Guaranteed Partner Profit Share

Accounting for Partnerships

Skill: Apply

Stimulus

Question

Prepare the Profit and Loss Appropriation Account of 'Warna Kraf' Partnership for the year ended 31 December 2025, showing how the guarantee to Chandran is honoured. Then state each partner's final profit share and explain why the overall total does not change.

Thinking steps

1. Adjust the net profit: add total interest on drawings, then deduct interest on capital and partners' salary to obtain the divisible profit.
2. Compute divisible profit = 60,000 + 2,000 − 8,000 − 6,000 = RM48,000.
3. Split the balance in the 3:2:1 ratio: Aziz RM24,000, Badrul RM16,000, Chandran RM8,000.
4. Compare Chandran's share (RM8,000) with the guarantee (RM12,000) and identify the RM4,000 shortfall.
5. Charge the RM4,000 shortfall to Aziz and Badrul in the 3:2 ratio → Aziz RM2,400, Badrul RM1,600.
6. Deduct those contributions from the original shares to get final shares: Aziz RM21,600, Badrul RM14,400, Chandran RM12,000 (total stays RM48,000).

Model answer

Step 1: Divisible profit

Net profit RM60,000 + Interest on drawings (1,000+800+200 = RM2,000) = RM62,000.

Less Interest on capital (4,000+3,000+1,000 = RM8,000) and Badrul's salary (RM6,000).

Divisible profit = 62,000 − 8,000 − 6,000 = RM48,000.

Step 2: Initial split 3:2:1

Aziz = 48,000 × 3/6 = RM24,000

Badrul = 48,000 × 2/6 = RM16,000

Chandran = 48,000 × 1/6 = RM8,000

Step 3: Guarantee not met

Chandran's RM8,000 < guaranteed RM12,000 → shortfall RM4,000.

Step 4: Shortfall of RM4,000 borne by Aziz and Badrul (3:2)

Aziz = 4,000 × 3/5 = RM2,400

Badrul = 4,000 × 2/5 = RM1,600

Final profit shares:

Aziz = 24,000 − 2,400 = RM21,600

Badrul = 16,000 − 1,600 = RM14,400

Chandran = 8,000 + 4,000 = RM12,000

Total = RM48,000 (unchanged, only redistributed).

In the Profit and Loss Appropriation Account, interest on drawings is credited (raising divisible profit) while interest on capital, salary and profit shares are debited. The guarantee is honoured by transferring RM4,000 from Aziz's and Badrul's shares to Chandran, so Chandran's current account is credited RM12,000.