Accounting Treatment of Workmen Compensation Reserve: Change in Profit Sharing Ratio

Workmen Compensation Reserve is the reserve created out of profits to meet the needs of employees or workers. An amount is kept aside in the reserve in name of workers to meet the unforeseen situation. A claim can or cannot be made against this reserve. Accounting treatment differs for situations against the claim for Workmen Compensation Reserve. During the change in profit sharing ratio or reconstitution of the firm due to change in profit sharing ratio among existing partners, admission, retirement, death of partner, or dissolution of the partnership, the amount of Workmen Compensation Reserve is distributed among the partners in the old profit sharing ratio.

Accounting Treatment of Workmen Compensation Reserve:

Case 1: If there is no claim against Workmen Compensation Reserve:

Illustration1: 

M and N are partners sharing profit and loss in the ratio of 5:3. They decided to share their future profit and loss in the ratio of 4:4. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 12,000. Show the accounting treatment for the same.

Solution: 

Illustration 2: 

G and H are partners sharing profit and loss in the ratio of 2:1. They decided to share their future profit and loss equally. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 7,200. Show the accounting treatment for the same.

Solution:

Case 2: If the claim for Workmen Compensation is lower than the amount of Workmen Compensation Reserve:

A) Provision made for Workmen Compensation Reserve:

B) Unclaimed amount of Workmen Compensation Reserve transferred to partners Capital A/c:

Illustration 1: 

P and Q are partners sharing profit and loss in the ratio of 4:3. They decided to share their future profit and loss equally. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 15,600. There was a claim against Workmen Compensation Reserve for ₹9,300. Show the accounting treatment for the same.

Solution:

Illustration 2: 

Atul and Reema are partners sharing profit and loss in the ratio of 6:4. They decided to share their future profit and loss equally. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 23,700. There was a claim against the Workmen Compensation Reserve of ₹13,200. Show the accounting treatment for the same.

Solution:

Case 3: If the claim against workmen compensation is equal to the amount of Workmen Compensation Reserve:

Illustration 1: 

Sudhir and Manan are partners sharing profit and loss in the ratio of 3:3. They decided to share their future profit in the ratio of 2:3. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 24,600. There was a claim against Workmen Compensation Reserve for ₹24,600. Show the accounting treatment for the same.

Solution:

Illustration 2: 

K and L are partners sharing profit and loss in the ratio of 3:2. They decided to share their future profit in the ratio of 2:3. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 10,300. There was a claim against Workmen Compensation Reserve for ₹10,300. Show the accounting treatment for the same.

Solution:

Case 4: If the claim for workmen compensation is more than the amount of Workmen Compensation Reserve:

A) When the claim is more than the reserve:

B) When revaluation amount of claim is charged from Partner’s Capital Account:

Illustration 1: 

Sameer and Amit are partners sharing profit and loss in the ratio of 5:4. They decided to share their future profit in the ratio of 3:2. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 28,800. There was a claim against Workmen Compensation Reserve for ₹30,600. Show the accounting treatment for the same.

Solution:

Illustration 2: 

X and Y are partners sharing profit and loss in the ratio of 7:3. They decided to share their future profit in the ratio of 5:5. On the date Balance sheet showed Workmen Compensation Reserve at ₹ 17,600. There was a claim against Workmen Compensation Reserve for ₹20,100. Show the accounting treatment for the same.

Solution: