GUARANTEE OF PROFIT PARTNERSHIP ACCOUNTING.

 

GUARANTEE OF PROFIT

New partner (or partners) may be admitted in the firm with minimum guaranteed profit from the business. The profit may be guaranteed to an existing or incoming(new) partner by:

1.All the remaining partners in an agreed ratio or

2. One or more of the existing or old partners.

When the guaranteed partner’s or new partner’s share of profit (actual) is more than the guaranteed amount then his Actual share of profit is given to him instead of the guaranteed amount of profit.

 

 

1.    GUARANTEE OF PROFIT BY ALL THE REMAINING PARTNERS.

 

When all the remaining partners (other than the Guaranteed) guarantee that the guaranteed partner shall be given a minimum amount of profit.

 

Journal entries

 

1.      On Distributing the profit as if there is no Guarantee Agreement.

 

Profit and Loss Appropriation a/c    Dr.

       To All Partner’s capital a/c

 

2.      On CHARGING Deficiency to Guaranteeing Partner

 

Guaranteeing partner’s capital a/c     Dr.

                 To Guaranteed partner’s capital a/c

 

 

 

Illustration

A, B and c are partners in a firm sharing profits in the ratio of 4:2:1. It is provided that C’s share in profit would not be less than Rs. 37,500. Profit for the year ended 31st March,2021 was Rs. 1,57,500.

Prepare Profit and Loss Appropriation Account.

Dr.                      PROFIT AND LOSS APPROPRIATION ACCOUNT                                           Cr.

                                                                                                                                          Rs.

Particulars                  Rs.                    Particulars                                   

To A’s cap a/c                         90,000                       By Profit & Loss a/c

Less C’s share of deficiency 10,000                           (net profit)                                       1,57,500

                                                  80,000

To B’s cap a/c                         45,000

Less C’s share of deficiency 5,000       40,000

To C’s cap a/c                22,500

Add def. met by A & B   15,000       37,500

                                      1,57,500                                                                1,57,500

WORKING NOTES

 

Distribution of Profit

Particulars                                                          A                                 B                                 C                     

Divide Net Profit of Rs. 1,57,500            90,000                          45,000                      22,500

In 4:2:1

 

However, C’s minimum Guaranteed

Profit = 37,500

Thus, Deficiency is of 37,500-22,500

15,000

 

Deficiency met by A and B in 4:2

Or 2:1

 

15,000*2/3 = 10,000

15,000*1/3 = 5,000

 

Final share of profit                               80,000                               40,000                    37,500

To be given                                    (90,000-10,000)                (45,000-5,000)          (22,500+10,000)

 

 

NOTE:     Since no specific ratio is given in which the Deficiency is to be met, it means A and C will meet the Deficiency in their given Profit- Sharing ratio i.e. 4:2.

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