Workmen Compensation Reserve in Partnership Accounts

Meaning of Workmen Compensation Reserve

Meaning of Workmen

Workmen means any person (male or female) working as an employee of the firm. Traditionally the term workmen is used to refer to the people who do labour work. But here it can be an employee working at any level in the organization or doing any kind of work. In short all the employees working in the firm are covered under the term workmen.

Meaning of Compensation

When some loss is inflicted on someone due to some of our act then it is our duty to pay the amount of loss to the person who suffered loss. Such amount paid is called compensation. Suppose you are going on road on a two wheeler and you inadvertently hit some person walking on road. That person gets injuries and has to spend Rs 20000/- on his medical treatment. In this case it is your duty to pay Rs 20000/- to that person. The amount you pay is called compensation.

Meaning of Workmen Compensation

In a partnership firm many people work as employees. Partnership firm is the employer of all these people. As per law, it is the duty of employer to ensure the safety of the people working in the firms workplace (office, factory, Godown, etc.)

Now if some employee gets a physical injury at the workplace then it is assumed that the employer has not taken proper action to ensure the safety of its employees. Such injured employee has to incur expenditure on his medical treatment. And it is the duty of partnership firm to pay such medical expenses amount to the employee. This amount is called workmen compensation claim.

Meaning of Reserve

While partnership firm runs its business then it has to incur many expenses. Some expenditure can come suddenly and is unforeseen. Firm will usually keep some amount separate out of profits to meet such unforeseen expenses. The amount kept separate out of profits to meet unforeseen expenses is known as reserve

Meaning of Workmen Compensation Reserve

The firm does not know when a workmen may get injury. And hence when a need may arise to pay workmen compensation cannot be ascertained. Firm will usually create a reserve to meet any such compensation expenses. The reserve to meet the liability for workmen Compensation is known as workmen Compensation reserve

Accounting Treatment of Workmen Compensation Reserve

When the reserve is created

Journal Entry

• Profit and Loss Appropriation A/c Dr...
  • To Workmen Compensation Reserve A/c

Workmen Compensation Reserve has a credit balance and is shown on the liabilities side of the balance sheet.

When the reserve is closed on reconstitution

Whenever there is reconstitution of partnership firm , then all the reserves and accumulated profits/losses accounts are closed. For more details please refer to this article.

Here we will discuss the accounting treatment of closure of workmen Compensation Reserve

Various situations that can arise are shown in the below diagram :

Now we will discuss accounting treatment and the journal entries in each case one by one.

Case 1 - When no claim exists

Since no claim exists so there is no use for the reserve existing in the books of accounts. hence the whole reserve will be distributed among the old partners in the old ratio

Journal entry

• Workmen Compensation Reserve A/c Dr...
  • To Old Partners Capital/Current A/c ( In the old ratio)

Note : Capital A/c will be used if fluctuating method is followed and current A/c is used if fixed capital method is followed.

Case 2 - Question is silent on the existence of any claim

In this case we will assume that there is no claim. Since no claim exists so there is no use for the reserve existing in the books of accounts. hence the whole reserve will be distributed among the old partners in the old ratio

Journal entry

• Workmen Compensation Reserve A/c Dr...
  • To Old Partners Capital/Current A/c ( In the old ratio)

Note : Capital A/c will be used if fluctuating method is followed and current A/c is used if fixed capital method is followed.

Case 3 - When Claim exists and Claim = Reserve

Reserve will be used to create a liability for the claim. Since claim = reserve so no part of reserve will be left for the partners

Journal entry

• Workmen Compensation Reserve A/c Dr...
  • To Workmen Compensation Claim A/c

Note : Workmen Compensation Claim is a liability and will be shown on the liabilities side of the new balance sheet

Case 4 - When Claim exists and Claim < Reserve

Reserve will be used to create a liability for the claim. Since claim < reserve so some amount of reserve will be left and will be distributed among the old partners in the old ratio. Suppose WCR is Rs 1 Lakh. Claim is Rs 60K. In this case claim will be credited by Rs 60K and Rs 40K will be distributed among old partners in the old ratio)

Journal entry

• Workmen Compensation Reserve A/c Dr...
  • To Workmen Compensation Claim A/c
  • To Old Partners Capital/Current A/c ( In the old ratio)

Note : Workmen Compensation Claim is a liability and will be shown on the liabilities side of the new balance sheet

Note : Capital A/c will be used if fluctuating method is followed and current A/c is used if fixed capital method is followed.

Case 5 - When Claim exists and Claim > Reserve

Reserve will be used to create a liability for the claim. Claim is already higher than reserve. So no part of reserves will be left for distribution among the partners and so partner capital A/c will not be used in this case. The excess of claim over the reserve will be debited to Revaluation A/c as it is a loss to the firm. Example - Suppose WCR Rs 100000. Claim = Rs 120000. In this case Rs 20000 will be debited to revaluation A/c

Journal entry

• Workmen Compensation Reserve A/c Dr...
• Revaluation A/c Dr..
  • To Workmen Compensation Claim A/c

The amount of revaluation loss will be distributed among the partners by following entry

• Old Partners Capital A/c Dr.. (In the old ratio)
  • To Revaluation A/c

Note : Workmen Compensation Claim is a liability and will be shown on the liabilities side of the new balance sheet

Note : Capital A/c will be used if fluctuating method is followed and current A/c is used if fixed capital method is followed.

Key Points to easily remember journal entries

• Workmen Compensation Reserve is Debited in all the cases
• Workmen Compensation Claim is credited only in cases where any claim exists
• Where reserve is higher then claim then the excess amount(reserve - claim) is always credit to old partners capital/current A/c in old ratio.
• Workmen Compensation Reserve and Workmen Compensation Fund both are same and there is no difference between them

Example Question

A and B are partners sharing profits equally. Suppose workmen Compensation Reserve = Rs 100000 as per question.

Case 1 - When no claim exists

Case 2 - Question is silent on the existence of any claim (Same entry as in Case 1)

Case 3 - When Claim exists and Claim = Reserve. Suppose as per question claim is Rs 100000

Case 4 - When Claim exists and Claim < Reserve. Suppose as per question claim is Rs 70000

Case 5 - When Claim exists and Claim > Reserve. Suppose as per question claim is Rs 120000

WCR Treatment in different types of reconstitution

The accounting treatment of workmen compensation reserve is similar in all case of reconstitution (change in profit sharing ratio, admission, retirement and death) with minor differences. The difference lies in only one thing i.e. excess reserves are distributed among which partners.

All the rest of the accounting treatment is same for all the chapters and you need not study it again and again for each chapter. However practice few questions from each chapter to get a flavor of difference in treatment as described above