Guarantee of Profit to a Partner: Adjustment Method and Solved Format

Guarantee of profit to a partner is a small topic in partnership accounts, but it can change the whole answer if you miss one line in the question.

At first, the idea sounds unusual. If partners have already agreed to share profits in a ratio, why does one partner need a guaranteed amount? The answer is simple: sometimes a partner is promised a minimum share of profit. If the normal profit share falls below that promise, the shortage is made good by the partner or partners who gave the guarantee.

That shortage is called deficiency.

Once you understand deficiency, this topic becomes very logical. You are not creating a new expense. You are only adjusting the distribution of the same profit among partners.

This is the idea that protects you from the most common mistake in guarantee questions.

What Guarantee of Profit Means

A guarantee of profit means one partner is assured a minimum amount as his or her share of profit.

For example, A, B, and C are partners. C is guaranteed that C’s share of profit will not be less than Rs. 20,000 in any year. If C’s normal share comes to Rs. 24,000, there is no problem. C will get Rs. 24,000 because the actual share is higher than the guaranteed amount.

But if C’s normal share comes to Rs. 16,000, C must still receive Rs. 20,000. The shortage of Rs. 4,000 will be taken from the partner or partners who gave the guarantee.

That Rs. 4,000 is the deficiency.

Situation	Treatment
Normal share is more than guarantee	Give the normal share
Normal share is equal to guarantee	No adjustment is needed
Normal share is less than guarantee	Add the deficiency to the guaranteed partner’s share

The guarantee may be given to a new partner, an existing partner, or a specific partner named in the question. In many exam questions, it appears when a new partner is admitted because the new partner may want assurance before joining the firm.

Why This Topic Confuses Students

Most students do not make mistakes because the calculation is difficult. They make mistakes because the question has too many small conditions.

One line may say the partners share profits in the ratio 3:2:1.

Another line may say one partner is guaranteed Rs. 25,000.

Another line may say the deficiency will be borne by A and B in the ratio 2:3.

If you divide the profit directly in 3:2:1 and stop there, the answer is incomplete.

If you give the guaranteed partner the minimum amount but forget to reduce the guaranteeing partners, the total will not match the firm’s profit.

If you reduce all partners instead of only the partners named in the guarantee, the final distribution will be wrong.

These three may be the same, partly related, or completely different.

The Adjustment Method

Use this method every time. It is short, reliable, and easy to check.

1. Find the profit available for distribution.
2. Divide that profit among all partners in the normal profit sharing ratio.
3. Compare the guaranteed partner’s normal share with the guaranteed amount.
4. If there is a deficiency, transfer it from the guaranteeing partners to the guaranteed partner.
5. Check that the final shares still add up to the original distributable profit.

The formula is:

Deficiency = Guaranteed amount - Normal share of guaranteed partner

Use this formula only when the guaranteed amount is more than the normal share.

If the normal share is higher, deficiency is nil.

If the total has changed, you have either added deficiency without deducting it from someone else, or deducted it from the wrong place.

Who Bears the Deficiency?

This is where the wording of the question matters.

Wording in the question	Who bears the deficiency
Deficiency is to be borne by A	A alone
Deficiency is to be borne by A and B equally	A and B in equal shares
Deficiency is to be borne by A and B in 3:2	A and B in 3:2
Old partners guarantee the new partner’s profit	Old partners in the ratio given, or in their profit sharing ratio if no special ratio is given

Do not reduce the guaranteed partner’s own share while making good the deficiency. The whole point of the guarantee is that this partner should receive the promised minimum.

Also remember that the deficiency is not debited to Profit and Loss Account like an expense. It is an adjustment between partners.

The simple journal entry for deficiency is:

Guaranteeing Partners' Capital or Current A/c Dr.
    To Guaranteed Partner's Capital or Current A/c

Use Capital Accounts under the fluctuating capital method. Use Current Accounts under the fixed capital method.

A Simple Solved Example

Let us solve a clean example first.

A, B, and C are partners sharing profits in the ratio 3:2:1. C is guaranteed a minimum profit of Rs. 18,000. Any deficiency is to be borne by A and B in the ratio 3:2. The firm earned a profit of Rs. 90,000.

Step 1: Divide Profit in the Normal Ratio

The ratio is 3:2:1. Total parts are 6.

