1Guarantee is an assurance given to the partner of the firm that at least a fixed amount shall be given to him/her irrespective of his/her actual share in profits of the firm. If actual share in profits is less than the guaranteed amount in that case the deficit amount shall be borne either by the firm or by any partner as the case may be.
Note: Guarantee to a partner is given for minimum share in profits. If the actual share in profits is more than the minimum guaranteed amount then the actual profits will be allowed to the partner.
- Case: 1. When guarantee is given by FIRM (i.e., by all the Partners of the firm):
- Guaranteed amount to a partner is written in Profit and Loss Appropriation A/c
- Remaining profits are distributed among the remaining partners in their remaining ratio.
- Case 2: When guarantee is given by a partner or partners to another partner:
- Calculate the share in profits for the partner to whom guarantee is given
- If share in profits is more than the guaranteed amount, distribute the profits as per the profit and loss sharing ratio in usual manner.
- If share in profits is less than the guaranteed amount, find the difference between the share in profits and the guaranteed amount and the difference is known as Deficiency. Deficiency is distributed among the partner or partners who guaranteed in a certain ratio and subtracted from his or their respective shares.
Example: A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit
C for 1/6th share in profits and guaranteed that his share of profits will not be less then Rs.
25,000. Total profits of the firm were Rs. 90,000. Calculate share of profits for each:
partner when:
1. Guarantee is given by firm.
2. Guarantee is given by A
3. Guarantee is given by A and B equally.
Solution:
- Case 1: When Guarantee is given by firm Profit and Loss Appropriation Account. For the year ending on 31ST March, 2011. Dr. Cr. Particulars "Particulars" To A's Capital A/c By Profit and Loss A/c (3/5 of Rs.65,000) 39,000 90,000To B's Capital A/c (2/5 of Rs.65,000) 26,000 To C's Capital A/c (1/6 of Rs.90,000 or Rs. 25,000 whichever is more 25,000 90,000 90,000
- Case 2: When Guarantee is given by A Profit and Loss Appropriation Account for the year ending on 31ST March, 2011 Dr. Cr. Particulars "Particulars" To A's Capital A/c By Profit and Loss A/c (3/6 of Rs.90,000) 45,000 (Net Profits) 90,000 Less : Deficiency Borne for C (10,000) 35,000. To B's Capital A/c (2/6 of Rs.90,000) 30,000 To C's Capital A/c (1/6 of Rs.90,000 15,000 Add: Deficiencey Recover from A 10,000 25,000 90,000 90,000
- Case 3: When Guarantee is given by A and B equally. Profit and Loss Appropriation Account for the year ending on 31ST March, 2011 Dr. Cr. Particulars "Particulars" To A's Capital A/c By Profit and Loss A/c (3/6 of Rs.90,000) 45,000 (Net Profits) 90,000 Less : Deficiency Borne for C (1/2 of 10,000) 5,000 30,000 To B's Capital A/c (2/6 of Rs.90,000) 30,000 Less : Deficiency Borne for C (1/2 of 10,000) 5,000 25,000 To C's Capital A/c (1/6 of Rs.90,000 15,000 Add : Deficiency Recover from A 5,00 Deficiency Recover From B 5,000 25,000 90,000 90,000.
