Guarantee of Profits

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 1 – Allocate 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 3 – Share

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 1 – Allocate 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.