Question

Ajay is admitted as a partner. The firm's Balance Sheet shows a Workmen Compensation Reserve of ₹80,000. If a claim of ₹90,000 arises, how is the extra ₹10,000 recorded?

Hint:

On admission:

Excess liability over reserve → loss to old partners
Short liability → gain to old partners
Always adjust in old profit-sharing ratio.

Answer 1

Concept: Workmen Compensation Reserve is a provision created to meet future claims. On admission of a new partner:

Actual liability must be adjusted against reserve.
Any excess claim is treated as a loss.

Step 1: Given data. \[ \text{Reserve} = ₹80{,}000 \] \[ \text{Actual claim} = ₹90{,}000 \] Excess claim: \[ 90{,}000 - 80{,}000 = ₹10{,}000 \]
Step 2: Accounting treatment.

Reserve is first used to meet the claim.
Extra ₹10,000 is a loss of the firm.
It is borne by old partners in their old profit-sharing ratio (since it relates to past period).
Journal Entry: \[ \text{Workmen Compensation Reserve A/c Dr.} \quad 80{,}000 \] \[ \text{Old Partners’ Capital A/cs Dr.} \quad 10{,}000 \] \[ \text{To Workmen Compensation Liability A/c} \quad 90{,}000 \] Conclusion: The extra ₹10,000 is treated as a loss and debited to the old partners’ capital accounts in their old profit-sharing ratio.