A firm’s balance sheet shows the following:
Workmen Compensation Reserve ₹70,000
Workmen Compensation claim ₹90,000
State the journal entry to be passed at the time of Reconstitution of firm.
Debit Workmen Compensation Reserve A/c ₹70,000 and Revaluation A/c ₹20,000;
Credit Workmen Compensation claim ₹90,000
Accounting Treatment of Workmen Compensation Reserve During Firm Reconstitution
When a firm is reconstituted, adjustments are made for reserves, accumulated profits, and losses. The Workmen Compensation Reserve (WCR) is a reserve created out of firm's profits to meet potential liabilities towards workmen claims. At the time of reconstitution, this reserve needs to be adjusted based on any actual or estimated claims.
In this specific case, the firm has a Workmen Compensation Reserve of \(₹70,000\) and a Workmen Compensation Claim of \(₹90,000\). The claim amount \(₹90,000\), is greater than the reserve amount \(₹70,000\).
The treatment is as follows:
- The existing Workmen Compensation Reserve of \(₹70,000\) is fully utilized to meet the claim. This means the Workmen Compensation Reserve account is debited with \(₹70,000\).
- The claim amount is \(₹90,000\), but only \(₹70,000\) is covered by the reserve. The excess claim is \(₹90,000 - ₹70,000 = ₹20,000\).
- This excess claim of \(₹20,000\) represents an increase in liability which was not fully provided for by the reserve. This additional liability or loss is debited to the Revaluation Account. The Revaluation Account is used to record increases and decreases in the value of assets and liabilities during the reconstitution of a firm.
- The total claim of \(₹90,000\) needs to be credited to the Workmen Compensation Claim account (or Provision for Workmen Compensation Claim account) as a liability.
Based on this, the journal entry to be passed at the time of reconstitution is:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Workmen Compensation Reserve A/c <strong>Dr.</strong> | 70,000 | ||
| Revaluation A/c <strong>Dr.</strong> | 20,000 | ||
| To Workmen Compensation Claim A/c | 90,000 | ||
| (Being Workmen Compensation Reserve transferred and excess claim adjusted through Revaluation) | |||
This entry effectively closes the Workmen Compensation Reserve account (as it's fully used), records the full liability for the claim, and debits the excess claim to the Revaluation Account, which will eventually be transferred to the partners' capital accounts in their profit-sharing ratio (if there's a balance in Revaluation Account).
Revision Table: Workmen Compensation Reserve Treatment
| Scenario | Journal Entry |
|---|---|
| No Claim Existing | Workmen Compensation Reserve A/c Dr. To Partners' Capital/Current A/cs (Reserve distributed to partners in PSR) |
| Claim < Reserve | Workmen Compensation Reserve A/c Dr. To Workmen Compensation Claim A/c (Claim amount) To Partners' Capital/Current A/cs (Remaining Reserve) (Reserve used for claim, balance distributed) |
| Claim = Reserve | Workmen Compensation Reserve A/c Dr. To Workmen Compensation Claim A/c (Claim amount) (Reserve fully used for claim) |
| Claim > Reserve (as in this question) | Workmen Compensation Reserve A/c Dr. (Full Reserve) Revaluation A/c Dr. (Excess Claim) To Workmen Compensation Claim A/c (Total Claim) (Reserve used, excess claim debited to Revaluation) |
Additional Information: Revaluation Account & Firm Reconstitution
The Revaluation Account is a nominal account prepared at the time of reconstitution (like admission, retirement, death of a partner, or change in profit sharing ratio) to ascertain the net effect of revaluing assets and reassessing liabilities. Its purpose is to record increases and decreases in the book values of assets and liabilities to reflect their current worth.
- Debit Side of Revaluation Account: Records decreases in asset values and increases in liability amounts. It also includes unrecorded liabilities. These represent losses on revaluation.
- Credit Side of Revaluation Account: Records increases in asset values and decreases in liability amounts. It also includes unrecorded assets. These represent gains on revaluation.
- Balance of Revaluation Account: The net gain (Credit side > Debit side) or loss (Debit side > Credit side) on revaluation is transferred to the Capital Accounts (or Current Accounts) of the old partners in their old profit-sharing ratio.
In the context of the Workmen Compensation Claim exceeding the reserve, the excess amount is a loss (an increase in liability), hence it is debited to the Revaluation Account. This loss will ultimately reduce the partners' capital balances.
Important Questions from Reconstitution of a Partnership : Retirement/Death of a Partner
In the absence of any information regarding the acquisition of share in profit of the retiring partner by the remaining partners, it is assumed that they will acquire his/her share in:
Profit and Loss Suspense Account is debited at the time of death of partner.
Identify the section of the Indian Partnership Act, 1932, that states that the outgoing partner has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits that has been earned with his/her money.
What is the correct sequence at the time of death of a partner?
(A) Amount paid to Executor
(B) Preparation of Revaluation account
(C) Calculation of Amount Payable to Executor of Deceased Partner
(D) Calculation of Revaluation Gain/Loss
(E) Balance of Executor’s loan A/c
Choose the correct answer:
Gobind, Hari, and Pratap are partners. On the retirement of Gobind, the goodwill already appears in the books at ₹24,000. The goodwill will be written off
