: 2: 1, provided that C’s share will not be less than ₹ 15,000 in any year. Further, B gives a guarantee that gross fee earned by him for the firm shall be equal to his average gross fee of the preceding five years, when he was carrying on his profession alone which is ₹25,000. The Net profit for the year ended March 31st 2024 is ₹ 75,000. The gross fee earned by B for the firm was ₹ 16,000. You are required to show Profit and Loss Appropriation Account.
Dr. Profit and Loss Appropriation Account. Cr.
| Particulars | ₹ | Particulars | ₹ |
| To A’s capital To B’s Capital To C’s capital | 41,400 27,600 15,000 | By Net Profit By B’s capital | 75,000 9,000 |
| 84,000 | 84,000 |
Working notes (hints):
Since B has provided the guarantee of a minimum fee, the deficiency in fees has been debited to B’s capital account, then the remaining profit distribution procedure has been followed as in previous cases mentioned above.
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