WHAT IS WORKMEN COMPENSATION RESERVE

Workmen Compensation Reserve is a reserve created out of firm’s profits to meet possible liability to pay compensation to employees, if it arises. It means, a claim may or may not arise. It also means that claim may be higher than amount of reserve. The Treatment of Workmen Compensation Reserve represented by compensation payable to workers is an external liability and the balance of amount left, if any, is an internal liability payable to partners.

The Treatment of Workmen Compensation Reserve is as follows:

ACCOUNTING TREATMENT

IF NO LIABLITY OR CLAIM EXIST 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/cs                    (in old ratio)      
(Being the amount of Workmen Compensation Reserve credited to Old
Partner’s Capital Accounts in their old profit sharing ratio)

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:

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)

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)

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/cs…………………………………………..Dr.                
To Revaluation A/c
(Being the loss on Revaluation is transferred to Capital or current
Accounts of old partners in their old ratio)

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.

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

EXAMPLE: A, B and C are sharing profits and losses in the ratio of 4:3:2, decided to take D as a partner for 1/5th share in the firm with effect from 1st April, 2018. On this day the Workmen Compensation Reserve showed a balance of ₹90,000.

Show the treatment in following cases:

Case 1: If there is no other information

Case 2: If a claim on account Workmen Compensation is estimated at ₹45,000

Case 3: If a claim on account of Workmen Compensation is estimated at ₹99,000

CASE 1: SOLUTION:

CASE 2: SOLUTION:

CASE 3: SOLUTION:

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