

What Is the Guarantee of Profit to a Partner?
Guarantee is the promise made by one or more partners, and in certain situations, the company, to guarantee a specific amount of profits, with the burden of proof being with the party making the guarantee. In other words, the partner receiving such a guarantee must provide a minimum predetermined sum.
If the actual share of earnings is less than the agreed amount, the business or any partners, as applicable, will be responsible for covering the gap. A company will make various "Adjustments" in this situation. The company will give the partner the actual earnings if the actual share in profits exceeds the minimum guarantee amount.
Guarantee by the Firm or by All the Partners of the Firm
In this instance, the company initially records the partner's capital guarantee in the Profit and Loss Appropriation Account. The leftover profit is divided according to the remaining partners' respective ratios.

Guarantee by the Firm
For instance:
P, Q, and R are partners in a business where they split profits and losses 2:2:1. P and Q have promised that R's profit would never be less than Rs. 20,000 in any given year. The year ended March 31st, 2018, with a net profit of Rs. 60,000. Account for Profit and Loss Appropriation.
Practising Notes:
Less than Rs. 20,000 makes up R's 1/5 of Rs. 60000. (guarantee amount). As a result, he must get Rs. 20,000, and the other two partners (P and Q) will split the remaining Rs. 40,000 in profit according to their respective profit-sharing ratios (2:2 or 1:1).
Guarantee by One Partner Only
In this situation, the partner who obtained the assurance has their lack of profit first computed. The share of the partner who provided the guarantee is then reduced to reflect this shortfall.
For instance:
Let's now suppose that in the first case, if P is the only one to assure R, the changes will be as follows:
Practising Notes:
R's share is below the stipulated amount once again. He will thus receive the promised sum, but this time the earnings of Q won't be impacted because only P is providing the guarantee. Therefore, only P's share would be adjusted (deducted) for the Rs. 8,000 in profit shortfall.
Guaranteed by other partners, but the ratio of failure is specified.
In this situation, the other partners share the loss in a predetermined ratio (not the remaining profit-sharing ratio). In this scenario, the company will update the Profit and Loss Appropriation Account with the guaranteed amount paid to the partner. After then, it divides the leftover profit among the remaining participants in proportion to their original investment.
Past Modifications
There are instances in a company where owing to various factors, such as an accounting mistake, a missed entry, a change in the profit sharing ratio having a retroactive effect, etc. We will now examine the various changes in 2 distinct situations.
When there is simply one mistake: In this situation, an adjustment table is created, and an adjusting journal entry is created to fix the mistake. For 2. when there are several mistakes.
When there are several mistakes: In this situation, the company creates a new working note version of the special table and the Profit and Loss Appropriation (a component of the final account). We will then record the relevant information in our diary.

Guarantee of profit to a Partner in Partnership
Conclusion
A guarantee indicates one or more partners or the business guaranteeing a certain amount of earnings, with the guaranteeing party bearing the risk. Thus, the guaranteed partner receives a minimal amount.
The company or a partner will pay the difference if the actual share of earnings is less than the promised amount. Such a corporation will make several "Adjustments." The company will provide the partner the real earnings if they exceed the minimum guarantee.
FAQs on Guarantee of Profit to a Partner: Explained
1. What is meant by a 'Guarantee of Profit to a Partner' in a partnership firm?
A guarantee of profit is a special agreement where a new or existing partner is promised a minimum amount of profit from the business. If the partner's actual share of profit for a year is less than this guaranteed amount, the shortfall is paid by the other partners as per their agreement, ensuring the partner receives the minimum promised sum.
2. How is the guaranteed amount paid if a partner's actual profit share is less?
If a partner's actual profit share is less than the guaranteed amount, the difference is called a 'deficiency'. This deficiency is then paid by the partner or partners who gave the guarantee. They contribute to this shortfall from their own share of profits, usually in their profit-sharing ratio or another pre-agreed ratio.
3. Could you explain the guarantee of profit with a simple example?
Certainly. Imagine partners A, B, and C share profits equally, and C is guaranteed a minimum profit of ₹20,000. If the firm's total profit is ₹45,000, each partner's initial share is ₹15,000. Since C's share is ₹5,000 short of the guarantee, A and B will cover this deficiency from their shares. They will contribute ₹2,500 each, so their final profit will be ₹12,500 each, while C receives the guaranteed ₹20,000.
4. Why would a firm offer a guarantee of profit to a partner?
A firm usually offers a profit guarantee to give a new partner a sense of financial security and confidence. This is often a strategy to attract a person with valuable skills, a strong reputation, or significant capital into the partnership. It assures them they will earn a minimum amount, reducing their personal risk in joining the business.
5. What is the difference between a guarantee given by the firm and a guarantee given by an individual partner?
The main difference is who bears the deficiency. When a guarantee is given by the firm, it means all the other partners collectively bear the shortfall, usually in their profit-sharing ratio. However, when a guarantee is given by an individual partner, only that specific partner is responsible for covering the entire deficiency from their personal share of the profit.
6. What happens if the firm incurs a loss instead of a profit? Does the guarantee still apply?
Yes, the guarantee is still valid even if the firm incurs a loss. The guaranteed partner must receive their minimum promised profit. In this scenario, the amount to be covered by the guaranteeing partners includes not only the guaranteed profit but also the guaranteed partner's share of the loss. This entire sum is then borne by the guaranteeing partners.
7. How is the guarantee of profit shown in the Profit and Loss Appropriation Account?
In the Profit and Loss Appropriation Account, the net profit is first distributed among all partners as per their standard profit-sharing ratio. Afterwards, an adjustment entry is shown where the deficiency amount is debited from the capital accounts of the guaranteeing partners and credited to the capital account of the guaranteed partner, finalising the distribution.
8. What happens if the guaranteed partner's actual profit share is more than the guaranteed amount?
If the guaranteed partner's actual share of the profit is higher than the minimum guaranteed amount, then no adjustment is needed. The partner will receive the actual, higher amount of profit. The guarantee only comes into effect when the actual share falls below the promised minimum.

















