When Ajay is admitted as a new partner, all existing reserves and liabilities must be properly adjusted before his admission. The Balance Sheet shows a Workmen Compensation Reserve of ₹80,000. However, an actual claim of ₹90,000 arises. This means the firm has a shortage of ₹10,000 (₹90,000 − ₹80,000).
Step 1: Adjustment of Existing Reserve
The entire Workmen Compensation Reserve of ₹80,000 will be used to meet part of the claim.
Step 2: Treatment of Excess Claim
Since the claim exceeds the reserve by ₹10,000, the extra amount is treated as a loss. This loss must be borne by the old partners in their old profit-sharing ratio, because it relates to the period before Ajay’s admission.
Journal Entry:
Workmen Compensation Reserve A/c Dr. ₹80,000
Profit & Loss A/c Dr. ₹10,000
To Workmen Compensation Claim A/c ₹90,000
Explanation:
• ₹80,000 is adjusted from the existing reserve.
• ₹10,000 is debited to the Profit & Loss Account as it is an additional loss.
• The total claim of ₹90,000 is recorded as a liability.
Conclusion:
The extra ₹10,000 is recorded as a loss in the Profit & Loss Account and is borne by the old partners in their old profit-sharing ratio before the admission of Ajay.