Guarantee is the promise made by one or more partners, and in certain situations, the company, to guarantee a specific amount of profits, with the burden of proof being with the party making the guarantee. In other words, the partner receiving such a guarantee must provide a minimum predetermined sum.
If the actual share of earnings is less than the agreed amount, the business or any partners, as applicable, will be responsible for covering the gap. A company will make various "Adjustments" in this situation. The company will give the partner the actual earnings if the actual share in profits exceeds the minimum guarantee amount.
Guarantee by the Firm or by All the Partners of the Firm
In this instance, the company initially records the partner's capital guarantee in the Profit and Loss Appropriation Account. The leftover profit is divided according to the remaining partners' respective ratios.
Guarantee by the Firm
P, Q, and R are partners in a business where they split profits and losses 2:2:1. P and Q have promised that R's profit would never be less than Rs. 20,000 in any given year. The year ended March 31st, 2018, with a net profit of Rs. 60,000. Account for Profit and Loss Appropriation.
Less than Rs. 20,000 makes up R's 1/5 of Rs. 60000. (guarantee amount). As a result, he must get Rs. 20,000, and the other two partners (P and Q) will split the remaining Rs. 40,000 in profit according to their respective profit-sharing ratios (2:2 or 1:1).
Guarantee by One Partner Only
In this situation, the partner who obtained the assurance has their lack of profit first computed. The share of the partner who provided the guarantee is then reduced to reflect this shortfall.
Let's now suppose that in the first case, if P is the only one to assure R, the changes will be as follows:
R's share is below the stipulated amount once again. He will thus receive the promised sum, but this time the earnings of Q won't be impacted because only P is providing the guarantee. Therefore, only P's share would be adjusted (deducted) for the Rs. 8,000 in profit shortfall.
Guaranteed by other partners, but the ratio of failure is specified.
In this situation, the other partners share the loss in a predetermined ratio (not the remaining profit-sharing ratio). In this scenario, the company will update the Profit and Loss Appropriation Account with the guaranteed amount paid to the partner. After then, it divides the leftover profit among the remaining participants in proportion to their original investment.
There are instances in a company where owing to various factors, such as an accounting mistake, a missed entry, a change in the profit sharing ratio having a retroactive effect, etc. We will now examine the various changes in 2 distinct situations.
When there is simply one mistake: In this situation, an adjustment table is created, and an adjusting journal entry is created to fix the mistake. For 2. when there are several mistakes.
When there are several mistakes: In this situation, the company creates a new working note version of the special table and the Profit and Loss Appropriation (a component of the final account). We will then record the relevant information in our diary.
Guarantee of profit to a Partner in Partnership
A guarantee indicates one or more partners or the business guaranteeing a certain amount of earnings, with the guaranteeing party bearing the risk. Thus, the guaranteed partner receives a minimal amount.
The company or a partner will pay the difference if the actual share of earnings is less than the promised amount. Such a corporation will make several "Adjustments." The company will provide the partner the real earnings if they exceed the minimum guarantee.