Guarantee, commission and current accounts
Aarav, Bina and Chirag share profits 3:2:1. Their fixed capitals on 1 April 2024 are ₹4,00,000, ₹2,50,000 and ₹1,50,000. The deed provides interest on capital at 8% p.a.; Bina is to receive a salary of ₹5,000 per month; Chirag is to receive a commission of ₹14,000; drawings carry interest at 6% p.a.; and Chirag is guaranteed a minimum share of profit of ₹1,20,000, any shortfall to be borne by Aarav. Drawings were Aarav ₹60,000, Bina ₹45,000 and Chirag ₹30,000, all withdrawn on 1 October 2024. Profit before these appropriations is ₹4,20,000. The accountant has already divided the whole profit in the profit-sharing ratio and has recorded neither the guarantee nor the salary, commission or interest. Bina argues that her salary must be paid before interest on capital; Chirag wants his commission calculated on the profit left after charging the guarantee.
1. Compute the divisible profit and show the allocation among partners, including the guarantee. State whether Bina's ordering claim is correct.
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Charges against profit:
- Interest on capital: Aarav ₹4,00,000 × 8% = ₹32,000; Bina ₹2,50,000 × 8% = ₹20,000; Chirag ₹1,50,000 × 8% = ₹12,000. Total = ₹64,000.
- Bina’s salary: ₹5,000 × 12 = ₹60,000.
- Chirag’s commission: ₹14,000.
- Total charges = ₹1,38,000.
Divisible profit = ₹4,20,000 − ₹1,38,000 = ₹2,82,000.
Normal shares 3:2:1:
- Aarav: 3/6 × ₹2,82,000 = ₹1,41,000
- Bina: 2/6 × ₹2,82,000 = ₹94,000
- Chirag: 1/6 × ₹2,82,000 = ₹47,000
Chirag’s guaranteed profit share is ₹1,20,000. His actual share is ₹47,000, so the shortfall is ₹73,000, borne by Aarav. Final profit shares:
- Aarav: ₹1,41,000 − ₹73,000 = ₹68,000
- Bina: ₹94,000
- Chirag: ₹47,000 + ₹73,000 = ₹1,20,000
Bina’s ordering claim does not change the total divisible profit here because both salary and interest are charges against profit. Unless the deed gives a priority in a deficiency situation, the order of debit does not affect the amount; what matters is that both are provided for before profit sharing. Chirag’s commission is a separate charge and is not calculated after the guarantee.
2. Prepare partners' current accounts for the year.
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Interest on drawings (6% for 6 months, as drawings were made on 1 October 2024):
- Aarav: ₹60,000 × 6% × 6/12 = ₹1,800
- Bina: ₹45,000 × 6% × 6/12 = ₹1,350
- Chirag: ₹30,000 × 6% × 6/12 = ₹900
Current Accounts
| Particulars | Aarav | Bina | Chirag |
|---|---|---|---|
| By Interest on capital | 32,000 | 20,000 | 12,000 |
| By Salary | - | 60,000 | - |
| By Commission | - | - | 14,000 |
| By Profit share (after guarantee) | 68,000 | 94,000 | 1,20,000 |
| Total credit | 1,00,000 | 1,74,000 | 1,46,000 |
| To Drawings | 60,000 | 45,000 | 30,000 |
| To Interest on drawings | 1,800 | 1,350 | 900 |
| Total debit | 61,800 | 46,350 | 30,900 |
| Closing balance (Cr.) | 38,200 | 1,27,650 | 1,15,100 |
The balances agree in total with the unwithdrawn appropriations: ₹4,20,000 − drawings ₹1,35,000 − interest on drawings ₹4,050 = ₹2,80,950.
3. If profit before appropriations were only ₹1,50,000, show the guarantee shortfall and Aarav's profit share. Can the firm debit Aarav's current account even if it creates a debit balance?
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Charges remain: interest on capital ₹64,000 + Bina’s salary ₹60,000 + Chirag’s commission ₹14,000 = ₹1,38,000.
Divisible profit = ₹1,50,000 − ₹1,38,000 = ₹12,000.
Normal shares 3:2:1: Aarav ₹6,000; Bina ₹4,000; Chirag ₹2,000.
Chirag’s guarantee is ₹1,20,000. Shortfall = ₹1,20,000 − ₹2,000 = ₹1,18,000, borne by Aarav.
Final profit shares:
- Aarav: ₹6,000 − ₹1,18,000 = −₹1,12,000
- Bina: ₹4,000
- Chirag: ₹1,20,000
The firm can debit Aarav’s current account with the shortfall even if it creates a debit balance. The guarantee is a contractual obligation undertaken by Aarav; a debit balance is a receivable from him, not a negative expense. If Aarav later fails to pay and the firm is dissolved, the unpaid debit balance would be dealt with as a capital deficiency under the dissolution rules.