Understanding Partner's Profit Sharing and Guarantee

This question deals with the concepts of profit sharing among partners, the admission of a new partner, and a guarantee of minimum profit provided to the new partner.

We are given a partnership with two initial partners, A and B, sharing profits in a specific ratio. A new partner, C, is admitted with a fixed share of future profits and a guarantee regarding the minimum amount of profit they will receive.

Analyzing the Partnership Scenario

• Initial Partners: A and B
• Old Profit Sharing Ratio (A:B): $3:4$
• New Partner: C
• C's Share in Future Profits: $1/5$th
• C's Guaranteed Minimum Profit: ₹30,000

The question asks how any deficiency in C's guaranteed profit share will be borne by A and B. A deficiency arises if C's $1/5$th share of the actual profit of the firm turns out to be less than the guaranteed amount of ₹30,000.

How Deficiency in Guaranteed Profit is Handled

When a new partner is admitted with a guarantee of minimum profit, and the partnership deed is silent on how any deficiency will be borne, it is typically borne by the old partners in their old profit-sharing ratio. If the deed specifies that only one partner or multiple partners in a specific ratio will bear the deficiency, then that specific agreement is followed.

In this question, there is no specific mention that the deficiency will be borne differently. Therefore, we assume the general rule applies.

Determining Who Bears the Deficiency

The deficiency in C's guaranteed profit will be borne by the existing partners before C's admission, which are A and B.

Determining the Ratio for Bearing Deficiency

According to the general rule, the deficiency will be borne by A and B in their old profit sharing ratio. The old profit sharing ratio between A and B is given as $3:4$.

Therefore, any amount needed to bring C's share up to the guaranteed ₹30,000 will be deducted from A's and B's respective shares of profit in the ratio $3:4$.

Conclusion on Deficiency Ratio

Based on the standard accounting treatment for partner's guaranteed profit when the agreement is silent, the deficiency in C's share will be borne by A and B in their old profit sharing ratio of $3:4$.

Revision Table: Key Partnership Concepts

Additional Information: Partner Guarantee Scenarios

Understanding partner guarantees is important in partnership accounting. Here are a few related points:

• Guarantee by the Firm: When the guarantee is given by the firm, any deficiency is borne by all partners other than the one guaranteed, in their respective profit sharing ratio (or the ratio they agree upon for this purpose). In this question, the guarantee to C by 'A and B' implies the firm is giving the guarantee, and the remaining partners (A and B) will bear it.
• Guarantee by One Partner: Sometimes, only one specific partner guarantees a minimum profit to another partner. In such a case, the entire deficiency is borne solely by the guaranteeing partner, and it is deducted from their share of profit.
• Guarantee by Some Partners in a Specific Ratio: The partnership deed might specify that a guarantee is given by certain partners, and any deficiency will be borne by them in a ratio other than their old profit sharing ratio. This specific ratio mentioned in the deed overrides the general rule.
• Calculation of Deficiency: Deficiency = Guaranteed Minimum Profit - Actual Share of Profit (based on firm's total profit). If the actual share is greater than the guarantee, there is no deficiency.
• Impact on Profit Distribution: The total profit of the firm is first calculated. Then, C's share is calculated based on the firm's profit. If C's calculated share is less than ₹30,000, the deficiency is calculated. This deficiency is then debited to the accounts of the partners bearing the deficiency (A and B in 3:4 ratio here) and credited to C's account to bring their share up to ₹30,000. The remaining profit is distributed among A and B in their remaining profit sharing ratio (after accounting for C's share and the deficiency).