Q.At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due? Show with the help of an imaginary balance sheet.
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Start your 14-day free trial to unlock the full solution →After revaluation, assets and liabilities appear at their revised (revalued) figures in the new Balance Sheet, while the net gain or loss from revaluation is transferred to the partners’ capital accounts in their old profit-sharing ratio.
The Concept: Why Revaluation Changes Book Values
When a firm undergoes a change in its partnership (admission, retirement, death, or change in profit-sharing ratio), the existing assets and liabilities must be brought to their current fair values. This is because the incoming partner should not benefit from hidden reserves (undervalued assets) nor suffer from hidden losses (overvalued assets or unrecorded liabilities). Similarly, the outgoing partner must be compensated for any appreciation or depreciation that occurred during their tenure.
The Revaluation Account (also called Profit & Loss Adjustment Account) is a temporary account that captures all changes in asset/liability values. Its balance — profit or loss — is then transferred to the old partners’ capital accounts in their old profit-sharing ratio. After this process, the assets and liabilities in the new Balance Sheet reflect their revalued amounts, not the original book values.
A common mistake is to think that revaluation changes only the asset side. Remember: every revaluation entry affects both sides — either through the Revaluation Account (for gains/losses) or through the partner’s capital accounts (for the net effect). Also, depreciation on revalued assets is calculated on the new value from the date of revaluation.
The Accounting Treatment
The rule is simple:
- Increase in asset value → Debit Asset Account, Credit Revaluation Account (gain)
- Decrease in asset value → Debit Revaluation Account, Credit Asset Account (loss)
- Increase in liability → Debit Revaluation Account, Credit Liability Account (loss)
- Decrease in liability → Debit Liability Account, Credit Revaluation Account (gain)
- Unrecorded asset → Debit Asset Account, Credit Revaluation Account (gain)
- Unrecorded liability → Debit Revaluation Account, Credit Liability Account (loss)
After all adjustments, the Revaluation Account is closed by transferring its balance to the old partners’ capital accounts in their old profit-sharing ratio.
Imaginary Balance Sheet: Before and After Revaluation
Let us take a simple example. A and B are partners sharing profits in the ratio 3:2. Their Balance Sheet as on 31st March 2024 is:
| Liabilities | Amount (Rs) | Assets | Amount (Rs) |
|---|---|---|---|
| Capital A | 1,00,000 | Land & Building | 80,000 |
| Capital B | 60,000 | Plant & Machinery | 50,000 |
| Creditors | 40,000 | Debtors | 30,000 |
| Cash | 40,000 | ||
| Total | 2,00,000 | Total | 2,00,000 |
They decide to admit C as a new partner on 1st April 2024. The following revaluations are agreed upon:
- Land & Building is to be appreciated by 25%
- Plant & Machinery is to be depreciated by 10%
- Debtors are to be valued at ₹28,000 (provision for doubtful debts)
- A liability of ₹5,000 for outstanding salary is to be recorded
Step 1: Calculate Revaluation Profit/Loss
Working Note 1: Revaluation of Assets and Liabilities
| Particulars | Old Value (Rs) | New Value (Rs) | Change (Rs) | Gain/Loss |
|---|---|---|---|---|
| Land & Building | 80,000 | 1,00,000 | +20,000 | Gain |
| Plant & Machinery | 50,000 | 45,000 | -5,000 | Loss |
| Debtors | 30,000 | 28,000 | -2,000 | Loss |
| Outstanding Salary (new liability) | 0 | 5,000 | +5,000 | Loss |
| Net Gain | +8,000 |
Step 2: Journal Entries for Revaluation
| Date | Particulars | L.F. | Debit (Rs) | Credit (Rs) |
|---|---|---|---|---|
| 2024 Apr 1 | Land & Building A/c Dr | 20,000 | ||
| To Revaluation A/c | 20,000 | |||
| (Being increase in value of Land & Building) | ||||
| Revaluation A/c Dr | 5,000 | |||
| To Plant & Machinery A/c | 5,000 | |||
| (Being decrease in value of Plant & Machinery) | ||||
| Revaluation A/c Dr | 2,000 | |||
| To Debtors A/c | 2,000 | |||
| (Being reduction in value of Debtors) | ||||
| Revaluation A/c Dr | 5,000 | |||
| To Outstanding Salary A/c | 5,000 | |||
| (Being unrecorded liability recorded) |
Step 3: Transfer Revaluation Profit to Partners’ Capital Accounts
Working Note 2: Distribution of Revaluation Profit
Old ratio of A and B = 3:2
Revaluation Profit = ₹8,000
A’s share = 8,000 × 3/5 = ₹4,800
B’s share = 8,000 × 2/5 = ₹3,200
| Date | Particulars | L.F. | Debit (Rs) | Credit (Rs) |
|---|---|---|---|---|
| 2024 Apr 1 | Revaluation A/c Dr | 8,000 | ||
| To A’s Capital A/c | 4,800 | |||
| To B’s Capital A/c | 3,200 | |||
| (Being revaluation profit transferred to partners’ capital accounts) |
Step 4: The Revaluation Account (Ledger) …
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