Adjustment for Revaluation of Assets and Liabilities

When a partner retires or dies, the firm’s assets and liabilities may not be recorded at their current realisable values. Some assets might be undervalued or overvalued; some liabilities might be overstated or understated. There could also be assets or liabilities that are completely unrecorded — for example, a fully paid-up asset that was never entered in the books, or an outstanding expense that was never accounted for.

The purpose of revaluation is to bring all assets and liabilities to their true and fair values as on the date of retirement or death. This ensures that the retiring or deceased partner receives (or pays) the correct amount based on the firm’s actual financial position.

A Revaluation Account is opened for this purpose. It is a nominal account. Any gain (profit) or loss on revaluation is transferred to the capital accounts of all partners, including the retiring/deceased partner, in their old profit-sharing ratio. This is exactly the same treatment as in the case of admission of a partner.

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Journal Entries for Revaluation

The following seven standard journal entries cover every possible revaluation situation:

1. Increase in the value of an asset

Asset is worth more than its book value — the firm gains.

Assets A/c (individually)          Dr.
    To Revaluation A/c
(Increase in the value of asset)

2. Decrease in the value of an asset

Asset is worth less than its book value — the firm loses.

Revaluation A/c                    Dr.
    To Assets A/c (individually)
(Decrease in the value of asset)

3. Increase in the amount of a liability

The firm now owes more — a loss.

Revaluation A/c                    Dr.
    To Liabilities A/c (individually)
(Increase in the amount of liability)

4. Decrease in the amount of a liability

The firm owes less — a gain.

Liabilities A/c (individually)     Dr.
    To Revaluation A/c
(Decrease in the amount of liability)

5. Unrecorded asset brought into books

A new asset is discovered — a gain.

Assets A/c                         Dr.
    To Revaluation A/c
(Unrecorded asset brought into books)

6. Unrecorded liability brought into books

A new liability is discovered — a loss.

Revaluation A/c                    Dr.
    To Liability A/c
(Unrecorded liability brought into books)

7. Transfer of profit or loss on revaluation to partners’ capital accounts

If there is a profit (credit balance in Revaluation A/c):

Revaluation A/c                    Dr.
    To All Partners’ Capital A/cs (individually)
(Profit on revaluation transferred to partners’ capital accounts)

If there is a loss (debit balance in Revaluation A/c):

All Partners’ Capital A/cs (individually)  Dr.
    To Revaluation A/c
(Loss on revaluation transferred to partners’ capital accounts)

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Key Points to Remember

• The Revaluation Account is prepared exactly as in the case of admission of a partner. …