Partner	Normal share
A	Rs. 90,000 x 3/6 = Rs. 45,000
B	Rs. 90,000 x 2/6 = Rs. 30,000
C	Rs. 90,000 x 1/6 = Rs. 15,000

C is guaranteed Rs. 18,000.

C’s normal share is only Rs. 15,000.

So deficiency is:

Rs. 18,000 - Rs. 15,000 = Rs. 3,000

Step 2: Divide Deficiency Between A and B

A and B bear the deficiency in the ratio 3:2.

Partner	Share in deficiency
A	Rs. 3,000 x 3/5 = Rs. 1,800
B	Rs. 3,000 x 2/5 = Rs. 1,200

Step 3: Find Final Profit Shares

Partner	Normal share	Adjustment	Final share
A	Rs. 45,000	Less Rs. 1,800	Rs. 43,200
B	Rs. 30,000	Less Rs. 1,200	Rs. 28,800
C	Rs. 15,000	Add Rs. 3,000	Rs. 18,000
Total			Rs. 90,000

Notice that the total is still Rs. 90,000. That means the adjustment is balanced.

Profit and Loss Appropriation Account Format

Profit and Loss Appropriation Account
Particulars	Rs.	Particulars	Rs.
To A’s Capital A/c	43,200	By Profit and Loss A/c	90,000
To B’s Capital A/c	28,800
To C’s Capital A/c	18,000
Total	90,000	Total	90,000

You can also show the normal profit share first and then the deficiency adjustment separately in working notes. Both ways are acceptable if the final shares are clear and correct.

Journal Entry for the Same Example

If the question asks for journal entry for deficiency, the entry will be:

A's Capital A/c Dr.        1,800
B's Capital A/c Dr.        1,200
    To C's Capital A/c              3,000

This entry means A and B are sacrificing part of their normal shares so that C receives the guaranteed amount.

If the firm maintains fixed capitals, use Current Accounts:

A's Current A/c Dr.        1,800
B's Current A/c Dr.        1,200
    To C's Current A/c              3,000

That is why the total profit does not change.

When One Partner Alone Gives the Guarantee

Now let us change the wording.

A, B, and C are partners sharing profits in the ratio 5:3:2. C is guaranteed a minimum profit of Rs. 25,000. B alone has given the guarantee. The firm earned profit of Rs. 1,00,000.

Step 1: Divide Profit Normally

Total parts are 10.

Partner	Normal share
A	Rs. 1,00,000 x 5/10 = Rs. 50,000
B	Rs. 1,00,000 x 3/10 = Rs. 30,000
C	Rs. 1,00,000 x 2/10 = Rs. 20,000

C is guaranteed Rs. 25,000.

Deficiency:

Rs. 25,000 - Rs. 20,000 = Rs. 5,000

Since B alone has guaranteed C’s profit, B alone bears Rs. 5,000.

Final Profit Shares

Partner	Normal share	Adjustment	Final share
A	Rs. 50,000	No change	Rs. 50,000
B	Rs. 30,000	Less Rs. 5,000	Rs. 25,000
C	Rs. 20,000	Add Rs. 5,000	Rs. 25,000
Total			Rs. 1,00,000

The Profit and Loss Appropriation Account will show A Rs. 50,000, B Rs. 25,000, and C Rs. 25,000 on the debit side as final distribution.

The deficiency entry will be:

B's Capital A/c Dr.        5,000
    To C's Capital A/c              5,000

This is the easiest way to handle questions where one partner takes full responsibility for the guarantee.

When There Is No Deficiency

Sometimes students force an adjustment even when none is required.

Read this example carefully.

A, B, and C share profits in the ratio 2:2:1. C is guaranteed a minimum profit of Rs. 20,000. The firm earned profit of Rs. 1,25,000.

C’s normal share:

Rs. 1,25,000 x 1/5 = Rs. 25,000

C is already getting Rs. 25,000, which is more than the guaranteed amount of Rs. 20,000.

So there is no deficiency.

Final shares are:

Partner	Final share
A	Rs. 50,000
B	Rs. 50,000
C	Rs. 25,000

No partner needs to sacrifice anything.

Guarantee After Interest on Capital or Salary

Some questions include interest on capital, partner salary, or commission along with the guarantee. Do not panic. The method is still the same, but you must first decide what amount is being guaranteed.

