Workmen Compensation Reserve: With and Without a Claim

You spot Workmen Compensation Reserve in a partnership balance sheet and begin dividing it between the partners. Then an adjustment mentions a compensation claim. Suddenly, the entry you were about to write does not feel quite right.

That hesitation is useful. A reserve created for a particular purpose needs one extra check before anyone receives a share of it.

At reconstitution, first compare the existing reserve with the claim to be recognised. Any unused reserve goes to the old partners in their old profit-sharing ratio. If the claim exceeds the reserve, the shortfall is charged to Revaluation Account.

We will work through the four possibilities, then follow one adjustment all the way into a new balance sheet. All examples are original, and all amounts are in rupees.

What workmen compensation reserve means

Workmen compensation reserve is profit retained for possible compensation needs relating to workers. It is a specific reserve. Creating it is an appropriation of profit, while providing for a known obligation is a different accounting step. NCERT explains this distinction in its chapter on provisions and reserves.

Think of the reserve as a safety net woven from earlier profits. When the partnership changes, you check how much of that net is needed for the claim before deciding what can be released to the partners.

The reserve balance does not, by itself, mean that the same amount sits in a separate bank account. A reserve is an account representing retained profit. Cash and investments, if any, have their own accounts.

That last sentence matters. If a claim has already been recorded as a separate liability, or the question explicitly requires a reserve to remain, read those instructions before using a standard entry.

The four cases at a glance

The Delhi Directorate of Education’s Accountancy support material, printed page 88, sets out the four cases below.

Claim position	Reserve treatment	Effect on partners
No claim	Transfer the whole reserve	Credit in the old ratio
Claim below reserve	Provide for claim; transfer surplus	Credit surplus in the old ratio
Claim equals reserve	Use the whole reserve for the claim	No surplus or shortfall
Claim above reserve	Use reserve; debit shortfall to Revaluation	Share the final revaluation result in the old ratio

Two short calculations help:

Surplus = Reserve - Claim
(when reserve is larger)

Shortfall = Claim - Reserve
(when claim is larger)

You will have a surplus, a shortfall, or neither. You cannot have both on the same reserve-and-claim adjustment.

Case 1: No compensation claim

Asha and Bharat share profits in the ratio of 3:2. They admit Charu. Their old balance sheet shows Workmen Compensation Reserve of Rs. 90,000, and no claim exists.

The entire Rs. 90,000 is available for transfer:

Asha:   90,000 x 3/5 = 54,000
Bharat: 90,000 x 2/5 = 36,000

Particulars	Debit (Rs.)	Credit (Rs.)
Workmen Compensation Reserve A/c Dr.	90,000
To Asha’s Capital A/c		54,000
To Bharat’s Capital A/c		36,000

Being the reserve transferred to the old partners in their old profit-sharing ratio.

Charu receives no share of this distribution. The reserve arose before her admission.

Also notice what has happened to cash: nothing. Asha and Bharat have been credited in their capital accounts. That does not mean the firm has paid them Rs. 54,000 and Rs. 36,000.

In an ordinary reconstitution exercise, if a reserve appears but the question supplies no claim information and no instruction to retain it, the usual treatment is the same as the no-claim case. Read all adjustments before reaching that conclusion.

Case 2: Claim is less than the reserve

Keep the same partners and the same Rs. 90,000 reserve. This time, an unrecorded compensation claim is estimated at Rs. 36,000.

Only the unused portion can go to Asha and Bharat:

Reserve:             90,000
Less claim:          36,000
Surplus:             54,000

Asha:   54,000 x 3/5 = 32,400
Bharat: 54,000 x 2/5 = 21,600

Particulars	Debit (Rs.)	Credit (Rs.)
Workmen Compensation Reserve A/c Dr.	90,000
To Provision for Workmen Compensation Claim A/c		36,000
To Asha’s Capital A/c		32,400
To Bharat’s Capital A/c		21,600

Being provision made for the claim and the surplus reserve transferred in the old ratio.

Check the credit side: Rs. 36,000 + Rs. 32,400 + Rs. 21,600 = Rs. 90,000. The reserve has been used once, in full, across three destinations.

