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 change in the profit sharing ratio among the existing partners is a reconstitution of the firm, treated like an admission. Workmen Compensation Reserve with no claim against it is an accumulated profit. It was earned while the old ratio applied, so, when no further information is given, it is distributed among the partners in their old profit sharing ratio (5 : 3 : 2 here), before the new ratio (2 : 3 : 5) takes effect.
Why the other options are incorrect
Option (1) Distributed among partners in their capital ratio — Incorrect. Profits and reserves are shared in the profit sharing ratio, never in the ratio of capitals.
Option (2) Distributed among partners in their new profit sharing ratio — Incorrect. The reserve belongs to the period before the change. Sharing it in the new ratio would give Vinay a larger part of profits earned when his share was only 2/10.
Option (4) Carried forward to new balance sheet — Incorrect. The reserve is left in the books only if the partners decide to keep it and pass an adjusting entry instead. With no such information, it is distributed.
NCERT (2026-27 edition): |