Guarantee of Profit to a Partner

What is Guarantee?

Guarantee is defined as a surety of a specific amount of gains by one or more partners and in some cases by the enterprise, where the burden of guarantee is carried by the party furnishing such a guarantee. To put it in other words, it is a minimum fixed amount for the partner who is given such a guarantee.

What is Guarantee of Profit to a Partner?

If the actual share in profits is less than the promised amount, then the deficit amount will be handled either by the firm or by any of the partner. There are various ‘Adjustments’ which an enterprise will do in such a scenario. If the actual share in gains is more than the minimum guarantee amount then the enterprise will furnish the actual gains to the partner.

Sometimes a partner is :

  • Admitted into the enterprise with a surety of certain minimal amount by way of his share in the profits of the firm
  • Such guarantee may be given by the former partners in a definite ratio or by any of the former partners, individually to the new partner or an associate
  • The minimal promised amount will be paid to such a novice partner when his share of gain as per the profit sharing ratio (PSR) is less than the promised amount

The above mentioned is the concept that is explained in detail about Guarantee of Profit to a Partner for the class 12 students. To know more, stay tuned to BYJU’S.

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