Guarantee of profit to a partner

The essentials

Sometimes a partner, often a new or junior one, is promised that his share of profit will not fall below a fixed amount. This is a guarantee of minimum profit. If his actual share is less than the guaranteed amount, the shortfall (deficiency) is borne by the other partners. The guarantee may be given by the firm (all other partners bear the deficiency in their profit-sharing ratio) or by particular partners (only they bear it, in the ratio agreed between them, or in their own profit-sharing ratio if nothing is said).

Key points

• Deficiency = Guaranteed amount − Actual share of profit (only if positive).
• If the actual share exceeds the guarantee, no adjustment is needed.
• Guarantee by firm: deficiency shared by the other partners in their mutual profit ratio.
• Guarantee by one partner: that partner alone bears the deficiency.
• The adjustment is shown in the Profit and Loss Appropriation Account, by deducting the deficiency from the giving partners' shares and adding it to the guaranteed partner's share.

Exam tips

Always first find each partner's normal share, then calculate the deficiency, and finally decide who bears it. Read carefully whether the guarantee is "by the firm" or "by A".

Common mistakes

• Making the guaranteed partner also bear part of his own deficiency.
• Applying the guarantee when the actual share is already higher than the minimum.