Accounting Treatment of Workmen Compensation Reserve in case of Retirement of a Partner

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 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:

Radha, Megha, and Sanjay are three partners in a firm sharing their profits and losses in the ratio of 3:2:1. Megha decided to retire from the company, and the remaining partners decided to share their future profits and losses in the ratio of 4:5. On the date of Retirement, the balance sheet showed Workmen Compensation Reserve at ₹66,000. Pass the necessary Journal Entry for the same. 

Solution:

Illustration 2:

Stacy, Garry, and Hazel are partners in a firm sharing their profits and losses in the ratio of 2:3:2. Hazel decided to retire from the company, and the remaining partners decided to share their future profits and losses in the ratio of 4:5. On the date of Retirement, the balance sheet showed Workmen Compensation Reserve at ₹46,000. Pass the necessary Journal Entry for the same. 

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:

Dheeraj, Rakesh, and Mohan are partners in a firm sharing their profits and losses equally. Rakesh retires from the company, and the remaining partners, Dheeraj and Mohan decided to share their future profits and losses in the ratio of 2:5. On the date of Retirement, the balance sheet showed a Workmen Compensation Reserve of ₹24,600. There was a claim against Workmen Compensation Reserve for ₹12,000. Pass the necessary Journal Entry for the same.

Solution:

Illustration 2:

Varsha, Sakshi, and Mayuri are partners in a firm sharing their profits and losses in the ratio of 6:4:6. Sakshi retires from the company, and the remaining partners decided to share their future profits and losses equally. On the date of Retirement, the balance sheet showed a Workmen Compensation Reserve of ₹17,500. There was a claim against Workmen Compensation Reserve for ₹3,500. Pass the necessary Journal Entry for the same.

Solution:

Case 3: If the claim for Workmen’s Compensation is equal to the amount of Workmen’s Compensation Reserve:

Illustration 1:

Suresh, Devi, and Scarlet are partners in a firm sharing their profits and losses equally. Devi retired from the company, and the remaining partners decided to share their future profits and losses in the ratio 6:3. On the date of Retirement, the balance sheet showed a Workmen Compensation Reserve of ₹13,700. There was a claim against Workmen Compensation Reserve for ₹13,700. Pass the necessary Journal Entry for the same.

Solution:

Illustration 2:

Harry, Sejal, and Anushka are partners in a firm sharing their profits and losses in the ratio 4:5:4. Devi retires from the company, and the remaining partners decided to share their future profits and losses in the ratio 2:4. On the date of Retirement, the balance sheet showed a Workmen Compensation Reserve of ₹9,900. There was a claim against Workmen Compensation Reserve for ₹9,900. Pass the necessary Journal Entry for the same.

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:

Ankit, Anil, and Vansh are partners in a firm sharing their profits and losses in the ratio 4:5:7. Anil decided to retire from the company, and the remaining partners decided to share their future profits and losses equally. On the date of Retirement, the balance sheet showed a Workmen Compensation Reserve of ₹8,700. There was a claim against Workmen Compensation Reserve for ₹15,500. Pass the necessary Journal Entry for the same.

Solution:

Illustration 2:

Tilak, Tara, and Tanuj are partners in a firm sharing their profits and losses in the ratio 3:2:5. Tanuj decided to retire from the company, and the remaining partners decided to share their future profits and losses 4:5. On the date of Retirement, the balance sheet showed a Workmen Compensation Reserve of ₹14,400. There was a claim against Workmen Compensation Reserve for ₹27,000. Pass the necessary Journal Entry for the same.

Solution: