Workmen Compensation Reserve Journal Entry
A workmen compensation reserve is created to set aside funds for potential future liabilities related to workers' compensation claims. This reserve helps ensure that the business can meet its obligations to workers in case of accidents or injuries.
Scenario:
A company decides to create a workmen compensation reserve of ₹50,000.
1. Creating the Workmen Compensation Reserve
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Profit and Loss A/c | 50,000 | |
| To Workmen Compensation Reserve A/c | 50,000 | ||
| (Being reserve created for workmen compensation) |
Explanation:
- Profit and Loss A/c is debited to record the expense for creating the reserve.
- Workmen Compensation Reserve A/c is credited to set up the reserve on the balance sheet.
Utilizing the Workmen Compensation Reserve
When the reserve is utilized to pay for an actual workmen compensation claim.
2. Utilizing the Workmen Compensation Reserve
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-07-15 | Workmen Compensation Reserve A/c | 20,000 | |
| To Cash/Bank A/c | 20,000 | ||
| (Being payment made for workmen compensation claim) |
Explanation:
- Workmen Compensation Reserve A/c is debited to reduce the reserve.
- Cash/Bank A/c is credited to reflect the outflow of cash for the compensation payment.
Adjusting the Reserve
If the company decides to adjust the reserve amount based on new estimates.
Increasing the Reserve
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-08-31 | Profit and Loss A/c | 10,000 | |
| To Workmen Compensation Reserve A/c | 10,000 | ||
| (Being reserve increased for workmen compensation) |
Decreasing the Reserve
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-09-30 | Workmen Compensation Reserve A/c | 5,000 | |
| To Profit and Loss A/c | 5,000 | ||
| (Being excess reserve reversed) |