You can also write this as two entries: first debit the reserve and credit the provision for Rs. 36,000, then distribute the remaining Rs. 54,000. The result is identical.

The new balance sheet will show the unpaid claim of Rs. 36,000 as a liability. It will not show the old Rs. 90,000 reserve as well. Keeping both would count the same amount twice.

Case 3: Claim equals the reserve

Now suppose the new claim is Rs. 90,000, exactly equal to the reserve.

Particulars	Debit (Rs.)	Credit (Rs.)
Workmen Compensation Reserve A/c Dr.	90,000
To Provision for Workmen Compensation Claim A/c		90,000

Being the entire reserve applied towards provision for the claim.

There is nothing left to distribute and no additional shortfall to charge.

The reserve account closes, while the unpaid claim appears in the new balance sheet at Rs. 90,000. Asha’s and Bharat’s capital accounts receive no adjustment from this item.

This is a useful pause point: an entry can change the composition of the liabilities side without changing its total.

Case 4: Claim exceeds the reserve

Finally, the reserve is Rs. 90,000, but the new claim is Rs. 1,14,000.

Claim:              1,14,000
Less reserve:         90,000
Shortfall:            24,000

Particulars	Debit (Rs.)	Credit (Rs.)
Workmen Compensation Reserve A/c Dr.	90,000
Revaluation A/c Dr.	24,000
To Provision for Workmen Compensation Claim A/c		1,14,000

Being the claim provided for using the reserve and the uncovered amount charged to revaluation.

For this adjustment, the amount entering Revaluation Account is Rs. 24,000, not Rs. 1,14,000. Charging the full claim there after already using the reserve would overstate the loss.

If there are no other revaluation items, transfer the Rs. 24,000 loss as follows:

Particulars	Debit (Rs.)	Credit (Rs.)
Asha’s Capital A/c Dr.	14,400
Bharat’s Capital A/c Dr.	9,600
To Revaluation A/c		24,000

Being the revaluation loss transferred in the old ratio of 3:2.

A publisher’s worked partnership solution, PDF page 23, illustrates the same shortfall treatment alongside other revaluation adjustments.

In a full question, combine all revaluation gains and losses before transferring the final balance. A compensation shortfall does not automatically mean that the firm’s overall revaluation result is a loss.

Why the old profit-sharing ratio applies

The surplus comes from profits accumulated before the partnership changed. The incoming partner did not earn those earlier profits. NCERT’s admission chapter, sections 2.6 and 2.7, assigns accumulated profits and the revaluation result to the old partners in their old ratio.

In our examples, Asha and Bharat therefore use 3:2 even if Asha, Bharat, and Charu will share future profits equally.

For ordinary distribution of the surplus, do not substitute the sacrificing ratio used in a goodwill adjustment. Both adjustments may appear in the same question, but they answer different questions about partners’ entitlements.

If you need a refresher, our guide to old, new, sacrificing, and gaining ratios explains the role of each ratio.

Retirement includes the retiring partner

Suppose Dev, Esha, and Farah share profits in 3:2:1. Farah retires. The reserve is Rs. 96,000, and a new claim of Rs. 36,000 must be recognised.

The surplus is Rs. 60,000:

Partner	Share of surplus
Dev: Rs. 60,000 x 3/6	Rs. 30,000
Esha: Rs. 60,000 x 2/6	Rs. 20,000
Farah: Rs. 60,000 x 1/6	Rs. 10,000

Farah’s retirement does not erase her entitlement to earlier profits. Credit all three partners, including Farah. The same old-partner principle applies to a shortfall included in the revaluation result, as explained in NCERT’s retirement and death chapter.

Fixed capitals use current accounts

Where partners maintain fixed capital accounts, these reserve and revaluation adjustments normally go through their current accounts. With fluctuating capitals, use capital accounts.

The split of the amount does not change. For example, if Asha and Bharat maintain fixed capitals in Case 2, credit their current accounts by Rs. 32,400 and Rs. 21,600. A school marking scheme, Question 19, demonstrates a reserve surplus transferred to current accounts.

A complete admission example, including the balance sheet

Let’s give the reserve some company. This is where the individual entry becomes part of a complete answer.