The question may say:

Wording	How to understand it
C is guaranteed Rs. 30,000 as share of profit	Compare C’s share of distributable profit with Rs. 30,000
C is guaranteed Rs. 30,000 excluding interest on capital	Give interest separately, then compare only C’s profit share with Rs. 30,000
C is guaranteed Rs. 30,000 including interest on capital	Compare C’s total credit, including interest, with Rs. 30,000

The phrase “including” or “excluding” is not decoration. It decides the calculation.

Let us solve one example with interest on capital.

X, Y, and Z are partners sharing profits in the ratio 2:2:1. The profit before interest on capital is Rs. 1,20,000. Interest on capital is X Rs. 12,000, Y Rs. 8,000, and Z Rs. 5,000. Z is guaranteed a minimum profit of Rs. 25,000 excluding interest on capital. Deficiency is to be borne by X and Y equally.

Step 1: Record Interest on Capital

Total interest on capital:

Rs. 12,000 + Rs. 8,000 + Rs. 5,000 = Rs. 25,000

Profit left for sharing:

Rs. 1,20,000 - Rs. 25,000 = Rs. 95,000

Step 2: Divide Rs. 95,000 in 2:2:1

Partner	Normal profit share
X	Rs. 95,000 x 2/5 = Rs. 38,000
Y	Rs. 95,000 x 2/5 = Rs. 38,000
Z	Rs. 95,000 x 1/5 = Rs. 19,000

Z is guaranteed Rs. 25,000 excluding interest on capital. So we compare only Z’s profit share, not Z’s interest on capital.

Deficiency:

Rs. 25,000 - Rs. 19,000 = Rs. 6,000

X and Y bear this equally:

Partner	Deficiency borne
X	Rs. 3,000
Y	Rs. 3,000

Final Profit Share After Guarantee

Partner	Normal profit share	Adjustment	Final profit share
X	Rs. 38,000	Less Rs. 3,000	Rs. 35,000
Y	Rs. 38,000	Less Rs. 3,000	Rs. 35,000
Z	Rs. 19,000	Add Rs. 6,000	Rs. 25,000
Total			Rs. 95,000

Profit and Loss Appropriation Account

Profit and Loss Appropriation Account
Particulars	Rs.	Particulars	Rs.
To Interest on Capital A/c	25,000	By Profit and Loss A/c	1,20,000
To X’s Capital A/c, profit share	35,000
To Y’s Capital A/c, profit share	35,000
To Z’s Capital A/c, profit share	25,000
Total	1,20,000	Total	1,20,000

Z will also receive interest on capital of Rs. 5,000 separately because the guarantee was excluding interest on capital.

If the question had said “including interest on capital”, the comparison would be different. Then you would compare Z’s total credit with the guaranteed amount.

The Clean Format to Use in Exams

When a guarantee question is asked, your working notes should be neat. Marks are often given for the method, not only for the final amount.

Use this format:

Working Note 1: Normal profit distribution
Total profit x Partner's share

Working Note 2: Deficiency
Guaranteed amount - Normal share of guaranteed partner

Working Note 3: Deficiency borne by guaranteeing partners
Deficiency x Agreed ratio

Working Note 4: Final profit distribution
Normal share +/- deficiency adjustment

Then prepare the Profit and Loss Appropriation Account or pass the journal entry, depending on what the question asks.

Do not hide the deficiency calculation in rough work. Write it clearly. It tells the examiner that you understood the guarantee condition.

Journal Entries You Should Know

There are two ways a question may expect the answer.

If Only Deficiency Adjustment Is Asked

Use this entry:

Guaranteeing Partners' Capital or Current A/c Dr.
    To Guaranteed Partner's Capital or Current A/c

This records the transfer of deficiency.

If Final Profit Distribution Is Asked

First distribute profit normally or directly show the adjusted shares:

Profit and Loss Appropriation A/c Dr.
    To Partners' Capital or Current A/c

Then, if needed, pass the separate deficiency adjustment entry.

In many school-level answers, the final adjusted shares are shown directly in the Profit and Loss Appropriation Account. That is fine when the workings clearly show how deficiency was calculated.

Common Mistakes in Guarantee Questions

The first mistake is treating the guaranteed amount as an expense. It is not an expense of the business. It is an adjustment of profit distribution among partners.

