Question

Write a note on guarantee of profit to a partner.

Answer 1

Guarantee to a partner refers to the guarantee of certain minimum amount of profit by all the other partners or any one partner of a firm. The difference amount is paid to the guaranteed partner, if and only if his/her share in the profit is lesser than the assured amount (or the minimum amount guaranteed). There are usually two cases:

Case 1: If a partner is guaranteed by all the other partners for minimum profit

Step I: Calculate the profit earned by the firm.

Step II: Calculate the share of profit of the guaranteed partner.

Step III: Deficiency, if any, will be borne by all the other partners either in their profit ratio or in any other agreed ratio.

Case 2: If a partner is guaranteed by any other partner for minimum profit

Step I: Calculate the profit earned by the firm.

Step II: Calculate the share of profit of all the partners.

Step III: Calculate the deficiency of the guaranteed partner.

Step IV: Deduct the amount of deficiency from the profit of the guarantor partner and add the deficiency amount to the guaranteed partner’s profit.