Ira and Kabir share profits in 5:3 and maintain fluctuating capitals. Their balance sheet immediately before Leela’s admission contains:

Assets	Amount (Rs.)
Bank	70,000
Inventory	1,00,000
Furniture	80,000
Premises	2,60,000
Total	5,10,000

Liabilities and capitals	Amount (Rs.)
Trade creditors	66,000
Workmen Compensation Reserve	84,000
Ira’s capital	2,10,000
Kabir’s capital	1,50,000
Total	5,10,000

The admission terms are:

1. Leela brings Rs. 1,20,000 as capital through the bank. The new ratio is 3:2:1.
2. A previously unrecorded compensation claim of Rs. 1,05,000 is to be provided for. It is unpaid.
3. Inventory increases in value by Rs. 18,000.
4. Furniture decreases in value by Rs. 5,000.
5. No goodwill or other adjustments are required, and the reserve is to be closed.

Step 1: Recognise the compensation claim

The reserve covers Rs. 84,000. The uncovered part is Rs. 1,05,000 less Rs. 84,000, or Rs. 21,000.

Particulars	Debit (Rs.)	Credit (Rs.)
Workmen Compensation Reserve A/c Dr.	84,000
Revaluation A/c Dr.	21,000
To Provision for Workmen Compensation Claim A/c		1,05,000

Being the claim recognised and the shortfall charged to revaluation.

No reserve surplus reaches the partners. The reserve has been fully used for the claim.

Step 2: Record the asset changes

Debit Inventory Account and credit Revaluation Account by Rs. 18,000 for the increase in inventory.

Debit Revaluation Account and credit Furniture Account by Rs. 5,000 for the fall in furniture value.

The revaluation working now reads:

Revaluation item	Effect (Rs.)
Compensation shortfall: loss	21,000
Furniture decrease: loss	5,000
Total losses	26,000
Less inventory increase: gain	18,000
Net revaluation loss	8,000

This is why we waited before distributing the result. Rs. 21,000 was the compensation shortfall; Rs. 8,000 is the firm’s net revaluation loss after considering all three adjustments.

Step 3: Transfer the net loss

Use Ira and Kabir’s old ratio of 5:3:

Ira:   8,000 x 5/8 = 5,000
Kabir: 8,000 x 3/8 = 3,000

Debit Ira’s Capital Account by Rs. 5,000 and Kabir’s Capital Account by Rs. 3,000; credit Revaluation Account by Rs. 8,000.

Leela bears none of this adjustment. Her new profit share is irrelevant to the allocation of this pre-admission revaluation result.

Step 4: Record Leela’s capital

Debit Bank Account and credit Leela’s Capital Account by Rs. 1,20,000.

The closing capital balances are:

Partner	Closing capital (Rs.)
Ira: Rs. 2,10,000 less Rs. 5,000	2,05,000
Kabir: Rs. 1,50,000 less Rs. 3,000	1,47,000
Leela	1,20,000
Total capitals	4,72,000

Step 5: Prepare the new balance sheet

Assets	Amount (Rs.)
Bank: Rs. 70,000 + Rs. 1,20,000	1,90,000
Inventory: Rs. 1,00,000 + Rs. 18,000	1,18,000
Furniture: Rs. 80,000 less Rs. 5,000	75,000
Premises	2,60,000
Total assets	6,43,000

Liabilities and capitals	Amount (Rs.)
Trade creditors	66,000
Provision for compensation claim	1,05,000
Ira’s capital	2,05,000
Kabir’s capital	1,47,000
Leela’s capital	1,20,000
Total liabilities and capitals	6,43,000

Both sides agree. The old reserve has disappeared, the full unpaid claim appears, and bank has increased only because Leela brought capital.

As a second check, total assets increased by Rs. 1,33,000: Rs. 1,20,000 of new cash plus Rs. 13,000 of net asset appreciation. Rs. 5,10,000 + Rs. 1,33,000 = Rs. 6,43,000.

Providing for a claim and paying it are separate steps

Return to the Rs. 36,000 claim in Case 2. At recognition, the firm credits the provision account. If it later pays exactly Rs. 36,000 through the bank, the payment entry is:

Particulars	Debit (Rs.)	Credit (Rs.)
Provision for Workmen Compensation Claim A/c Dr.	36,000
To Bank A/c		36,000

Being the recognised compensation claim paid through the bank.

