Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that he

Numerical Questions · Q31

Q. Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than Rs. 5,000. The profits for the year ending March 31, 2020 amounted to Rs. 35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entry to show distributioin of profit among the partner.

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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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Fatima’s guaranteed profit is ₹5,000; her actual share (1/10 of ₹35,000) is only ₹3,500, creating a deficiency of ₹1,500. Radha and Mary bear this shortfall in the ratio 3:2 — Radha bears ₹900, Mary bears ₹600. The journal entry debits Radha’s Capital A/c (₹900) and Mary’s Capital A/c (₹600) and credits Fatima’s Capital A/c (₹1,500).

Concept First: Why This Treatment?

A guarantee of profit is a promise by one or more partners that a specific partner will receive a minimum amount of profit, regardless of the firm’s actual earnings. If the firm’s profit is lower than the guaranteed amount, the shortfall is borne by the guaranteeing partners in their agreed ratio.

The key accounting rule: Profit is first distributed in the normal profit-sharing ratio. Then, if the guaranteed partner’s share falls short, the deficiency is transferred from the guaranteeing partners’ capital accounts to the guaranteed partner’s capital account. This is a personal adjustment between partners — it does not affect the firm’s Profit and Loss Appropriation Account. The journal entry simply debits the guarantors and credits the beneficiary.

Watch out

Common Pitfall

Do NOT pass the deficiency adjustment through the Profit and Loss Appropriation Account. The guarantee is a private arrangement among partners; the firm’s books only show the final capital transfers. Also, ensure you compute the deficiency after the normal profit distribution, not before.

Step-by-Step Solution

Step 1: Compute Each Partner’s Share in the Normal Profit

Total profit = ₹35,000

Profit-sharing ratio = Radha : Mary : Fatima = 5 : 4 : 1

Partner	Share	Calculation	Amount (₹)
Radha	5/10	35,000 × 5/10	17,500
Mary	4/10	35,000 × 4/10	14,000
Fatima	1/10	35,000 × 1/10	3,500
Total			35,000

Step 2: Identify the Deficiency

Fatima’s guaranteed minimum = ₹5,000

Fatima’s actual share = ₹3,500

Deficiency = 5,000 – 3,500 = ₹1,500

Step 3: Allocate the Deficiency Between Guarantors

Radha and Mary bear the deficiency in the ratio 3:2.

Guarantor	Ratio	Calculation	Amount Borne (₹)
Radha	3/5	1,500 × 3/5	900
Mary	2/5	1,500 × 2/5	600
Total			1,500

Tip

Shortcut

The deficiency ratio (3:2) is independent of the profit-sharing ratio. Always use the ratio specified in the guarantee clause, not the original PSR.

Step 4: Journal Entry

Date: March 31, 2020

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2020 Mar 31	Radha’s Capital A/c ………Dr. Mary’s Capital A/c ………Dr. To Fatima’s Capital A/c (Being deficiency in Fatima’s guaranteed profit borne by Radha and Mary in the ratio 3:2)		900 600	1,500

Step 5: Final Capital Account Balances (for verification) …

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Concept First: Why This Treatment?

Step-by-Step Solution

Step 1: Compute Each Partner’s Share in the Normal Profit

Step 2: Identify the Deficiency

Step 3: Allocate the Deficiency Between Guarantors

Step 4: Journal Entry

Step 5: Final Capital Account Balances (for verification) …

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