Guarantee of profit to a partner

Basics of Accounting for Partnership

1. Guarantee of Profit to a Partner Prepared By PRASANTH.S.R

2. Sometimes , on admission of a new partner , the existing partners may give an assurance to the incoming partner that he shall be given a minimum amount of profit irrespective of the firm’s actual profit. Even if there is no profit or profit falls short of guaranteed minimum amount, the newly admitted partner enjoys the privilege of getting the guaranteed amount. If it is so, then the deficiency is borne by any one or by all other partners in their profit sharing ratio. Guarantee of Profit to a Partner

3. Sanju , Jithu and Suresh are partners in the ratio of 5:3:2. According to the agreement Suresh was given a guarantee of minimum amount of Rs.30000, as his share of profit every year. The profit of last year 2011 was Rs.120000. Divide the profit among Sanju , Jithu and Suresh by preparing profit and loss appropriation account. Illustration – 1 [ Guarantee given by the firm ]

4. Particulars Amount Particulars Amount To Profit transferred to Capital accounts Sanju Capital 60000 -given to C 3750 Jithu's Capital 36000 -given to C 2250 Suresh's Capital 24000 +from Sanju 3750 +from Jithu 2250     56250   33750     30000 By Net profit as per Profit and loss a/c         120000         120000   120000 Profit and Loss Appropriation Account for the year ended Dec. 31,2011 Dr. Cr.

5. Kavitha , Manitha and Savitha were partners in the ratio of 2:2:1. Savitha is given a guarantee of profit amounted to Rs.15000 as her share of profit every year. It was decided that any deficiency will be met by Manitha . the profit for the year December 2010 ending was Rs.60000. Prepare the profit and loss appropriation account for the year. Illustration – 2 [ Guarantee of Profit by one partner ]

6. Particulars Amount Particulars Amount To Profit transferred to Capital accounts Kavitha’s Capital = 60000 × 2 = 24000 5 Manitha's Capital = 60000 × 2 = 24000 5 -given to Savitha 3000 Manitha's Capital = 60000 × 1 = 12000 5 +given by Savitha 3000     24000       21000     15000 By Net profit as per Profit and loss a/c         60000         60000   60000 Profit and Loss Appropriation Account for the year ended Dec. 31,2010 Dr. Cr.

7. Vishnu , Jayan & Siva are partners sharing profit in the ratio of 5:4:1. Siva is given a guarantee that his share of profit in any year would be Rs.5000. Deficiency if any would be borne by Vishnu and jayan Equally. The profit for the year amounted to Rs.40000. Prepare profit and loss appropriation account. Illustration – 3 [ When Deficiency is shared by old Partners in the ratio other than their existing ratio ]

8. Particulars Amount Particulars Amount To Profit transferred to Capital accounts Vishnu’s Capital = 40000 × 5 = 20000 10 Less given to Siva = 500 Jayan's Capital = 40000 × 4 = 16000 10 Less given to Siva = 500 Shiva’s Capital = 40000 × 1 = 4000 10 +given by Vishnu = 500 +given by Jayan = 500         19500       15500       5000 By Net profit as per Profit and loss a/c         40000         40000   40000 Profit and Loss Appropriation Account for the year ended Dec. 31,2011 Dr . Cr .

9. Jimmy , Sunny and Danny started partnership business on 1st January 2014 in the ratio of 5:3:2. Jimmy guaranteed that Danny’s share of profits after sharing interest on capital @ of 5% per annum, would not be less than Rs.52500 in any year. The capital at the commencement of business was Jimmy – Rs.560000, Sunny – Rs.350000 and Danny – Rs.280000. the profits of the year ended 31 st December 2014 amounted to Rs . 278250 before providing for interest on capital . You are required to prepare profit and loss appropriation account. Illustration – 4 [Minimum Profit guarantee after adjustments in profits ]

10. Particulars Amount Particulars Amount To interest on capital Jimmy 28000 Sunny 17500 Danny 14000 To Profit transferred to Capital accounts Jimmy’s Capital = 218750 × 5 = 109375 10 Less given to Danny = 8750 Sunny's Capital = 218750 × 3 = 65625 10 Danny’s Capital = 218750 × 2 = 43750 10 +given by Jimmy = 8750       59500         100625     65625     52500 By Net profit as per Profit and loss a/c         278250         278250   278250 Profit and Loss Appropriation Account for the Dr. year ended Dec. 31,2014 Cr.

11. Ram and Shyam were partners in the ratio 3:2 . Mohan was their manager, they decided to take Mohan as a partner with effect from 1 st January 2009 for ¼ th share in the profits. Mohan was getting a salary of RS.43200 per annum and a commission of 10% of the net profits after charging such salary and commission when he was a manager. It was agreed that any excess amount which will be given to Mohan as a partner than the amount he was getting as manager would be personally borne by Shyam . Profit for the year 31 st December 2009 was Rs.360000 before salary and commission. Prepare their profit and loss appropriation account. Illustration – 5 [ Manager becoming Partner ]

12. Particulars Amount Particulars Amount To Profit transferred to Capital accounts Ram’s Capital = 288000× 3 = 172800 5 Shyam's Capital = 288000 × 2 = 115200 5 Less given to mohan = 18000 Mohan’s Capital = 360000 × 1 = 43750 4       172800       97200   90000 By Net profit as per Profit and loss a/c         360000         360000   360000 Profit and Loss Appropriation Account for the year ended Dec. 31,2014 Dr . Cr.