Abhay, Boris and Chetan were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Boris was guarantee

Question

Q. Abhay, Boris and Chetan were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Boris was guaranteed a profit of ₹95,000. Any deficiency on account of this was to be borne by Abhay and Chetan equally. The firm earned a profit of ₹2,00,000 for the year ended 31st March, 2023. The amount given by Abhay to Boris as guaranteed amount will be : (A) ₹17,500 (B) ₹35,000 (C) ₹25,000 (D) ₹10,000

CBSECBSE Class XII Board 2024MCQ· 1mImportance★★★★★

✓ Free question

Concept understanding — Guarantee of Profit

Profit Appropriation Account – A First Look

Think of a partnership firm as a group of friends who run a business together. At the end of the year, they have earned some profit. But before they split that profit among themselves, they must first settle certain obligations: pay interest on the capital each partner contributed, give a salary to a partner who works full-time, or pay a commission to a partner who brought in a special client. Only after these items are accounted for can the remaining profit be divided.

That is exactly what the Profit Appropriation Account does. It is not a separate ledger account in the double-entry system — it is an extension of the Profit and Loss Account. The Profit and Loss Account shows the net profit (or net loss) of the firm. The Profit Appropriation Account shows how that net profit is appropriated (distributed or allocated) among the partners and to various reserves.

Why does it matter?

Without an appropriation account, you would not know:

How much interest on capital each partner is entitled to.
Whether a partner’s salary or commission has been paid.
How much profit is transferred to the General Reserve.
What remains to be shared as profit among the partners.

In short, it answers the question: “We made Rs 5,00,000 profit — now what happens to it?”

Accounting treatment – the logic

The Profit Appropriation Account is credited with the net profit brought forward from the Profit and Loss Account. Then, all appropriations (interest on capital, partner’s salary, partner’s commission, transfer to reserve) are debited to this account. The balance left after all debits is the divisible profit, which is then credited to the partners’ capital accounts in their profit-sharing ratio.

Important

The Profit Appropriation Account is not a real account — it is a nominal account. It is closed at the end of each year by transferring its balance to the partners’ capital accounts.

The format (as per NCERT Class 12)

Below is the standard proforma. Note that the left side (Dr.) shows all appropriations, and the right side (Cr.) shows the net profit brought in.

Dr.	Profit and Loss Appropriation Account	Cr.
Particulars	Amount (Rs)	Particulars
To Interest on Capital:		By Net Profit (transferred from P&L A/c)
– Partner A	XXX
– Partner B	XXX
To Partner’s Salary (if any)	XXX
To Partner’s Commission (if any)	XXX
To General Reserve	XXX
To Profit transferred to:
– Partner A’s Capital A/c	XXX
– Partner B’s Capital A/c	XXX
Total	XXX	Total

Note

The total on both sides must match. The last item — profit transferred to partners’ capital accounts — is the balancing figure after all other appropriations are debited.

Key formula (plain text)

Interest on Capital = Capital × Rate of Interest × (Period / 12 months)

For example, if Partner A has capital of Rs 2,00,000 and the agreed rate is 10% per annum for a full year, interest on capital = 2,00,000 × 10/100 × 12/12 = Rs 20,000.

A common mistake to avoid

Watch out

Do not confuse the Profit Appropriation Account with the Profit and Loss Account. The P&L Account shows the net profit earned from business operations. The Appropriation Account shows how that net profit is distributed. They are two separate steps in the final accounts.

In a nutshell

Purpose: To show how net profit is allocated among partners and reserves.
Nature: Nominal account, closed at year-end.
Debit side: All appropriations (interest, salary, commission, reserve, profit share).
Credit side: Net profit from P&L Account.
Final balance: Transferred to partners’ capital accounts in profit-sharing ratio.

Once you see it as a simple “distribution sheet” for the profit, the whole concept clicks. The format is just a way to organise those distributions neatly.

Abhay contributes ₹17,500 to Boris to meet the guarantee shortfall; the answer is (A) ₹17,500.

Concept: Guarantee of Minimum Profit to a Partner

When a partner is guaranteed a minimum profit, the firm first distributes profit in the normal profit-sharing ratio. If the guaranteed partner's share falls short of the guarantee, the deficiency must be made good. The question then becomes: who bears this deficiency?

Here, Boris is guaranteed ₹95,000. The deficiency (if any) is to be borne by Abhay and Chetan equally — meaning they share the burden 1:1, not in their original profit ratio. This is a specific arrangement among the partners.

The accounting treatment is straightforward:

Distribute the total profit (₹2,00,000) in the normal ratio 5:3:2.
Compare Boris's share with his guarantee.
If his share is less, calculate the deficiency.
Abhay and Chetan each contribute half the deficiency from their own shares to Boris.

The net effect is a transfer within the appropriation: Abhay's and Chetan's capital/current accounts are debited (reduced), and Boris's is credited (increased) by the deficiency amount, split equally between the two guarantors.

