4.

Guarantee of Profits
Sometimes partners agree to guarantee minimum profit to a partner as a special
privilege. There can be many reasons for granting such a privilege. Attracting a reputed
individual, who is unwilling to bear the risk of income fluctuations to become a partner,
is one of such reasons. If the share of profit for such a partner falls short of the minimum
amount guaranteed, the other partners will adjust that shortage form their share of profit
according to the agreed conditions. If the share of profit of the partner holding guarantee
privilege comes equal or more than the guaranteed sum, that actual share will be given
without any adjustments.
 
Illustration 1.14
A, B and C have agreed to share their profits and losses in the ratio 3:3:2 in which C is
guaranteed a minimum profit of Rs.12,000. The divisible profit for the year 2001
amounted to Rs.42,000. Show distribution of profit.
Profit & Loss Appropriation A/c
Particulars Amount Particulars Amount
To A's   By P & L 42,000
Capital             Account
15,750
less adjusted to C         15,000    
750
To B's      
Capital            
15,750
less adjusted to C         15,000    
750
To C's      
Capital             
10,500
add share adjusted 12,000    
1,500
            from A & B      
  42,000   42,000
       
 If the entries of deduction and subtraction seem confusing, you can directly put C's
share of 12,000 in his name and divide the balance amount of 30,000 in the ratio
3:3 (equally). The next illustration is done that way. But remember when you do this
way in the examination don't forget to show the steps/workings to convince the
examiner that you know the concept clear.
 
Illustration 1.15
A, B and C sharing profits and losses in the ratio of 3:2:1 in with C having a minimum
guarantee of Rs.8,000. The profit available for distribution at the end of the year was
found to be Rs.42,000. Show distribution of profit.
 
 Profit & Loss Appropriation A/c
Particulars Amount Particulars Amount
To A's Capital 20,400 By  P & L Account 42,000
(34,000x3/5)      
To B's Capital 13,600    
(34,000x2/5)      
To C's Capital 8,000    
  42,000   42,000
You can divide 42,000 in the ratio 3:2:1 and then rearrange the amount. But here we
are directly crediting C's share and dividing the balance of Rs.34,000 in the ratio 3:2.
 
Illustration 1.16
A, B and C are partners sharing profits and losses in the ratio 2:1:1, with capitals of
Rs.40,000, Rs.30,000 and Rs.20,000 respectively. C’s minimum profit after interest on
capitals @6% has been guaranteed to be not less than Rs.10,000. A & B have agreed
that if C’s profit falls below the guaranteed sum such deficiency would be shared by
them equally. The net profit before interest on capitals is estimated to be Rs.38,400.
Prepare profit and loss appropriation account.
 
Here you cannot adopt direct distribution as in the previous case since the partners will bear the loss equally. When
you distribute balance of profit after paying the partner with guarantee, the loss is automatically gets distributed in the
profit sharing ratio. If any other ratio is to be applied for sharing the loss, you must adopt 'subtraction and addition'
method.
 
Profit & Los Appropriation A/c
Particulars Amount Particulars Amount
To Interest on Capitals:   2,400 By P&L Account 38,400
A
                                1,800    
          B
                1,200    
C
       
Profit to       A                 
16,500
Less: C's Share   Adj.        15,625    
875
       
Profit share to   B            
8,250
Less: C's Share Adj.   7,375    
875
       
Profit Share to C          
8,250
Add: Share Adj A+B     10,000    
 1,750
  38,400   38,400
 
Illustration 1.17
A, B and C are partners sharing profits and losses in the ratio 2:1:1, with capitals of
Rs.40,000, Rs.30,000 and Rs.20,000 respectively. C’s minimum profit after interest on
capitals @6% has been guaranteed to be not less than Rs.10,000. A & B have agreed
that if C’s profit falls below the guaranteed sum such deficiency would be shared by
them in the ratio 3:2. The net profit before interest on capitals is estimated to be
Rs.38,400. Prepare profit and loss appropriation account.
 
Profit & Los Appropriation A/c
Particulars Amoun Particulars Amount
t
To Interest on Capitals:   2,400 By P&L Account 38,400
A
                               1,800    
           B
                               1,200    
          C
       
Profit to       A                 
16,500
Less: C's Share   Adj.  15,450    
1,050
       
Profit share to   B            
8,250
Less: C's Share Adj.   7,550    
700
       
0Profit Share to      
C          8,250
Add: Share Adj A+B     10,000    
1,750
  38,400   38,400
 
Illustration 1.18
A, B and C are partners sharing profits and losses in the ratio 2:1:1, with capitals of
Rs.40,000, Rs.30,000 and Rs.20,000 respectively. A has personally guaranteed that he
shall bear the deficiency if C’s share of profit after interest on capitals of partners @6%
falls below Rs.10,000. The net profit before interest on capitals is estimated to be
Rs.38,400. Prepare profit and loss appropriation account.
 
Profit & Los Appropriation A/c
 Particulars Amoun Particulars Amount
t
To Interest on Capitals:   2,400 By P&L Account 38,400
A
                                1,800    
          B
                                1,200    
         C
Profit to       A                 
16,500
Less: C's Share   Adj.  14,750    
1,750
       
Profit share to   B 8,250    
       
0Profit Share to      
C          8,250
Add: Share Adj A          10,000    
1,750
  38,400   38,400