Treatment of Workmen Compensation Reserve in Realisation Account During Dissolution with Pending Claims

During the dissolution of a company, all assets and liabilities are realized, and the proceeds are distributed among the stakeholders. Workmen compensation reserve is a provision that is created to meet any claims arising from work-related injuries of employees. In case there are pending claims at the time of dissolution, it is important to understand how to treat the workmen compensation reserve in the realisation account.

1. Create a Provision for the Pending Claims

The first step is to create a provision for the pending claims. The provision should be equal to the estimated amount of the pending claims. The provision is debited to the realisation account and credited to the workmen compensation reserve account. This ensures that the provision is accounted for in the realisation account.

2. Deduct the Provision from the Workmen Compensation Reserve

The provision for the pending claims is then deducted from the workmen compensation reserve account. This ensures that the reserve is reduced by the amount of the provision, and only the balance is accounted for in the realisation account.

3. Account for the Remaining Balance of the Workmen Compensation Reserve

The remaining balance of the workmen compensation reserve is then transferred to the partners' capital accounts in their profit-sharing ratio. This ensures that the partners receive their share of the reserve as part of the distribution of assets.

4. Account for any Surplus or Deficit in the Provision

If the pending claims are settled for an amount that is less than the provision created, the surplus is credited to the realisation account. If the settlement amount is more than the provision, the deficit is debited to the realisation account.

Conclusion

In conclusion, the treatment of workmen compensation reserve in the realisation account during dissolution with pending claims requires the creation of a provision, deduction of the provision from the reserve, transfer of the remaining balance to the partners' capital accounts, and accounting for any surplus or deficit in the provision. It is important to ensure that all pending claims are accounted for in the realisation account to ensure a fair and equitable distribution of assets among the stakeholders.