The liability is now cleared, and bank falls by Rs. 36,000. Do not debit the reserve again: it was already closed when the provision was created.

If the wording says the claim is estimated, it has not thereby said that payment occurred. If the amount ultimately paid differs from the provision, a further adjustment is needed according to the timing and facts given.

Two variations worth recognising

Finding a missing reserve

Suppose Bharat is credited with Rs. 14,400 from the surplus. Asha and Bharat’s old ratio is 3:2, and the newly recognised claim is Rs. 54,000. The question asks for the original reserve.

Bharat’s Rs. 14,400 represents two-fifths of the surplus, not two-fifths of the entire reserve.

Surplus = 14,400 x 5/2
        = 36,000

Reserve = Claim + Surplus
        = 54,000 + 36,000
        = 90,000

The word attached to a figure matters just as much as the figure itself. Identify whether a partner’s share is a credit from surplus or a debit from loss before working backwards.

When the reserve must remain in the books

An explicit instruction to retain a reserve changes the entry. Here is a simple no-claim variation, with the whole reserve retained.

Asha and Bharat change their ratio from 3:2 to 1:1. There is no claim, and they agree to keep the Rs. 60,000 reserve unchanged in the balance sheet.

Partner	Old entitlement	Entitlement in new ratio
Asha	Rs. 36,000	Rs. 30,000
Bharat	Rs. 24,000	Rs. 30,000

Bharat would gain Rs. 6,000 of entitlement to the retained reserve, while Asha would lose Rs. 6,000. Debit Bharat’s Capital Account and credit Asha’s Capital Account by Rs. 6,000. The reserve account itself remains at Rs. 60,000.

This is an adjustment between partners for a reserve specifically retained. It is different from closing and distributing the reserve in the four standard cases. Where a claim is also present, recognise that obligation and determine exactly how much reserve the question requires to be retained before adjusting entitlements.

A quick check before you finish an answer

Watch for these common slips:

• Giving the incoming partner a surplus share. Separate earlier accumulated profits from future profit-sharing rights.
• Leaving out the retiring partner. Include that partner when dividing the old surplus or the relevant revaluation result.
• Charging the full claim to Revaluation Account. In the standard adjustment, charge only the amount not covered by the reserve.
• Distributing a surplus twice. If it has gone directly to partners, do not also credit it to Revaluation Account.
• Reducing bank before payment. Recognition of a liability and settlement of it are separate events.
• Recognising an existing liability again. The four-case examples assume the claim has not already been recorded separately.

For related practice, see accumulated profits and losses on reconstitution and revaluation adjustments.

Try these eight questions

Assume fluctuating capitals, a newly recognised unpaid claim, closure of the reserve, and no other revaluation items unless the question says otherwise.

1. P and Q share profits in 4:1. Their reserve is Rs. 75,000 and no claim exists. How much is credited to each partner?
2. Using the same ratio and reserve, the claim is Rs. 25,000. Find the surplus and each partner’s credit.
3. The reserve and claim are both Rs. 75,000. What goes to partners and what liability remains?
4. Using P and Q’s 4:1 ratio, the reserve is Rs. 75,000 and the claim is Rs. 95,000. Find the revaluation loss and each partner’s debit.
5. A reserve of Rs. 50,000 faces a claim of Rs. 62,000. There is also a revaluation gain of Rs. 20,000 on land. What is the net revaluation result?
6. R retires from a firm whose old ratio, P:Q:R, is 2:2:1. The reserve is Rs. 80,000 and the claim is Rs. 30,000. What is R’s share of the surplus?
7. Q receives Rs. 12,000 from a reserve surplus. P and Q share profits in 3:2, and the claim is Rs. 45,000. Find the original reserve.
8. A claim of Rs. 28,000 was provided for earlier and is now paid in full by bank. Which account is debited, and by how much?