Solution

Working Note 1: Distribution of Profit in Normal Ratio (5:3:2)

Total profit = ₹2,00,000

Profit-sharing ratio = 5:3:2 (sum = 10)

Abhay's share = $\frac{5}{10} \times 2,00,000 = ₹1,00,000$
Boris's share = $\frac{3}{10} \times 2,00,000 = ₹60,000$
Chetan's share = $\frac{2}{10} \times 2,00,000 = ₹40,000$

Working Note 2: Deficiency in Boris's Share

Boris is guaranteed ₹95,000, but his normal share is only ₹60,000.

Deficiency = ₹95,000 − ₹60,000 = ₹35,000

This ₹35,000 shortfall must be made good by Abhay and Chetan equally.

Working Note 3: Contribution by Abhay and Chetan

Since the deficiency is to be borne equally:

Abhay's contribution = $\frac{35,000}{2} = ₹17,500$
Chetan's contribution = $\frac{35,000}{2} = ₹17,500$

Working Note 4: Final Distribution of Profit

Partner	Normal Share (₹)	Adjustment (₹)	Final Share (₹)
Abhay	1,00,000	−17,500	82,500
Boris	60,000	+35,000	95,000
Chetan	40,000	−17,500	22,500
Total	2,00,000	0	2,00,000

The adjustment is a pure transfer: Abhay and Chetan each give up ₹17,500 of their profit share, which is added to Boris's share to bring it up to the guaranteed ₹95,000.

Watch out

A common mistake is to assume the deficiency is borne in the original profit-sharing ratio (5:2 between Abhay and Chetan). The question explicitly states "equally," so each bears half the deficiency regardless of their profit ratio.

Journal Entry (if required)

The guarantee adjustment is typically recorded in the Profit & Loss Appropriation Account or directly in the partners' capital/current accounts. The entry to reflect the transfer would be:

Date	Particulars	Debit (₹)	Credit (₹)
31-Mar-23	Abhay's Current/Capital A/c Dr.	17,500
	Chetan's Current/Capital A/c Dr.	17,500
	To Boris's Current/Capital A/c		35,000
	(Being deficiency on guarantee made good by Abhay and Chetan equally)

This entry reduces Abhay's and Chetan's balances and increases Boris's balance by the guarantee shortfall.

✓Final answer

Abhay contributes ₹17,500 to Boris to meet the guarantee deficiency. The correct answer is (A) ₹17,500 .

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

CBSE 2025Set 67/5/11 markMCQ

Q. John and Harry were partners in a firm sharing profits and losses in the ratio of 2 : 1. On 1st April, 2023, they admitted Dinesh as a new partner for 1/4th share in the profits of the firm with a guarantee that his share in the profits shall be at least ₹ 1,00,000. The net profit of the firm for the year ended 31st March, 2024 was ₹ 2,80,000. John’s share in the profits of the firm after giving the guaranteed amount of profit to Dinesh will be : (A) ₹ 1,40,000 (B) ₹ 1,20,000 (C) ₹ 1,00,000 (D) ₹ 70,000

›Reveal solution

John's share after bearing the guarantee shortfall to Dinesh is ₹1,20,000.

Concept: Guarantee of Minimum Profit to a Partner

When an incoming partner is admitted with a guarantee of minimum profit, the firm promises that the new partner will receive at least a specified amount, regardless of what the profit-sharing ratio yields. If the new partner's share calculated by the agreed ratio falls short of the guaranteed amount, the deficiency must be borne by one or more of the existing partners.

The accounting treatment depends on who bears the guarantee. The question is silent on this point, which means we apply the default rule: the deficiency is borne by the old partners (here, John and Harry) in their old profit-sharing ratio. The new partner receives the guaranteed amount, and the remaining profit is distributed among all partners in the new ratio, but the old partners' shares are reduced to make up the shortfall.

The mechanics are straightforward:

Calculate Dinesh's share under the new profit-sharing ratio.
Compare it with the guaranteed amount.
If the calculated share is less, the deficiency is borne by John and Harry in their old ratio (2:1).
Adjust each partner's final share accordingly.

Determination of New Profit-Sharing Ratio

Dinesh is admitted for $\frac{1}{4}$ share. The remaining share for John and Harry together is:

1 - \frac{1}{4} = \frac{3}{4}

John and Harry continue to share this $\frac{3}{4}$ in their old ratio of 2:1.

John's new share:

\frac{2}{3} \times \frac{3}{4} = \frac{2}{4} = \frac{1}{2}

Harry's new share:

\frac{1}{3} \times \frac{3}{4} = \frac{1}{4}

New profit-sharing ratio = John : Harry : Dinesh = $\frac{1}{2} : \frac{1}{4} : \frac{1}{4}$ = 2 : 1 : 1.

