WORKMEN COMPENSATION RESERVE

Accounting treatment of  Workmen Compensation Reserve At the time of admission of a partner

Workmen Compensation Reserve is a reserve created out of firm’s profits to pay compensation to employees.

At the time of admission of a partner, the Treatment of Workmen Compensation Reserve treated  as follows:

1. If there is no Liablity Or Claim  Against Workmen Compensation Reserve

In such a case, entire amount of Workmen Compensation Reserve is transferred to the Old Partner’s Capital/ Current  Accounts in their old profit-sharing ratio-

Workmen Compensation Reserve A/c   Dr.
To Old Partner’s Capital/ Current A/c
(Being the amount of Workmen Compensation Reserve credited to Old Partner’s Capital Accounts in their old profit sharing ratio)

Example: Mohit and Rachit are partners sharing profit in the ratio of 3 : 2, their Balance sheet on  March 31, 2021 shows Workmen compensation Reserve  40,000 .They admitted Rohit into partnership  for 1/4 share of profit on the following terms on April 1st  2021. Record necessary journal entry

• If No Liablity Or Claim Exist Against Workmen Compensation Reserve…….

JOURNAL ENTRIES IN THE BOOKS OF FIRM

Workmen Compensation Reserve A/c   Dr. 40,000
To Mohit’s Capital A/c       24,000

To Rachit’s Capital A/c      16,000
(Being the amount of Workmen Compensation Reserve credited to Old Partner’s Capital Accounts in their old profit sharing ratio 3:2)

2. If Claim For Workmen Compensation Exist

In such a situation, treatment of Workmen Compensation Reserve depends on the amount of liabilities. There can be three possible situations:

a.If the claim is lower than the amount of Workmen Compensation Reserve:

The amount of estimated claim is transferred to Provision for Workmen Compensation Claim Account and excess Workmen Reserve over the Workmen Compensation Claim is credited  to old partners in their old profit sharing ratio. The journal passed is:

Workmen Compensation Reserve  A/c Dr.
To Provision for Workmen Compensation Claim A/c
To Old partner’s Capital/ Current A/cs
(Being the provision for estimated claim made and balance transferred
to Old Partner’s Capital Accounts in their old profit sharing ratio)

ALSO READ : Investment Fluctuation Reserve

Example: Mohit and Rachit are partners sharing profit in the ratio of 3 : 2, their Balance sheet on  March 31, 2021 shows Workmen compensation Reserve  40,000 .They admitted Rohit into partnership  for 1/4 share of profit on the following terms on April 1st  2021. Record necessary journal entry

• if Claim on account of workmen’s compensation is Rs. 25,000.

The amount of estimated claim is transferred to Provision for Workmen Compensation Claim Account and excess Workmen Reserve over the Workmen Compensation Claim is credited  to  Mohit’s Capital A/c ,  Rachit’s Capital A/c  in their old profit sharing ratio. The journal passed is:

JOURNAL ENTRIES IN THE BOOKS OF FIRM

Workmen Compensation Reserve  A/c Dr. 40,000
To Provision for Workmen Compensation Claim A/c            25,000

To Mohit’s Capital A/c                                                             9,000

To Rachit’s Capital A/c                                                            6,000

(Being the provision for estimated claim made and balance transferred
to Old Partner’s Capital Accounts in their old profit sharing ratio)

b.If The Claim Is Equal To The Workmen Compensation Reserve:

Workmen Compensation Reserve is transferred to Provision for Workmen Compensation Claim Account and no amount is left for distribution among the old partners.

Workmen Compensation Reserve A/c   Dr.
To Provision for Workmen Compensation Claim A/c
(Being provision made for Workmen Compensation Claim.

Example: Mohit and Rachit are partners sharing profit in the ratio of 3 : 2, their Balance sheet on  March 31, 2021 shows Workmen compensation Reserve  40,000 .They admitted Rohit into partnership  for 1/4 share of profit on the following terms on April 1st  2021. Record necessary journal entry

• if Claim on account of workmen’s compensation is Rs.40,000.

Workmen Compensation Reserve is transferred to Provision for Workmen Compensation Claim Account and no amount is left for distribution among the old partners.

JOURNAL ENTRIES IN THE BOOKS OF FIRM

Workmen Compensation Reserve A/c   Dr. 40,000
To Provision for Workmen Compensation Claim A/c  40,000
(Being provision made for Workmen compensation Claim.)

c.If The Claim Is Higher Than The Amount Of Workmen Compensation Reserve:

The amount of Workmen Compensation reserve is transferred to Provision for Workmen Compensation Claim Account and shortage being a loss, is debited to Revaluation Account.

The journal entries passed are:

Workmen Compensation Reserve A/c      Dr.
Revaluation A/c                                             Dr.
To Provision for Workmen Compensation Claim A/c
(Being the amount of claim debited to Workmen Compensation Reserve and Revaluation Account)
Old Partner’s Capital/ Current A/cDr.
To Revaluation A/c
(Being the loss on Revaluation is transferred to Capital or current Accounts of old partners in their old ratio)

Example: Mohit and Rachit are partners sharing profit in the ratio of 3 : 2, their Balance sheet on  March 31, 2021 shows Workmen compensation Reserve  40,000 .They admitted Rohit into partnership  for 1/4 share of profit on the following terms on April 1st  2021. Record necessary journal entry

• if Claim on account of workmen’s compensation is Rs.50,000.

The amount of Workmen Compensation reserve is transferred to Provision for Workmen Compensation Claim Account and shortage being a loss, is debited to Revaluation Account.The journal entries passed are:

JOURNAL ENTRIES IN THE BOOKS OF FIRM

Workmen Compensation Reserve A/c      Dr. 40,000
Revaluation A/c                                             Dr. 10,000
To Provision for Workmen Compensation Claim A/c 50,000
(Being the amount of claim debited to Workmen Compensation Reserve and Revaluation Account)

Mohit’s Capital A/c       6,000 Dr.

Rachit’s Capital A/c     4,000  Dr.
To Revaluation A/c  10,000
(Being the loss on Revaluation is transferred to Old Partner’s Capital Accounts in their old profit sharing ratio)

When Partners Decide Not To Close The Workmen Compensation Reserve

In this case the gaining partner compensate  sacrificing partner proportionately of the amount of workmen compensation reserve against which there is no liability.

The journal entry passed is

Gaining Partner Capital/ Current A/c…                        Dr.
To Sacrificing Partner’s Capital/ Current A/c

(Adjustment of Workmen Compensation Reserve without closing the WCR account)

In case, Claim for Workmen Compensation is determined or accepted, it becomes a liability. In this case, Workmen Compensation Claim Account is credited instead of Provision for Workmen Compensation Claim Account.

 

ALSO READ : Law Of Supply