Based on following Balance Sheet of Tarnav and Manav as at 31^st March 2022, answer question:

                       Balance Sheet as at 31^st March 2022

On that date the firm was dissolved on the following term:

(i) Tarnav promised to pay Sanjay's loan and took over stock in trade at ₹4,000.
(ii) Creditors payable after one month, were paid immediately at 6% discount.
(iii) Debtors of ₹1,000 proved bad, plant realised 130%.
(iv) Expenses on Realisation were ₹1,500 borne and paid by Manav.
(v) Manav took over an old computer completely written off from the book at ₹500.

Workman Compensation Reserve will be transferred to:

Credit side of Partners' Capital A/c

The correct answer is Option (1) - Credit side of Partners' Capital A/c.

Workmen Compensation Reserve is an accumulated profit/reserve. In the case of dissolution, the treatment of Workman Compensation Reserve (WCR) is handled as follows:

Case 1: If there is NO Liability- If there is no claim against the reserve, the entire WCR is treated as an accumulated profit. It is transferred to the Credit side of Partners' Capital A/c in their profit-sharing ratio.

Case 2: If there is a Liability (Claim)-  If a claim exists, the amount equal to the liability is first transferred to the Credit side of the Realisation Account. Any remaining balance of the reserve (excess) is then credited to the Partners' Capital Accounts.

Journal Entry: 

 Workman Compensation Reserve A/c ... Dr (₹12,000)

           To Tarnav's Capital A/c (₹6,000)

           To Manav's Capital A/c (₹6,000) (Assuming equal ratio as capitals are equal)

Since the reserve is being distributed to the partners, it is posted on the Credit side of Partners' Capital A/c.