Calculation of Profit Distribution

Working Note 1: Dinesh's share as per new ratio

Net profit for the year = ₹2,80,000

Dinesh's share = $\frac{1}{4} \times 2,80,000 = ₹70,000$

Working Note 2: Guarantee shortfall

Guaranteed amount to Dinesh = ₹1,00,000

Dinesh's share as per ratio = ₹70,000

Deficiency = ₹1,00,000 – ₹70,000 = ₹30,000

This deficiency of ₹30,000 must be borne by John and Harry in their old ratio of 2:1.

Working Note 3: Deficiency borne by old partners

John's share of deficiency = $\frac{2}{3} \times 30,000 = ₹20,000$

Harry's share of deficiency = $\frac{1}{3} \times 30,000 = ₹10,000$

Working Note 4: Final distribution of profit

Partner	Share as per new ratio (2:1:1)	Adjustment for guarantee	Final share
John	$\frac{2}{4} \times 2,80,000 = ₹1,40,000$	Less: ₹20,000	₹1,20,000
Harry	$\frac{1}{4} \times 2,80,000 = ₹70,000$	Less: ₹10,000	₹60,000
Dinesh	$\frac{1}{4} \times 2,80,000 = ₹70,000$	Add: ₹30,000	₹1,00,000
Total			₹2,80,000

Watch out

A common mistake is to assume the guarantee is borne by all partners in the new ratio. The guarantee deficiency is borne by the old partners in their old ratio unless the partnership deed specifies otherwise.

Profit and Loss Appropriation Account

for the year ended 31st March, 2024

Particulars	Amount (₹)	Particulars	Amount (₹)
John's Capital A/c	1,20,000	Profit and Loss A/c (Net Profit)	2,80,000
Harry's Capital A/c	60,000
Dinesh's Capital A/c	1,00,000
Total	2,80,000	Total	2,80,000

✓Final answer

John's share in the profits after giving the guaranteed amount to Dinesh is ₹1,20,000 . The correct answer is (B) .

CBSE 2024Set 67/1/11 markMCQ

Q. Abhay, Boris and Chetan were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Boris was guaranteed a profit of ₹95,000. Any deficiency on account of this was to be borne by Abhay and Chetan equally. The firm earned a profit of ₹2,00,000 for the year ended 31st March, 2023. The amount given by Abhay to Boris as guaranteed amount will be : (A) ₹17,500 (B) ₹35,000 (C) ₹25,000 (D) ₹10,000

›Reveal solution

Abhay contributes ₹17,500 to Boris to meet the guarantee shortfall; the answer is (A) ₹17,500.

Concept: Guarantee of Minimum Profit to a Partner

The accounting treatment is straightforward:

Distribute the total profit (₹2,00,000) in the normal ratio 5:3:2.
Compare Boris's share with his guarantee.
If his share is less, calculate the deficiency.
Abhay and Chetan each contribute half the deficiency from their own shares to Boris.

Solution

Working Note 1: Distribution of Profit in Normal Ratio (5:3:2)

Total profit = ₹2,00,000

Profit-sharing ratio = 5:3:2 (sum = 10)

Abhay's share = $\frac{5}{10} \times 2,00,000 = ₹1,00,000$
Boris's share = $\frac{3}{10} \times 2,00,000 = ₹60,000$
Chetan's share = $\frac{2}{10} \times 2,00,000 = ₹40,000$

Working Note 2: Deficiency in Boris's Share

Boris is guaranteed ₹95,000, but his normal share is only ₹60,000.

Deficiency = ₹95,000 − ₹60,000 = ₹35,000

This ₹35,000 shortfall must be made good by Abhay and Chetan equally.

Working Note 3: Contribution by Abhay and Chetan

Since the deficiency is to be borne equally:

Abhay's contribution = $\frac{35,000}{2} = ₹17,500$
Chetan's contribution = $\frac{35,000}{2} = ₹17,500$

Working Note 4: Final Distribution of Profit

Partner	Normal Share (₹)	Adjustment (₹)	Final Share (₹)
Abhay	1,00,000	−17,500	82,500
Boris	60,000	+35,000	95,000
Chetan	40,000	−17,500	22,500
Total	2,00,000	0	2,00,000

The adjustment is a pure transfer: Abhay and Chetan each give up ₹17,500 of their profit share, which is added to Boris's share to bring it up to the guaranteed ₹95,000.

Watch out

Journal Entry (if required)

The guarantee adjustment is typically recorded in the Profit & Loss Appropriation Account or directly in the partners' capital/current accounts. The entry to reflect the transfer would be:

Date	Particulars	Debit (₹)	Credit (₹)
31-Mar-23	Abhay's Current/Capital A/c Dr.	17,500
	Chetan's Current/Capital A/c Dr.	17,500
	To Boris's Current/Capital A/c		35,000
	(Being deficiency on guarantee made good by Abhay and Chetan equally)

This entry reduces Abhay's and Chetan's balances and increases Boris's balance by the guarantee shortfall.

✓Final answer

Abhay contributes ₹17,500 to Boris to meet the guarantee deficiency. The correct answer is (A) ₹17,500 .

CBSE 2024Set ANNUAL1 markMCQ
$Q. A, R and B are partners in a firm sharing profits and losses in the ratio of 6 : 4 : 1. A guaranteed minimum profit of ₹ 16,000 to B. The net profit of the firm for the year ended on 31st March, 2023 was ₹ 1,32,000. R's share of profit of the firm will be$
(a) ₹ 72,000.
(b) ₹ 68,000.
(c) ₹ 48,000.
(d) ₹ 16,000.
›Reveal solutionSolution
R's share of profit is ₹48,000 — option (c) — because the guarantee to B is borne by A, leaving R's normal share unchanged.

Profit-sharing ratio A : R : B = 6 : 4 : 1 (total 11). Net profit = ₹1,32,000.

Partner Normal share Amount (₹)
A 6/11 72,000
R 4/11 48,000
B 1/11 12,000

B's guaranteed minimum = ₹16,000, but B's normal share is only ₹12,000, so there is a deficiency of ₹16,000 − ₹12,000 = ₹4,000. The guarantee was given by A alone, so A alone bears this ₹4,000.

A's final share = 72,000 − 4,000 = ₹68,000

B's final share = 12,000 + 4,000 = ₹16,000

R's final share = ₹48,000 (unaffected)

Therefore R's share of profit is ₹48,000.

✓Final answer
$(c) ₹48,000.$

Partner	Normal share	Amount (₹)
A	6/11	72,000
R	4/11	48,000
B	1/11	12,000

CBSE 2023Set 67/1/11 markMCQ

Q. Read the following hypothetical situation and answer questions number 4 and 5 on the basis of the given information : Kavita, Savita and Madhu were partners in a firm with capitals of ₹ 6,00,000, ₹ 4,00,000 and ₹ 2,00,000 respectively. After providing interest on capital @ 10% p.a., the profits are divisible as follows : Kavita 1/3, Savita 1/2 and Madhu 1/6. Kavita personally guaranteed that Savita's share of profit after charging interest on capital would not be less than ₹ 1,00,000 in any year. The profit for the year ending 31st March, 2022 amounted to ₹ 3,00,000 before providing interest on capital. Savita's share of profit is short of the guaranteed amount by : (A) ₹ 40,000 (B) ₹ 70,000 (C) ₹ 20,000 (D) ₹ 10,000

›Reveal solution

Savita's share of profit is short of the guaranteed amount by ₹10,000, which is borne by Kavita.

The question deals with the concept of 'Guarantee of Profit to a Partner'. This is a common arrangement in partnership firms where one or more partners are assured a minimum amount of profit, irrespective of the firm's actual earnings.

Concept of Guarantee of Profit

When a partner is guaranteed a minimum profit, it means that if their share of profit (calculated according to the profit-sharing ratio) falls short of the guaranteed amount, the deficiency must be made good. This deficiency can be borne by:

The firm (i.e., by all other partners in their profit-sharing ratio).
One specific partner.
A group of specific partners in an agreed ratio.

In this problem, Kavita has personally guaranteed that Savita's share of profit would not be less than ₹1,00,000. This means any deficiency in Savita's profit share will be borne solely by Kavita.

Accounting Treatment

The distribution of profit, including any guarantee adjustments, is shown in the Profit and Loss Appropriation Account.

First, all appropriations like interest on capital, salary, commission are provided.
The remaining profit is then distributed among partners according to their profit-sharing ratio.
At this stage, if any partner's share is less than their guaranteed amount, the deficiency is calculated.
This deficiency is then added to the guaranteed partner's share and deducted from the share of the partner(s) who gave the guarantee.

The journal entries for distributing profit and making good the guarantee deficiency would typically involve:

For Interest on Capital:
- Profit and Loss Appropriation A/c Dr.
  - To Partner's Capital/Current A/c (Individual partners) (Being interest on capital provided)
For Distribution of Profit (including guarantee adjustment):
- Profit and Loss Appropriation A/c Dr.
  - To Partner's Capital/Current A/c (Kavita's final share)
  - To Partner's Capital/Current A/c (Savita's final share)
  - To Partner's Capital/Current A/c (Madhu's final share) (Being profit distributed among partners after guarantee adjustment)

We will now proceed with the calculations and prepare the Profit and Loss Appropriation Account.

Working Notes

WN 1: Calculation of Interest on Capital

Interest on Capital is provided at 10% p.a. on the opening capitals.

Kavita's Capital = ₹6,00,000
- Interest on Kavita's Capital = ₹6,00,000 $\times$ 10% = ₹60,000
Savita's Capital = ₹4,00,000
- Interest on Savita's Capital = ₹4,00,000 $\times$ 10% = ₹40,000
Madhu's Capital = ₹2,00,000
- Interest on Madhu's Capital = ₹2,00,000 $\times$ 10% = ₹20,000
Total Interest on Capital = ₹60,000 + ₹40,000 + ₹20,000 = ₹1,20,000

WN 2: Calculation of Profit available for distribution

The profit for the year before providing interest on capital was ₹3,00,000.

Profit before Interest on Capital = ₹3,00,000
Less: Total Interest on Capital (from WN 1) = ₹1,20,000
Profit available for distribution = ₹1,80,000

WN 3: Distribution of Profit before Guarantee Adjustment

The profit-sharing ratio is Kavita 1/3, Savita 1/2, and Madhu 1/6.

To find a common ratio, we find the LCM of the denominators (3, 2, 6), which is 6.

Kavita: 1/3 = 2/6
Savita: 1/2 = 3/6
Madhu: 1/6 So, the profit-sharing ratio is 2:3:1.

The profit available for distribution is ₹1,80,000 (from WN 2).

Kavita's share = ₹1,80,000 $\times$ (2/6) = ₹60,000
Savita's share = ₹1,80,000 $\times$ (3/6) = ₹90,000
Madhu's share = ₹1,80,000 $\times$ (1/6) = ₹30,000

WN 4: Calculation of Deficiency and its Adjustment

Kavita guaranteed that Savita's share of profit after charging interest on capital would not be less than ₹1,00,000.

Savita's share of profit (before guarantee adjustment, from WN 3) = ₹90,000
Guaranteed minimum profit for Savita = ₹1,00,000
Deficiency in Savita's share = ₹1,00,000 - ₹90,000 = ₹10,000

Since Kavita personally guaranteed Savita's profit, this deficiency of ₹10,000 will be borne by Kavita.

Final Profit Shares:
- Kavita's share: ₹60,000 (original share) - ₹10,000 (deficiency borne) = ₹50,000
- Savita's share: ₹90,000 (original share) + ₹10,000 (deficiency received) = ₹1,00,000
- Madhu's share: ₹30,000 (unchanged) = ₹30,000

Solution: Profit and Loss Appropriation Account

For the year ending 31st March, 2022

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital:		By Profit and Loss A/c
> Kavita	60,000	> (Net Profit for the year)	3,00,000
> Savita	40,000
> Madhu	20,000
To Partners' Capital A/cs (Share of Profit):
> Kavita (WN 4)	50,000
> Savita (WN 4)	1,00,000
> Madhu (WN 4)	30,000
TOTAL	3,00,000	TOTAL	3,00,000

✓Final answer

Savita's share of profit is short of the guaranteed amount by ₹10,000 . This deficiency is borne by Kavita.

CBSE 2023Set 67/1/11 markMCQ

Q. Read the following hypothetical situation and answer questions number 4 and 5 on the basis of the given information : Kavita, Savita and Madhu were partners in a firm with capitals of ₹ 6,00,000, ₹ 4,00,000 and ₹ 2,00,000 respectively. After providing interest on capital @ 10% p.a., the profits are divisible as follows : Kavita 1/3, Savita 1/2 and Madhu 1/6. Kavita personally guaranteed that Savita's share of profit after charging interest on capital would not be less than ₹ 1,00,000 in any year. The profit for the year ending 31st March, 2022 amounted to ₹ 3,00,000 before providing interest on capital. The total profits of the firm after adjustment of guaranteed amount will be distributed between the partners as : (A) Kavita ₹ 60,000, Savita ₹ 40,000 and Madhu ₹ 20,000 (B) Kavita ₹ 50,000, Savita ₹ 1,00,000 and Madhu ₹ 30,000 (C) Kavita ₹ 60,000, Savita ₹ 90,000 and Madhu ₹ 30,000 (D) Kavita ₹ 60,000, Savita ₹ 1,00,000 and Madhu ₹ 20,000

›Reveal solution

After interest on capital and guarantee adjustment, the profit distribution is: Kavita ₹50,000, Savita ₹1,00,000 and Madhu ₹30,000.

Concept: Guarantee of Profit by a Partner

When one partner guarantees a minimum share of profit to another partner, the guarantee operates after all appropriations (like interest on capital) have been made. If the guaranteed partner's share falls short of the guaranteed amount, the deficiency is borne by the guarantor partner from their own share.

The accounting treatment follows these steps:

Calculate interest on capital for all partners (this is an appropriation, debited to Profit & Loss Appropriation Account).
Determine divisible profit = Total profit − Interest on capital.
Distribute divisible profit in the agreed profit-sharing ratio.
Check the guarantee: Compare the guaranteed partner's share (profit share only, excluding interest) with the guaranteed minimum.
Adjust for deficiency: If there is a shortfall, the guarantor transfers the deficiency amount from their profit share to the guaranteed partner.

Watch out

The guarantee applies to the share of profit only, not to interest on capital. Savita's ₹1,00,000 guarantee is her minimum profit share after interest has already been provided separately.

