What is Workmen Compensation Reserve?
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 a 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:
Illustration 1:
Tarun, Sanvi, and Sudha were partners in a firm sharing profits and losses in the ratio of 3:2:1. On 23rd May 2021, Sudha died, and the new profit-sharing ratio between Tarun and Sanvi was decided to 4:5. On the date of death, Workmen Compensation Reserve showed a balance of ₹60,000. Pass the necessary Journal Entries assuming that only the share of the deceased partner is transferred to their Capital A/c.
Solution:
Illustration 2:
Radha, Madhu, and Rakesh were partners in a firm sharing profits and losses equally. On 3rd March 2021, Madhu died, and the new profit-sharing ratio between the remaining partners was decided as 3:4. On the date of death, Workmen Compensation Reserve showed a balance of ₹48,900. Pass the necessary Journal Entries assuming that the books of accounts are closed.
Solution:
Case 2: If the claim for Workmen’s Compensation is lower than the amount of Workmen’s Compensation Reserve:
A. Provision made for Workmen Compensation Reserve:
B. Unclaimed amount of Workmen Compensation Reserve transferred to partners Capital A/c:
Illustration 1:
Rakhi, Suresh, and Mahesh were three partners in a firm sharing their profits and losses in the ratio 2:3:5. On 10th January 2022, Suresh died, and the new profit-sharing ratio between the remaining partners was decided to 4:5. On the date of death, Workmen Compensation Reserve showed a balance of ₹58,500. There was a claim against Workmen Compensation Reserve for ₹10,000. Pass the necessary Journal Entries assuming that only the share of the deceased partner is transferred to their Capital A/c.
Solution:
Illustration 2:
Peter, Harry, and Sejal were three partners in a firm sharing their profits and losses in the ratio 1:2:2 On 30th February 2022, Peter died, and the new profit-sharing ratio between the remaining partners was decided to 1:1. On the date of death, Workmen Compensation Reserve showed a balance of ₹75,000. There was a claim against Workmen Compensation Reserve for ₹20,000. Pass the necessary Journal Entries assuming that the books of accounts are closed.
Solution:
Case 3: If the claim for Workmen’s Compensation is equal to the amount of Workmen’s Compensation Reserve:
Illustration 1:
Rahul, Anjali, and Tina were three partners in a firm sharing their profits and losses in the ratio 1:1:1. On 15th October 2021, Tina died, and the new profit-sharing ratio between Rahul and Anjali was decided to 2:3. On the date of death, Workmen Compensation Reserve showed a balance of ₹27,000. There was a claim against Workmen Compensation Reserve for ₹27,000. Pass the necessary Journal Entries assuming that only the share of the deceased partner is transferred to their Capital A/c.
Solution:
Illustration 2:
Aradhya, Somya, and Radhika were three partners in a firm sharing their profits and losses in the ratio 4:5:4. On 5th December 2020, Somya died, and the new profit-sharing ratio between the remaining partners were decided to 3:4. On the date of death, Workmen Compensation Reserve showed a balance of ₹15,000. There was a claim against Workmen Compensation Reserve for ₹15,000. Pass the necessary Journal Entries assuming that the books of accounts are closed.
Solution:
Case 4: If the claim for Workmen’s Compensation is more than the amount of Workmen’s 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:
Anil, Sonam, and Raj were partners in a firm sharing profits and losses in the ratio 2:3:2. On 20th April 2020, Sonam died, and the new profit-sharing ratio between the remaining partners was decided to 3:2. On the date of death, Workmen Compensation Reserve showed a balance of ₹18,000. There was a claim against Workmen Compensation Reserve for ₹25,000. Pass the necessary Journal Entries assuming that only the share of the deceased partner is transferred to their Capital A/c.
Solution:
Illustration 2:
Mohan, Sohan, and Rohan were partners in a firm sharing profits and losses in the ratio 5:4:6. On 30th April 2021, Rohan died, and the new profit-sharing ratio between the remaining partners was decided to 5:2. On the date of death, Workmen Compensation Reserve showed a balance of ₹20,000. There was a claim against Workmen Compensation Reserve for ₹34,500. Pass the necessary Journal Entries assuming that the books of accounts are closed.
Solution: