Accounting Treatment of Reserves or Accumulated Profits or Losses

Accounting Treatment of Reserves or Accumulated Profits or Losses-min

Accounting Treatment of Reserves or Accumulated Profits and Losses is required before the reconstitution of the partnership firm, because of these all reserves or accumulated profits or losses earned/generated with the efforts of all partners, old partners(in case of admission) or remaining Partners( in case of death or retirement) and these are distributed among them in their old profit sharing ratio.

The Content covered in this article: –

  1. What are Reserves or Accumulated Profits or Losses
  2. Accounting Treatment of different type of Reserves
    1. General Reserve 
    2. Workmen Compensation Reserve
    3. Investment Fluctuation Reserve 
    4. Deferred Revenue Expenditure

What are Reserves or Accumulated Profits or Losses: –

A reserve or Accumulated Profits or Losses refers to the share of profit saved by the business/firm for future growth or expansion and to handle the situation of losses in the future. 

Reserve: Meaning, type, Accounting treatment

Accounting Treatment of Reserves or Accumulated Profits or Losses: –

The total amount of Reserves or Accumulated Profits or Losses exists in the books as belonging to the partner in their old ratio. So, we have to distribute these amounts among all partners in their old ratio by crediting the share of the total amount to the particular partners capital account(in case of fluctuating) or Current Accounts (in case of fixed capital) before reconstitution of the partnership firm 

The Journal Entries are shown as per the type of the reserve as follows: –

1. General Reserve or Accumulated Profits or Losses: – 

In this case, the following two journal entries are posted: – 

Date   Particulars
L.F. Debit Credit
           
(i) Journal Entry for Reserves Accumulated Profits: 
  Reserves A/c Dr.   XXXX  
  Profit or Loss A/c (Cr. Balance) Dr.   XXXX  
            To Partners’ Capital (Current) A/c     XXXX
  (Being adjustment of reserve made in old profit sharing ratio.)      
         
(ii) Journal Entry for Accumulated Losses: 
  Partners’ Capital (Current) A/c Dr.   XXXX  
  To Profit or Loss A/c (Dr Balance)     XXXX
  (Being adjustment of reserve made in old profit sharing ratio.)      
         

2. Workmen Compensation Reserve:-

The Workmen Compensation Reserve is created to meet the liabilities on the account of compensation to employees in the accident cases. So, as per the meaning of workmen compensation reserve, it will be paid only in the case of an accident it means it may be or may not be paid. The firm can have funded in this reserve so it can be treated as follows:  –

1. When the Claim against Workmen compensation Reserve does not Exist: – 

In the case, Where no claim exists against the reserve the full amount will be distributed among the partners in the old profit sharing ratio. 

Date   Particulars
L.F. Debit Credit
           
  Workmen Compensation Reserve A/c Dr.   XXXX  
            To Partners’ Capital (Current) A/c     XXXX
  (Being adjustment of reserve made in old profit sharing ratio.)      
         

2. When the Claim against Workmen compensation Reserve Exists: – 

In the case, Where claim exists against the reserve then the treatment of the amount of reserve are different as per the following cases: – 

(a) Where estimate amount of claim is equal to the total amount of Workmen Compensation Reserve: –

The total amount of reserve will be transferred to the Provision for the workmen compensation claim.

Date   Particulars
L.F. Debit Credit
           
  Workmen Compensation Reserve A/c Dr.   XXXX  
            To Provision for Workmen Compensation Claim A/c     XXXX
  (Being amount of reserves transferred to the provision account.)      
         

(b) Where estimate amount of claim is less than the total amount of Workmen Compensation Reserve: –

The total amount of claim against reserve will be transferred to the Provision for the workmen compensation claim and the balance amount will be distributed among the partners in their old profit sharing ratio.

Date   Particulars
L.F. Debit Credit
           
  Workmen Compensation Reserve A/c Dr.   XXXX  
  To Provision for Workmen         Compensation Claim A/c     XXXX
  To Partners’ Capital (Current) A/c     XXXX
  (Being amount of reserves transferred to provision account and balance amount distributed among the partners.)      
         

(c) Where estimate amount of claim is more than the total amount of Workmen Compensation Reserve: –

The total amount of claim against reserve will be transferred to the Provision for the workmen compensation claim and the balance amount will be distributed among the partners in their old profit sharing ratio.

Date   Particulars
L.F. Debit Credit
           
  Workmen Compensation Reserve A/c Dr.   XXXX  
  Revaluation A/c  Dr.   XXXX  
  To Provision for Workmen         Compensation Claim A/c     XXXX
  (Being amount of reserves and balance amount from the revaluation equal to the amount of claim transferred to the provision account.)      
         

2. Deferred Revenue Expenditure: – 

The huge amount of revenue expenditure spent on any type of work which was not claimed in the related financial year and does not have any resealable value but provide benefit in future accounting year also is known as Deferred Revenue Expenditure. The advertisement is an example of these type of assets. 

Date   Particulars
L.F. Debit Credit
           
  Partners’ Capital (Current) A/c Dr.   XXXX  
  To Deferred Revenue Expenditure a/c     XXXX
  (Being Deferred revenue expenditure written off in old profit sharing ratio.)      
         

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