Solution

Working Note 1: Interest on Capital

Interest on capital @ 10% p.a.:

Kavita: $\frac{10}{100} \times ₹6,00,000 = ₹60,000$
Savita: $\frac{10}{100} \times ₹4,00,000 = ₹40,000$
Madhu: $\frac{10}{100} \times ₹2,00,000 = ₹20,000$

Total Interest on Capital = ₹60,000 + ₹40,000 + ₹20,000 = ₹1,20,000

Working Note 2: Divisible Profit

Profit before interest on capital = ₹3,00,000

Less: Interest on capital = ₹1,20,000

Divisible Profit = ₹3,00,000 − ₹1,20,000 = ₹1,80,000

Working Note 3: Distribution in Profit-Sharing Ratio (before guarantee adjustment)

Profit-sharing ratio: Kavita 1/3, Savita 1/2, Madhu 1/6

Kavita: $\frac{1}{3} \times ₹1,80,000 = ₹60,000$
Savita: $\frac{1}{2} \times ₹1,80,000 = ₹90,000$
Madhu: $\frac{1}{6} \times ₹1,80,000 = ₹30,000$

Working Note 4: Guarantee Adjustment

Savita's guaranteed minimum share of profit = ₹1,00,000

Savita's actual share (before guarantee) = ₹90,000

Deficiency = ₹1,00,000 − ₹90,000 = ₹10,000

Since Kavita has personally guaranteed Savita's profit, Kavita will bear this deficiency from her own share.

Working Note 5: Final Distribution of Profit (after guarantee adjustment)

Partner	Share before Guarantee (₹)	Adjustment (₹)	Final Share (₹)
Kavita	60,000	−10,000	50,000
Savita	90,000	+10,000	1,00,000
Madhu	30,000	—	30,000
Total	1,80,000	—	1,80,000

Profit & Loss Appropriation Account

for the year ended 31st March, 2022

Particulars	Amount (₹)	Particulars	Amount (₹)
Interest on Capital:		Profit before interest	3,00,000
Kavita	60,000
Savita	40,000
Madhu	20,000	1,20,000
Profit transferred to:
Kavita's Capital A/c	50,000
Savita's Capital A/c	1,00,000
Madhu's Capital A/c	30,000	1,80,000
Total	3,00,000	Total	3,00,000

Tip

In guarantee questions, always work in two stages: first distribute profit normally in the agreed ratio, then adjust for the guarantee shortfall between the guarantor and the guaranteed partner only. Other partners remain unaffected.

✓Final answer

The total divisible profit of ₹1,80,000 after interest on capital is distributed as: Kavita ₹50,000, Savita ₹1,00,000 and Madhu ₹30,000 . The correct answer is (B) .

CBSE 2023Set 67/3/11 markMCQ

Q. Read the following hypothetical situation and answer questions number 9 and 10 on the basis of information given : Anu, Charu and Divya are partners sharing profits and losses in the ratio of 2 : 1 : 2. Their capitals were ₹ 5,00,000, ₹ 3,00,000 and ₹ 2,00,000 respectively. Anu personally guaranteed that in any year, Divya's share of profit after allowing interest on capital to all partners @ 5% p.a. would not be less than ₹ 75,000. The profit for the year ending 31st March, 2022 amounted to ₹ 2,00,000. Divya's amount of guarantee is short by the following amount : (A) ₹ 75,000 (B) ₹ 5,000 (C) ₹ 15,000 (D) ₹ 20,000

›Reveal solution

Divya's guaranteed profit of ₹75,000 is short by ₹5,000 after considering her share of profit and interest on capital, which Anu, the guaranteeing partner, will bear.

The question deals with the concept of Guarantee of Profit to a Partner. This is an arrangement where one or more partners, or sometimes the firm itself, guarantees a minimum amount of profit to a specific partner for a given accounting period. If the actual share of profit (after all appropriations like interest on capital, salary, commission, etc.) falls short of the guaranteed amount, the deficiency is borne by the partner(s) who gave the guarantee, or by the firm in their profit-sharing ratio if the firm gave the guarantee.

In this scenario, Anu has personally guaranteed that Divya's share of profit, after allowing interest on capital, will not be less than ₹75,000. This means we first calculate the profit available for distribution, then distribute it among partners in their profit-sharing ratio, and then check if Divya's total income (interest on capital + share of profit) meets the guaranteed amount. If there's a shortfall, Anu's share of profit will be reduced by that amount, and Divya's share will be increased accordingly.

Let's proceed with the calculations and prepare the necessary accounts.

Working Notes

1. Calculation of Interest on Capital

Interest on Capital is allowed at 5% p.a. on the opening capital balances.

Anu's Interest on Capital = ₹5,00,000 $\times$ 5/100 = ₹25,000
Charu's Interest on Capital = ₹3,00,000 $\times$ 5/100 = ₹15,000
Divya's Interest on Capital = ₹2,00,000 $\times$ 5/100 = ₹10,000
Total Interest on Capital = ₹25,000 + ₹15,000 + ₹10,000 = ₹50,000

2. Calculation of Profit Available for Distribution (before guarantee adjustment)

Net Profit for the year = ₹2,00,000

Less: Total Interest on Capital = ₹50,000

Profit available for distribution = ₹2,00,000 - ₹50,000 = ₹1,50,000

3. Distribution of Profit (before guarantee adjustment)

The profit-sharing ratio is 2:1:2.

