Accounting Treatment (Journal Entries)

Case I: When the actual share is less than the guaranteed amount

In this case, the share of deficiency is recovered from the profit share of the Guaranteeing Partners and all the Adjustments are made in the Profit and Loss Appropriation Account before transferring the profit share to the Capital/Current Account of the Partner. The deficient amount is added to the profit share of the Guaranteed Partner in the Profit and Loss Appropriation Account, before transferring it to the Capital/Current Account.

A. Distribution of Profit/Loss among all the partners as if there is no Guarantee Arrangement: 

• In the case of Profit:

• In the case of Loss:

B. Recovering the Share of Deficiency from Guaranteeing Partners:

Guarantee of Minimum Profit to a Partner means that a partner has been assured to receive a minimum amount of profit (Guaranteed Amount). This further means that if in any year, the actual share of the profit of the guaranteed partner is less than the Guaranteed Amount, then the deficiency shall be covered by the partner providing the guarantee. The partner who has been assured to receive the guaranteed amount is called a ‘Guaranteed Partner’, and the partner or the partners giving such guarantee are called ‘Guaranteeing Partners’. Such assurance may be given by one or more or all the partners either in their profit-sharing ratio or in the ratio agreed upon by the partners.

Guarantee of Minimum Profit to a Partner can be understood in the following cases:

• When no information about the Guaranteeing Partner and the ratio in which the deficiency amount has to be borne is given: In this case, any deficiency in the Guaranteed Amount is borne by all the partners in their profit sharing ratio (Firm Guarantee).
• When the Guarantee is given by the specific partner: Under the situation where a specific partner provides the Guarantee of Minimum Profit to another Partner, then any deficiency in the Guaranteed Amount is borne by that specific partner only.
• When a Guarantee of Minimum Profit is given by all the partners in some specific ratio: Any deficiency in the Guaranteed Amount is borne by all the partners in the specific ratio agreed by all the partners (Personal Guarantee).