Varun, Vansh and Vinay are partners sharing profits in the ratio of 5:3:2. They decided to share future profits in the ratio of 2:3:5. What will be the accounting treatment of Workmen Compensation Reserve existing in the balance sheet on that date when further information is not available.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Distributed among partners in their old profit sharing ratio
A Workmen Compensation Reserve is set aside out of past profits to meet workers’ claims. When nothing is said about any claim against it, the whole reserve is treated like any other accumulated profit. A change in the profit sharing ratio is handled as on admission: accumulated profits and reserves go to the partners in the old ratio, the ratio in which they were earned.
Why the other options are incorrect
Option (1) Distributed among partners in their capital ratio — Incorrect. Profits are shared in the profit sharing ratio, not in proportion to capital, unless the deed says so.
Option (2) Distributed among partners in their new profit sharing ratio — Incorrect. The reserve was built up before the change; giving it out in the new ratio would hand Vinay a part of profits earned when his share was smaller.
Option (4) Carried forward to new balance sheet — Incorrect. If it were carried forward, it would later be shared in the new ratio, which has the same effect as Option (2). It is distributed now, unless the partners agree to keep it and pass an adjusting entry.
NCERT (2026-27 edition): |