Q.Assertion (A) : Increase in the value of liabilities on reconstitution of a firm is debited to Revaluation Account. Reason (R) : Increase in the value of liabilities is a loss. Select the correct alternative from the following : (A) Assertion (A) is correct, but Reason (R) is wrong. (B) Assertion (A) is wrong, but Reason (R) is correct. (C) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A). (D) Both Assertion (A) and Reason (R) are wrong.
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Start your 14-day free trial to unlock the full solution →Option (C) is correct: both the assertion and reason are true, and the reason correctly explains the assertion.
Concept: Revaluation Account and Treatment of Liabilities
When a partnership firm is reconstituted—whether due to admission, retirement, or death of a partner—the existing assets and liabilities are revalued to reflect their current market values. The Revaluation Account (also called Profit and Loss Adjustment Account) is opened to record all gains and losses arising from this revaluation.
The fundamental accounting treatment follows these principles:
For Assets:
- Increase in value → Debit Asset, Credit Revaluation Account (gain)
- Decrease in value → Debit Revaluation Account, Credit Asset (loss)
For Liabilities:
- Increase in value → Debit Revaluation Account, Credit Liability (loss)
- Decrease in value → Debit Liability, Credit Revaluation Account (gain)
The logic behind liability treatment is straightforward. A liability represents an obligation the firm owes. If a liability increases—say, an outstanding creditor of ₹50,000 is now found to be ₹55,000, or a provision for warranty claims needs to be raised from ₹10,000 to ₹15,000—the firm's net worth has declined. The firm now owes more than previously recorded. This is a loss to the firm.
Conversely, if a liability decreases (perhaps a creditor agrees to accept less, or an over-provision is discovered), the firm's obligation shrinks and net worth rises—a gain.
Students often confuse the treatment because they think "increase" always means debit. Remember: for liabilities, an increase means the firm is worse off (a loss), so the Revaluation Account is debited to capture that loss, while the liability account itself is credited to show the higher amount owed.
Analysis of the Given Statement
Assertion (A): "Increase in the value of liabilities on reconstitution of a firm is debited to Revaluation Account."
This is correct. When liabilities increase, the entry is:
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Revaluation A/c Dr. | xxx | ||
| To Liability A/c | xxx | ||
| (Being increase in liability recorded) |
The debit to Revaluation Account reflects the loss.
Reason (R): "Increase in the value of liabilities is a loss."
This is also correct. An increase in what the firm owes reduces the residual claim of the partners (capital). It is economically a loss—the firm's net position has deteriorated.
Moreover, Reason (R) explains Assertion (A): because an increase in liabilities is a loss, we debit the Revaluation Account (which accumulates all revaluation losses on its debit side and gains on its credit side). …
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