Workmen Compensation Reserve

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    Workmen Compensation reserve is a reserve which has been set aside from free reserves only for meeting the unforeseen future contingencies for workmen compensation to be paid for any mishappening and accident happen to workmen at the workplace. Workmen Compensation reserves are having a credit balance and appear in the Balance Sheet on the liability side of the Balance Sheet. Sometimes, the firm creates workmen compensation reserves are created from divisible profits of the business for meeting the liability of workmen compensation to arise in the future.

    The treatment of such workmen compensation reserves needs to be made at the time of reconstitution of the firm (i.e. admission of a new partner, the retirement of a partner, the death of a partner or at the time of change in profit sharing ratio of the firm). The Treatment of workmen compensation reserve involves the comparison of actual workmen compensation liability which happens to arise in near future and can be reasonably estimated at the time of reconstitution of the firm with the balance of Workmen compensation reserves shown in the Balance Sheet of the firm. Thus, the following situation may arise on a comparison of estimated liability of workmen compensation and workmen compensation reserve balance in books:

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