Anu's Share = ₹1,50,000 $\times$ (2/5) = ₹60,000
Charu's Share = ₹1,50,000 $\times$ (1/5) = ₹30,000
Divya's Share = ₹1,50,000 $\times$ (2/5) = ₹60,000

4. Calculation of Divya's Guaranteed Amount and Deficiency

Divya's total income (before guarantee adjustment) = Interest on Capital + Share of Profit

Divya's Interest on Capital = ₹10,000
Divya's Share of Profit (before adjustment) = ₹60,000
Total for Divya = ₹10,000 + ₹60,000 = ₹70,000

Guaranteed minimum profit for Divya = ₹75,000

Deficiency = Guaranteed Amount - Actual Total Income

Deficiency = ₹75,000 - ₹70,000 = ₹5,000

This answers question 9.

5. Adjustment for Deficiency

The deficiency of ₹5,000 is to be borne by Anu, as per the guarantee.

Anu's final share of profit = Anu's share (before adjustment) - Deficiency borne by Anu = ₹60,000 - ₹5,000 = ₹55,000
Divya's final share of profit = Divya's share (before adjustment) + Deficiency received by Divya = ₹60,000 + ₹5,000 = ₹65,000
Charu's share of profit remains unchanged = ₹30,000

6. Verification of Divya's Final Guaranteed Profit

Divya's final total income = Interest on Capital + Final Share of Profit

= ₹10,000 + ₹65,000 = ₹75,000. This matches the guaranteed amount.

Solution: Profit and Loss Appropriation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital:		By Net Profit	2,00,000
Anu	25,000
Charu	15,000
Divya	10,000
To Profit transferred to
Partners' Capital A/cs:
Anu (W.N. 5)	55,000
Charu (W.N. 5)	30,000
Divya (W.N. 5)	65,000
TOTAL	2,00,000	TOTAL	2,00,000

Solution: Partners' Capital Accounts (Fluctuating)

Particulars	Anu (₹)	Charu (₹)	Divya (₹)	Particulars	Anu (₹)	Charu (₹)	Divya (₹)
				By Balance b/d	5,00,000	3,00,000	2,00,000
				By Interest on Capital (W.N. 1)	25,000	15,000	10,000
				By P&L Appropriation A/c (W.N. 5)	55,000	30,000	65,000
To Balance c/d	5,80,000	3,45,000	2,75,000
TOTAL	5,80,000	3,45,000	2,75,000	TOTAL	5,80,000	3,45,000	2,75,000

Watch out

Remember that interest on capital and share of profit are appropriations of profit, not charges against profit. They are only allowed if there is sufficient profit. In this case, the profit was sufficient. The guarantee adjustment affects only the distribution of profit among partners, not the total profit available for appropriation.

✓Final answer

Divya's amount of guarantee is short by ₹5,000 . After adjustment, Anu's final share of profit is ₹55,000, Charu's is ₹30,000, and Divya's is ₹65,000.

CBSE 2023Set 67/3/11 markMCQ
$Q. Read the following hypothetical situation and answer questions number 9 and 10 on the basis of information given : Anu, Charu and Divya are partners sharing profits and losses in the ratio of 2 : 1 : 2. Their capitals were ₹ 5,00,000, ₹ 3,00,000 and ₹ 2,00,000 respectively. Anu personally guaranteed that in any year, Divya's share of profit after allowing interest on capital to all partners @ 5% p.a. would not be less than ₹ 75,000. The profit for the year ending 31st March, 2022 amounted to ₹ 2,00,000. The final amount of profit distributed among the partners after adjustment of guaranteed amount will be : (A) Anu ₹ 50,000; Charu ₹ 25,000; Divya ₹ 75,000 (B) Anu ₹ 55,000; Charu ₹ 30,000; Divya ₹ 65,000 (C) Anu ₹ 57,000; Charu ₹ 28,000; Divya ₹ 65,000 (D) Anu ₹ 45,000; Charu ₹ 30,000; Divya ₹ 75,000$
›Reveal solutionSolution

After interest on capital (₹50,000), the divisible profit is ₹1,50,000. Divya's share of ₹60,000 plus her interest of ₹10,000 gives ₹70,000, which is ₹5,000 short of her guaranteed ₹75,000. Anu, the guarantor, bears the ₹5,000. Final profit shares: Anu ₹55,000, Charu ₹30,000, Divya ₹65,000 — option (B).

Concept: Guarantee of Minimum Profit

Anu has personally guaranteed that Divya's share of profit — measured after interest on capital has been allowed to all partners — will not be less than ₹75,000. The steps are: allow interest on capital, distribute the remaining profit in the profit-sharing ratio, compare Divya's entitlement with the guarantee, and let the guarantor alone make good any deficiency.

Step 1 – Interest on Capital @ 5% p.a.

Partner Capital (₹) Interest (₹)
Anu 5,00,000 25,000
Charu 3,00,000 15,000
Divya 2,00,000 10,000
Total 50,000

Step 2 – Divisible Profit

Net profit ₹2,00,000 − interest on capital ₹50,000 = ₹1,50,000.

