Sometimes a partner is admitted into the firm with a guarantee of certain minimum amount by way of his share of profits of the firm. (Guaranteed Returns)

Such assurance may be given by all the old partners in a certain ratio or by any of the old partners, individually to the new partner. (Agency Concept)

The minimum guaranteed amount shall be paid to such new partner when his share of profit as per the profit-sharing ratio is less than the guaranteed amount.


STEPS – ACS (Allocate, Compare, Share)

Step No 1Allocate the profit as if there is no guarantee in their PSR.

Step No 2 – Compare – Compare new partner profit with the guaranteed amount.

Step No 3Share

  •  If guaranteed profit > Actual Profit – Share
  • If guaranteed profit < Actual Profit – Do nothing

 For example, Chunnu and Munnu, who are partners in a firm decide to admit Tunnu into their firm, giving her the guarantee of a minimum of Rs.25,000 as his share in firm’s profits.

The firm earned a profit of Rs.1,20,000 during the year and the agreed profit-sharing ratio between the partners is decided as 2:3:1.


Sol-

Guarantee – Rs 25,000

PSR – 2:3:1

Firms Profit – Rs. 1,20,000

STEPS – ACS (Allocate, Compare, Share)

Step No 1Allocate the profit as if there is no guarantee in their PSR.

 Allocate Rs, 1, 20, 000 in 2:3:1

 Chunnu’s Share = 1,20,000 / 6 x 2 = 40,000

 Munnu’s Share   = 1,20,000 /6 X3 = 60,000

 Tunnu’s Share    = 1,20,000/6* 1 =   20,000

Step No 2 – Compare – Compare new partner profit with the guaranteed amount.     

Tunnu’s Allocation = 20,000

Guaranteed Profit    = 25,000

Step No 3Share

  •  If guaranteed profit > Actual Profit – Share (25,000>20,000)
  • If guaranteed profit < Actual Profit – Do nothing – NA

Shortage = 25,000 -20,000 = Rs. 5,000

This shall be borne by the guaranteeing partners Chunnu and Munnu in their profit-sharing ratio, which in this case is 2:3,

Chunnu’s share in the deficiency = Rs.2,000 (2/5 of Rs. 5,000),

Munnu’s share in deficiency        = Rs.3,000. (3/5 of Rs. 5,000)

The total profit of the firm will be distributed among the partners as follows

Chunnu = Rs.38,000 (40,000-2,000)

Munnu = Rs.57,000(60,000–3,000)

Tunnu = Rs 25,000 (20,000 + 2,000 + 3,000).