The second mistake is adding the deficiency to the guaranteed partner but not deducting it from the guaranteeing partners. That makes the total distribution higher than the profit.

The third mistake is using the normal profit sharing ratio to bear deficiency when the question gives a separate deficiency ratio.

The fourth mistake is reducing all partners even when only one partner has given the guarantee.

The fifth mistake is making an adjustment when the guaranteed partner’s normal share is already more than the guaranteed amount.

The sixth mistake is ignoring words such as “including interest on capital” or “excluding interest on capital.”

This one line catches most errors.

A Mini Practice Question

Try this before looking at the answer.

P, Q, and R are partners sharing profits in the ratio 4:3:1. R is guaranteed a minimum profit of Rs. 24,000. Any deficiency is to be borne by P and Q in the ratio 2:1. The firm earned profit of Rs. 1,60,000.

Solution

R’s normal share:

Rs. 1,60,000 x 1/8 = Rs. 20,000

Deficiency:

Rs. 24,000 - Rs. 20,000 = Rs. 4,000

Deficiency borne by P and Q in 2:1:

Partner	Deficiency borne
P	Rs. 4,000 x 2/3 = Rs. 2,667
Q	Rs. 4,000 x 1/3 = Rs. 1,333

Normal shares:

Partner	Normal share
P	Rs. 80,000
Q	Rs. 60,000
R	Rs. 20,000

Final shares:

Partner	Final share
P	Rs. 80,000 - Rs. 2,667 = Rs. 77,333
Q	Rs. 60,000 - Rs. 1,333 = Rs. 58,667
R	Rs. 20,000 + Rs. 4,000 = Rs. 24,000
Total	Rs. 1,60,000

The small rounding difference is handled by writing the closest rupee values so that the total agrees with the profit.

How to Revise This Topic Quickly

Before an exam, do not try to memorise many different question types. Memorise the thinking sequence.

Ask yourself:

1. What profit is available for distribution?
2. What is the profit sharing ratio?
3. Who has been guaranteed a minimum amount?
4. What is that partner’s normal share?
5. Is there a deficiency?
6. Who bears the deficiency?
7. Do the final shares add up to the original profit?

If you can answer these seven questions, you can solve most guarantee of profit questions.

Also practise at least one question where:

Type of question	Why it matters
No deficiency arises	It stops you from forcing an adjustment
One partner bears the deficiency	It trains you to read the wording carefully
Deficiency is borne in a special ratio	It prevents ratio mistakes
Interest on capital is also given	It tests the order of appropriation

Guarantee questions reward patience. Read slowly, set up the working notes, and let the numbers move step by step.

Frequently Asked Questions

What is guarantee of profit to a partner?

Guarantee of profit to a partner means one partner is promised a minimum amount as share of profit. If the normal share is less than that amount, the shortage is made good by the partner or partners who gave the guarantee.

What is deficiency in guarantee of profit?

Deficiency is the shortage between the guaranteed amount and the partner’s normal profit share. It is calculated only when the normal share is lower than the guaranteed amount.

Is guarantee of profit treated as an expense?

No. Guarantee of profit is not treated as a business expense. It is an adjustment between partners while distributing profit.

Who bears the deficiency?

The deficiency is borne by the partner or partners named in the question. If old partners give the guarantee and no special ratio is given, the deficiency is usually borne by them in their profit sharing ratio.

What happens if the guaranteed partner’s normal share is more than the guaranteed amount?

No adjustment is needed. The partner receives the higher normal share because the guarantee is only a minimum assurance.

Which account is debited for deficiency?

The guaranteeing partner’s Capital Account or Current Account is debited. The guaranteed partner’s Capital Account or Current Account is credited.

Should I use Capital Account or Current Account in the journal entry?

Use Capital Account when the fluctuating capital method is followed. Use Current Account when the fixed capital method is followed.

Does guarantee of profit change the firm’s total profit?

No. The firm’s total profit remains the same. Only the final distribution among partners changes.

How do I handle guarantee when interest on capital is also given?

First read whether the guarantee is including or excluding interest on capital. If it is excluding interest on capital, compare only the partner’s profit share with the guaranteed amount. If it is including interest on capital, compare the partner’s total credit with the guaranteed amount.

What is the easiest way to check my answer?

Add the final shares of all partners. The total should equal the profit available for distribution. If it does not match, the deficiency adjustment has been handled incorrectly.