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When one partner provides a guarantee to another partner, who is responsible for covering any losses associated with that guarantee?
- a)Partnership firm
- b)Partner who gave the guarantee
- c)All the other partners
- d)Partner with the highest profit sharing ratio
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
When one partner provides a guarantee to another partner, who is respo...
Guarantee refers to the assurance of a specific amount of profits provided by one or more partners, or sometimes by the firm itself. The responsibility for any loss arising from this guarantee falls on the partner who issued it. Here are the key points regarding guarantees in partnerships:
- The guarantee ensures a minimum fixed amount for the partner receiving it.
- This assurance can be given by all existing partners in a certain ratio or by any individual partner.
- If the profits allocated to the partner fall short of the guaranteed amount, the deficiency must be covered by the guaranteeing partners.
- For example, if a partner is guaranteed a minimum of Rs. 25,000 and their share is only Rs. 20,000, the shortfall of Rs. 5,000 will be borne by the partners who provided the guarantee.
- The burden of this deficiency is shared according to the profit-sharing ratio among the guaranteeing partners.
In summary, when a partner is given a guarantee, any loss due to a shortfall in profits will be the responsibility of the partner who gave the guarantee.
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When one partner provides a guarantee to another partner, who is respo...
Understanding Guarantees in Partnerships
In a partnership, when one partner provides a guarantee to another, it is essential to understand the implications of that guarantee on liability and responsibility for losses.
Who is Responsible for Covering Losses?
- The partner who gives the guarantee is primarily responsible for covering any losses associated with that guarantee.
- This means that if the guaranteed obligation is not fulfilled, the partner who provided the guarantee must step in to cover the losses incurred.
Rationale Behind This Responsibility
- Guarantees are essentially promises made by one partner to take on the financial responsibility of another’s obligations.
- In a partnership, each partner acts on behalf of the firm and also carries individual liabilities. When a guarantee is provided, it signifies a personal commitment by the guaranteeing partner.
Implications for Other Partners
- Other partners in the firm are not automatically responsible for covering the losses tied to the guarantee unless otherwise stated in the partnership agreement.
- The primary liability rests with the guaranteeing partner, safeguarding the interests of other partners.
Conclusion
- Therefore, if a loss arises from a guaranteed obligation, it is the partner who provided the guarantee (option 'B') who bears the responsibility for that loss.
- This arrangement emphasizes the importance of trust and accountability within a partnership structure.
In a partnership, when one partner provides a guarantee to another, it is essential to understand the implications of that guarantee on liability and responsibility for losses.
Who is Responsible for Covering Losses?
- The partner who gives the guarantee is primarily responsible for covering any losses associated with that guarantee.
- This means that if the guaranteed obligation is not fulfilled, the partner who provided the guarantee must step in to cover the losses incurred.
Rationale Behind This Responsibility
- Guarantees are essentially promises made by one partner to take on the financial responsibility of another’s obligations.
- In a partnership, each partner acts on behalf of the firm and also carries individual liabilities. When a guarantee is provided, it signifies a personal commitment by the guaranteeing partner.
Implications for Other Partners
- Other partners in the firm are not automatically responsible for covering the losses tied to the guarantee unless otherwise stated in the partnership agreement.
- The primary liability rests with the guaranteeing partner, safeguarding the interests of other partners.
Conclusion
- Therefore, if a loss arises from a guaranteed obligation, it is the partner who provided the guarantee (option 'B') who bears the responsibility for that loss.
- This arrangement emphasizes the importance of trust and accountability within a partnership structure.
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