Answers with working

1. P receives Rs. 60,000 and Q Rs. 15,000: split Rs. 75,000 in 4:1.
2. Surplus is Rs. 50,000. Credit P Rs. 40,000 and Q Rs. 10,000; recognise the Rs. 25,000 claim separately.
3. Partners receive nothing from this item. Close the reserve into the provision and show the Rs. 75,000 unpaid claim.
4. Shortfall is Rs. 20,000. Debit P Rs. 16,000 and Q Rs. 4,000 when transferring the loss.
5. Compensation shortfall is Rs. 12,000. Rs. 20,000 gain less Rs. 12,000 loss gives a net revaluation profit of Rs. 8,000.
6. Surplus is Rs. 50,000. R receives one-fifth, or Rs. 10,000.
7. Surplus is Rs. 12,000 x 5/2 = Rs. 30,000. Add the Rs. 45,000 claim: the reserve was Rs. 75,000.
8. Debit Provision for Workmen Compensation Claim Account by Rs. 28,000 and credit Bank Account by the same amount.

Sources and further reading

• NCERT, Financial Accounting I, Depreciation, Provisions and Reserves, 2026-27 reprint, sections 7.12 and 7.12.2: meaning of reserves and their specific purposes.
• NCERT, Accountancy I, Admission of a Partner, 2026-27 reprint, sections 2.6, 2.7, and 2.9: accumulated profits, revaluation, and changes in profit-sharing rights.
• NCERT, Accountancy I, Retirement/Death of a Partner, 2026-27 reprint, sections 3.5 and 3.6: old partners’ shares in revaluation and accumulated profits.
• Delhi Directorate of Education, Accountancy Support Material 2021-22, printed page 88: the four compensation-reserve cases.
• Sultan Chand, Solutions of Model Test Papers 8 to 11, 2026 edition, PDF page 23: a claim exceeding the reserve within a combined revaluation problem.
• B. K. Birla Centre for Education, Accountancy Marking Scheme 2025-26, Question 19: transfer of surplus to partners’ current accounts.

Frequently asked questions

Is workmen compensation reserve a provision?

No. The reserve represents profit retained for a particular purpose. A provision for a compensation claim recognises an obligation. At reconstitution, the reserve can be applied towards that provision under the terms of the question.

What happens when there is no claim?

In the standard reconstitution treatment, transfer the full reserve to the old partners in their old profit-sharing ratio, unless the question specifically requires it to remain in the books.

What if the claim is smaller than the reserve?

Recognise the claim and distribute only the surplus. For a Rs. 90,000 reserve and a Rs. 36,000 claim, the amount available to partners is Rs. 54,000.

What if the claim exactly equals the reserve?

Debit the reserve and credit the compensation provision for the same amount. There is no surplus for partners and no uncovered loss from this adjustment.

What if the claim exceeds the reserve?

Use the full reserve and debit the shortfall to Revaluation Account. Credit the claim or provision account with the full liability. Transfer the final revaluation balance after considering all other revaluation items.

Which ratio is used for the surplus?

Use the old profit-sharing ratio when distributing the surplus. Do not use the new ratio or the sacrificing ratio simply because the question also contains an admission and goodwill adjustment.

Does the retiring partner receive a share?

Yes. The retiring partner participates in the surplus in the old ratio. That partner also shares the relevant revaluation result arising before retirement.

Should fixed capital accounts change?

These reserve and revaluation adjustments normally go to current accounts when capitals are fixed. With fluctuating capitals, they go to capital accounts. Follow any specific account instructions in the question.

Does an estimated claim reduce bank immediately?

No. An estimate to be provided for creates a liability. Bank falls when the claim is actually paid through the bank. Do not turn an unpaid claim into a payment entry.

Is the reserve shown in the new balance sheet?

After the standard closing entries, the old reserve does not remain. The unpaid claim appears as a liability, and any surplus has moved to partners’ accounts. A specific instruction to retain a reserve creates an exception.

What if the claim already appears separately in the old balance sheet?

Do not record that same liability again. Check whether the adjustment gives a revised total claim or an additional claim, and how the reserve is to be used. The entries above assume the claim is newly recognised.

Is the treatment identical on dissolution?

The same comparison helps identify any surplus, but dissolution uses Realisation Account for the relevant settlement process. Use the dissolution and Realisation Account guide for those entries rather than copying the revaluation entries from an admission question.