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Remuneration to a Partner

No partner is entitled to receive any remuneration in addition to his share in the profits of the firm for taking part in the business of the firm. However, the partnership agreement may expressly provide for the payment of remuneration to the working partners.

Remuneration could be in the form of salary, commission or any other mode. Remuneration payable to a partner is considered as an appropriation of profits and not a charge against profit. Remuneration to a partner should be debited to the profit and loss appropriation account and not to the profit and loss account of the firm. If the remuneration is to be calculated as a fixed percentage of net profit before charging such commission, then

 

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If the commission is to be calculated as a fixed percentage of net profit after charging such commission, then

 

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Guarantee of Minimum Profit to a Partner

The partnership agreement may provide for a guaranteed amount as profit to a partner (or partners). It means an assurance to give a minimum amount of profit to a partner when the actual share of profit is less than the guaranteed amount.
 

Allocation of profit is done in a normal way if the share of the partner, who has been guaranteed minimum profit, is more than the amount of guaranteed profit.

The guarantee may be provided by one or some or all the partners in the existing profit sharing ratio or in some agreed ratio. If the guarantee is given by all the partners in the existing profit sharing ratio, it is known as firm guarantee.

If the actual share of profit to a guaranteed partner is less than the amount guaranteed, then the deficiency shall be borne by the guaranteeing partners in the agreed ratio. The following journal entry is passed to record the deficiency, if any.

 



Illustration 5

 

X, Y and Z are partners in a firm sharing profits in the ratio of 2:2:1. According to the terms of the partnership agreement, Z has to get a minimum of ₹ 12,000 irrespective of the profits of the firm. Any excess payable to Z on account of such a guarantee shall be borne by X. Prepare the profit and loss appropriation account showing the distribution of profits among the partners in case the profits for the year 2013–2014 are

  1. ₹ 50,000
  2. ₹ 80,000

Solution:
 

(a) In case the profit is ₹ 50,000

 

In this case, Z’s guaranteed share is ₹ 12,000, while he would have got ₹ 10,000 in the absence of any such guarantee. The excess of the guaranteed amount over his normal share of profit will have to be borne by X as per the terms of partnership agreement. Y’s share will remain unaffected on account of this guarantee. In other words, Y’s share of profit will remain ₹ 20,000 (i.e. 50,000 × 2/5). The profit and loss appropriation account can now be prepared as follows:
 



(b) In case the profits are ₹ 80,000

 

In this case, Z is getting ₹ 16,000 (i.e. 80,000 × 1/5) as his share of profits. The amount is more than his guaranteed share. Hence, he will get ₹ 16,000 and X will not have to make any sacrifice. The profit and loss appropriation account can now be prepared as follows:
 





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