On what account realisation account differs from revaluation account.

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Q. On what account realisation account differs from revaluation account.

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Concept understanding — Revaluation Account Effect

The Revaluation Account Effect – A First Look

Imagine you and your friend run a small food stall together. You've been sharing profits equally. Now, your friend wants to bring in a third partner. Before the new person joins, you both decide to get the stall's equipment and stock properly valued. The old mixer you bought for ₹5,000 is now worth only ₹3,000. But the refrigerator you'd written off is actually worth ₹8,000 more than its book value.

These changes in asset values don't belong to the new partner. They happened while only you and your friend were running the business. So, any gain or loss from revaluing assets and liabilities must be shared only between the old partners. That's the entire intuition behind the Revaluation Account.

What It Really Means

The Revaluation Account is a nominal account (like a Profit & Loss account) that is opened only when there is a change in the profit-sharing ratio among partners – typically at the time of admission, retirement, or death of a partner. Its job is to capture the net effect (profit or loss) of revaluing the firm's assets and liabilities to their current market values.

Why does this matter? Because the new partner should not bear the burden of past errors or benefit from hidden gains that existed before they joined. The Revaluation Account ensures that all past adjustments are settled among the old partners only.

Accounting Treatment – The Debit/Credit Logic

The rule is simple:

Increase in asset value → Credit Revaluation Account (it's a gain)
Decrease in asset value → Debit Revaluation Account (it's a loss)
Increase in liability → Debit Revaluation Account (it's a loss – you owe more)
Decrease in liability → Credit Revaluation Account (it's a gain – you owe less)

Once all revaluation entries are passed, the Revaluation Account shows either a profit (credit balance) or a loss (debit balance). This profit or loss is then transferred to the old partners' capital accounts in their old profit-sharing ratio.

Important

The new partner is never affected by the Revaluation Account balance. Only old partners share this gain or loss.

The Proforma (Format) of Revaluation Account

Here is the standard format as per NCERT Class 12 Accountancy:

Dr.		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Decrease in Assets	...	By Increase in Assets	...
To Increase in Liabilities	...	By Decrease in Liabilities	...
To Unrecorded Liabilities	...	By Unrecorded Assets	...
To Loss transferred to Old Partners' Capital A/c (in old ratio)	...	By Profit transferred to Old Partners' Capital A/c (in old ratio)	...
Total	...	Total	...

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The key difference between a Revaluation Account and a Realisation Account lies in the stage of the partnership at which they are prepared and the purpose they serve.

A Revaluation Account is opened at the time of a change in the existing partnership — such as admission, retirement, or death of a partner. Its purpose is to record the increase or decrease in the value of assets and liabilities on the date of reconstitution. The resulting profit or loss is transferred to the old partners' capital accounts in their old profit-sharing ratio. The business continues after this adjustment.

A Realisation Account is opened only when the firm is dissolved. Its purpose is to record the sale of all assets and the payment of all liabilities. The profit or loss on realisation is transferred to all partners' capital accounts in their profit-sharing ratio. After this account is closed, the business ceases to exist.

Basis	Revaluation Account	Realisation Account
When prepared	On admission, retirement, or death of a partner	On dissolution of the firm
Purpose	To revalue assets and reassess liabilities	To sell assets and pay off liabilities

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Realisation Account is prepared at the time of dissolution of a firm to record the sale of assets and payment of liabilities, while Revaluation Account is prepared at the time of admission, retirement, or death of a partner to record the change in value of assets and liabilities without dissolving the firm.

Concept and Accounting Treatment

The fundamental difference between Realisation Account and Revaluation Account lies in the stage of the partnership at which each is prepared and the purpose they serve.

Revaluation Account is prepared when there is a change in the existing partnership agreement — typically on admission of a new partner, retirement, or death of an existing partner. The firm continues its business. The account records the increase or decrease in the value of assets and liabilities as on that date. Any profit or loss on revaluation is transferred to the old partners' capital accounts in their old profit-sharing ratio. The key point: the business is not wound up; only the values are adjusted to reflect current worth.

Realisation Account is prepared when the firm is dissolved — the business ceases to exist. All assets (except cash/bank) are transferred to this account at their book value, and all liabilities (except partner's loan/capital) are transferred. The account then records the actual amounts realised from sale of assets and amounts paid to settle liabilities. The resulting profit or loss on realisation is transferred to all partners' capital accounts in their profit-sharing ratio. The business ends here.

Watch out

A common mistake is to treat Revaluation Account as a permanent account. It is a nominal account that is closed by transferring its balance to partners' capital accounts. Realisation Account is also a nominal account but is closed only after all assets are sold and liabilities paid.

Key Differences at a Glance

Basis	Revaluation Account	Realisation Account
When prepared	On admission, retirement, death of a partner	On dissolution of the firm
Purpose	To adjust asset/liability values to current market values	To record sale of assets and payment of liabilities
Business continues?	Yes	No
Assets transferred	Only those whose value changes	All assets (except cash/bank) at book value
Liabilities transferred	Only those whose value changes	All liabilities (except partner's loan/capital)
Profit/Loss transferred to	Old partners in old ratio	All partners in profit-sharing ratio
Nature	Temporary adjustment account	Final settlement account

Detailed Explanation with Example

Revaluation Account (Admission of a Partner)

Suppose A and B are partners sharing profits 3:2. They admit C. On the date of admission, the book value of machinery is ₹1,00,000 but its current value is ₹1,20,000. A creditor of ₹10,000 is no longer payable.

Journal Entry:

Particulars	Debit (₹)	Credit (₹)
Machinery A/c Dr.	20,000
To Revaluation A/c		20,000
(Increase in value of machinery recorded)
Revaluation A/c Dr.	10,000
To Creditors A/c		10,000
(Liability no longer payable written back)

Revaluation Account:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Creditors A/c	10,000	By Machinery A/c	20,000
To Profit transferred to:
A's Capital A/c (3/5)	6,000
B's Capital A/c (2/5)	4,000
	20,000		20,000

The profit of ₹10,000 (₹20,000 - ₹10,000) is shared by A and B in their old ratio 3:2.

Realisation Account (Dissolution of Firm)

Now suppose the same firm A and B decides to dissolve. Assets: Machinery ₹1,00,000, Debtors ₹50,000, Stock ₹30,000. Liabilities: Creditors ₹40,000, Bank Loan ₹20,000. Machinery sold for ₹1,20,000, Debtors realised ₹45,000, Stock sold for ₹25,000. Creditors paid ₹38,000 (discount received), Bank Loan paid in full.

Journal Entry for transfer of assets:

Particulars	Debit (₹)	Credit (₹)
Realisation A/c Dr.	1,80,000
To Machinery A/c		1,00,000
To Debtors A/c		50,000
To Stock A/c		30,000
(Assets transferred to Realisation A/c at book value)

Journal Entry for transfer of liabilities:

Particulars	Debit (₹)	Credit (₹)
Creditors A/c Dr.	40,000
Bank Loan A/c Dr.	20,000
To Realisation A/c		60,000
(Liabilities transferred to Realisation A/c)

Journal Entry for sale of assets:

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c Dr.		1,90,000
	To Realisation A/c			1,90,000

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Q.On what account realisation account differs from revaluation account.

Concept and Accounting Treatment

Key Differences at a Glance

Detailed Explanation with Example

Revaluation Account (Admission of a Partner)

Realisation Account (Dissolution of Firm)

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