Guarantee of Profit to a Partner

What is Guarantee?

Guarantee is defined as a surety of a specific amount of gains by 1 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 authentic share in profits is less than the promised amount, then the deficit amount will be handled either by the enterprise or by any of the partner. There are various ‘Adjustments’ which an enterprise will do in such a scenario. If the authentic share in gains is more than the minimal 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 the way of his share of profits of the enterprise
  • Such guarantee may be given by the former partners in a definite ratio or by any of the former partners, individually to the novice partner or an associate
  • The minimal promised amount will be paid to such 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.