Step 3 – Distribution in 2 : 1 : 2

Partner Share (₹)
Anu (2/5) 60,000
Charu (1/5) 30,000
Divya (2/5) 60,000

Step 4 – Guarantee Check

Divya's total = interest ₹10,000 + share ₹60,000 = ₹70,000. Guaranteed minimum = ₹75,000. Deficiency = ₹5,000, borne wholly by Anu.

Step 5 – Final Distribution of the ₹1,50,000 Profit

Partner Original (₹) Adjustment (₹) Final (₹)
Anu 60,000 −5,000 55,000
Charu 30,000 — 30,000
Divya 60,000 +5,000 65,000
Total 1,50,000 0 1,50,000

Divya's total income is now ₹65,000 + ₹10,000 interest = ₹75,000, exactly meeting the guarantee.

Watch out

The guarantee is on Divya's total share after interest on capital, so her ₹10,000 interest counts towards the ₹75,000 — the shortfall is ₹5,000, not ₹15,000. Only the guarantor (Anu) bears it; Charu is unaffected.

✓Final answer
$Final profit distributed: Anu ₹55,000; Charu ₹30,000; Divya ₹65,000 — option (B).$
CBSE 2022Set MARCH1 markMCQ
$Q. When a new partner with a guaranteed amount of profit is admitted in a firm, such assurance may be given by ______.$
(a) New partner
(b) Old partners
(c) All partners
(d) None of these
›Reveal solutionSolution
The guarantee of profit to a new partner is usually given by (b) the old partners.

✓Final answer
$A guarantee of profit means a new partner is assured a certain minimum amount irrespective of the firm's actual profit-sharing outcome. If the new partner's actual share is less than the guaranteed amount, the shortfall (deficiency) must be borne by those who gave the guarantee. When an incoming partner is admitted on such terms, the assurance is normally provided by the old partners, who then bear the deficiency in their mutually agreed ratio (or old ratio if not specified). (a) New partner - wrong; the guarantee is given TO him, not BY him. (b) Old partners - correct. (c) All partners / (d) None - not the standard case for a newly admitted partner guaranteed by the firm. Hence the assurance is given by the old partners.$
CBSE 2022Set ANNUAL1 markMCQ
$Q. Who will contribute guaranteed profit if a firm has given a guarantee of minimum profit to a partner?$
(a) Only that partner who has maximum capital
(b) Only that partner who has maximum profit
(c) All partners in their capital ratio
(d) All partners in their profit sharing ratio
›Reveal solutionSolution

A profit guarantee's shortfall is borne by all partners in their profit-sharing ratio, unless the deed says a specific partner alone bears it.

Sometimes partners agree to guarantee a minimum amount of profit to one partner (often a new or junior partner), so that even if their actual share computed in the normal profit-sharing ratio falls short of this guaranteed minimum, the difference (the 'deficiency') is made good. Who bears this deficiency depends on the deed: if the deed specifically says one partner guarantees it, that partner alone bears the shortfall out of their own share. But where the deed is silent on who bears it, the default rule is that all the partners bear the deficiency in their mutual profit-sharing ratio — since the guarantee is really just an internal adjustment of how the firm's total profit gets divided, not an outside payment.

✓Final answer
$All partners contribute the guaranteed amount in their profit-sharing ratio (unless the deed names a specific partner).$
CBSE 2020Set ANNUAL1 mark
$Q. What is meant by guarantee of profit to a partner?$
›Reveal solutionSolution
A guarantee of profit assures a partner a minimum fixed amount of profit, topping up any shortfall if their actual share is less.

In a partnership, profits are normally shared in the agreed profit-sharing ratio. However, when a new partner is admitted (often a junior or newly-qualified partner), the other partners may guarantee that this partner will get at least a minimum specified amount of profit in any accounting year, no matter what their ratio-based share actually computes to.

If the partner's actual share (as per the normal ratio) is more than the guaranteed minimum, they simply get their normal share — the guarantee has no effect.

If the partner's actual share is less than the guaranteed minimum, the shortfall (the "deficiency") is made good by the guarantor(s) — either by the other partners in their existing ratio, or by one specific partner who gave the guarantee, as per what was agreed.

This protects the guaranteed partner's income while they are building up their stake in the firm, and is accounted for through an adjustment in the Profit and Loss Appropriation Account.

✓Final answer
$Guarantee of profit is an assurance that a partner's share of profit will not fall below an agreed minimum amount — any shortfall between the actual share and the guaranteed amount is borne by the guarantor partner(s).$

Partner	Original (₹)	Adjustment (₹)	Final (₹)
Anu	60,000	−5,000	55,000
Charu	30,000	—	30,000
Divya	60,000	+5,000	65,000
Total	1,50,000	0	1,50,000

Concept: Guarantee of Minimum Profit to a Partner

Solution

Journal Entry (if required)

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