Accountancy Part AAdmission of a Partner

A firm's balance sheet shows the following: Workmen Compensation Rese…

A firm's balance sheet shows the following:

Workmen Compensation Reserve ₹70,000
Workmen Compensation claim ₹90,000

State the journal entry to be passed at the time of Reconstitution of firm.

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Workmen Compensation Reserve A/c Dr. ₹70,000, Revaluation A/c Dr. ₹20,000, To Workmen Compensation claim ₹90,000

The reserve of ₹70,000 is used first against the claim. The claim is ₹20,000 more than the reserve; this extra liability is a loss on reconstitution and is debited to the Revaluation Account, which records the gains and losses on revaluing assets and liabilities.

Workmen Compensation Reserve A/c Dr. ₹70,000
Revaluation A/c Dr. ₹20,000
To Workmen Compensation Claim A/c ₹90,000

The Realisation Account in the last option is opened only on dissolution, not on reconstitution.

NCERT (2026-27 edition):
Revaluation of Assets and Reassessment of Liabilities – “… For this purpose the firm has to prepare the Revaluation Account. The gain or loss on revaluation of each asset and liability is transferred to this account and finally its balance is transferred to the capital accounts of the old partners in their old profit sharing ratio. In other words, the revaluation account is credited with increase in the value of each asset and decrease in its liabilities because it is a gain and is debited with decrease in the value of assets and increase in its liabilities is debited to revaluation account because it is a loss.”