What is a workmen compensation reserve?

Workmen Compensation Reserve as the name suggests is a reserve created by the company to compensate its employees in the event of any uncertainty in future. It is created to protect the interest of workers in the company.

Workmen Compensation Reserve Account is generally given effect in case of admission, retirement of partners or dissolution of firm.

If there is a change in the estimated value of reserve it is given effect during the revaluation of assets and liabilities.

Journal entry if the existing reserve is less than the new estimated amount:

Revaluation A/c (Dr)

To Workmen Compensation Reserve A/c

The reserve is credited because we need to create more than the existing reserve, since the new estimated liability is more than the existing.

Journal entry if the existing reserve is more than the new estimated amount:

Workmen Compensation Reserve A/c (Dr)

To Revaluation A/c

The reserve is debited because we need to decrease the existing reserve, since the new estimated liability is less than the existing.

If a worker claims compensation, it is said to be a liability against the reserve. In case of dissolution, any such liability against workmen compensation reserve takes priority to be paid off according to the law.

Journal entry in case of claim against reserve is:

Workmen Compensation Reserve A/c (Dr)

To Workmen Compensation Claim

The amount is transferred from the reserve to a new liability, hence the reserve is debited and the claim is credited.

If there are not sufficient funds in the firm to pay the liability, partners will have to bring funds from their personal assets to pay the workers.

Journal entry when partner’s have to bring funds:

Partner’s Capital Account (Dr)

To Workmen Compensation Reserve A/c

Partner’s need to bring funds to fulfill the liability, hence there account is debited and since the reserve is increased, hence it is credited.

If there is no liability against the Workmen Compensation Reserve then it is distributed amongst the partners in their existing profit-sharing ratio.

Journal entry for distribution of reserve is:

Workmen Compensation Reserve A/c (Dr)

To Partner’s Capital Account

Since, reserve is more than required it is distributed among partners, hence their account is credited and as the reserve decreases, it is debited.