Pinki, Deepti and Kaku are partner's sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his

Numerical Questions · Q29

Q. Pinki, Deepti and Kaku are partner's sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than Rs. 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to Rs. 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.

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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

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First, compute each partner’s share of the ₹40,000 profit in the 5:4:1 ratio.

Pinki’s share = 5/10 × ₹40,000 = ₹20,000

Deepti’s share = 4/10 × ₹40,000 = ₹16,000

Kaku’s share = 1/10 × ₹40,000 = ₹4,000

Kaku is guaranteed a minimum of ₹5,000. His actual share is ₹4,000, so the deficiency is ₹1,000. This deficiency is to be borne by Pinki and Deepti equally — ₹500 each.

So the final profit distribution becomes:

Pinki: ₹20,000 – ₹500 = ₹19,500
Deepti: ₹16,000 – ₹500 = ₹15,500
Kaku: ₹4,000 + ₹1,000 = ₹5,000

The journal entry to record the distribution of profit (after transferring the net profit to the Profit and Loss Appropriation Account) is:

Particulars	L.F.	Debit (₹)	Credit (₹)
Profit & Loss Appropriation A/c	Dr.	40,000
To Pinki’s Capital A/c			19,500
To Deepti’s Capital A/c			15,500
To Kaku’s Capital A/c			5,000
(Being profit distributed among partners after adjusting Kaku’s guarantee)

Alternatively, the adjustment for the deficiency can be recorded separately: …

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Kaku’s guaranteed minimum profit is ₹5,000; his actual share (10% of ₹40,000) is only ₹4,000, so a deficiency of ₹1,000 arises. This deficiency is borne equally by Pinki and Deepti (₹500 each). The journal entry debits Pinki’s Capital A/c and Deepti’s Capital A/c by ₹500 each, and credits Kaku’s Capital A/c by ₹1,000.

Concept and Accounting Treatment

The guarantee of profit is a promise by one or more partners (the guarantors) that a specific partner (the guarantee holder) will receive a minimum amount of profit in a given year. If the guarantee holder’s actual share of profit (based on the profit-sharing ratio) falls short of the guaranteed amount, the deficiency must be compensated.

The key accounting rule is: The deficiency is treated as an additional appropriation of profit by the guarantee holder, and a reduction of profit for the guarantors. This means the guarantee holder’s capital account is credited (increased) by the deficiency amount, and the guarantors’ capital accounts are debited (decreased) by their respective shares of the deficiency.

In this case, Kaku is the guarantee holder, and Pinki and Deepti are the guarantors. The deficiency is borne by Pinki and Deepti equally, regardless of their profit-sharing ratio. This is a specific agreement that overrides the general ratio.

The journal entry is passed after the Profit and Loss Appropriation Account has been closed and the partners’ capital accounts have been credited with their respective shares of profit. The entry simply adjusts the capital accounts to reflect the guarantee.

Solution

Step 1: Calculate Each Partner’s Share of Profit (Before Guarantee)

Total Profit = ₹40,000

Profit-sharing ratio = Pinki : Deepti : Kaku = 5 : 4 : 1

Pinki’s share = 5/10 × ₹40,000 = ₹20,000

Deepti’s share = 4/10 × ₹40,000 = ₹16,000

Kaku’s share = 1/10 × ₹40,000 = ₹4,000

Step 2: Determine the Deficiency

Guaranteed minimum for Kaku = ₹5,000

Kaku’s actual share = ₹4,000

Deficiency = ₹5,000 – ₹4,000 = ₹1,000

Step 3: Allocate the Deficiency

The deficiency of ₹1,000 is to be borne by Pinki and Deepti equally.

Pinki’s share of deficiency = ₹1,000 × 1/2 = ₹500

Deepti’s share of deficiency = ₹1,000 × 1/2 = ₹500

Step 4: Journal Entry

Particulars	Debit (₹)	Credit (₹)
Pinki’s Capital A/c Dr.	500
Deepti’s Capital A/c Dr.	500
To Kaku’s Capital A/c		1,000

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Concept and Accounting Treatment

Solution

Step 1: Calculate Each Partner’s Share of Profit (Before Guarantee)

Step 2: Determine the Deficiency

Step 3: Allocate the Deficiency

Step 4: Journal Entry

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