Steps of Guarantee of Minimum Profit to a Partner
Step 1: Calculate the actual share of the Guaranteed Partner in the Profit or loss of the firm for the given accounting period.
Step 2: Compare the Guaranteed Amount with the Actual share of the Profit/ Loss of the Guaranteed Partner to find out the deficiency if any.
Step 3: Distribute the deficient amount among the Guaranteeing Partners in the Guaranteeing Ratio.
Step 4: Distribute the Profit/Loss of the firm among the partners in the Profit-Sharing Ratio as if there is no case of Guarantee of Minimum Profit.
Step 5: Recover the share of deficiency from the Guaranteeing Partners and credit the same to the Guaranteed Partner.
Guarantee of Minimum Profit to a Partner: Journal Entries & Example
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).
Table of Content
- Steps of Guarantee of Minimum Profit to a Partner
- Accounting Treatment (Journal Entries)
- Example of Guarantee of Minimum Profit to a Partner