Accountancy · Ch 3 — Reconstitution of a Partnership Firm — Admission of a Partner
Revaluation of Assets and Reassessment of Liabilities
Revaluation of Assets and Reassessment of Liabilities
When a new partner is admitted, the existing partners must ensure that the firm’s assets and liabilities are recorded at their current, realisable values. Over the years, assets may be undervalued or overvalued in the books, and liabilities may be overstated or understated. There may also be assets or liabilities that have never been recorded at all. To correct all these, the firm prepares a Revaluation Account (also called a Profit & Loss Adjustment Account).
The purpose is simple: any gain or loss from revaluation belongs to the old partners, because it relates to the period before the new partner joined. The new partner should neither benefit from hidden reserves nor suffer from hidden losses that existed before his admission.
How the Revaluation Account Works
The Revaluation Account is a nominal account. It is credited with gains and debited with losses. The net balance — profit or loss — is transferred to the old partners’ capital accounts in their old profit-sharing ratio.
Gains (credit entries in the Revaluation Account) arise from:
- An increase in the value of an asset
- A decrease in the amount of a liability
- Recording an unrecorded asset
Losses (debit entries in the Revaluation Account) arise from:
- A decrease in the value of an asset
- An increase in the amount of a liability
- Recording an unrecorded liability
Journal Entries for Revaluation
The textbook gives eight standard journal entries. Each is recorded only for the amount of change — not the full book value.
| Entry | Transaction | Debit | Credit |
|---|---|---|---|
| (i) | Increase in value of an asset | Asset A/c Dr. | To Revaluation A/c |
| (ii) | Decrease in value of an asset | Revaluation A/c Dr. | To Asset A/c |
| (iii) | Increase in amount of a liability (loss) | Revaluation A/c Dr. | To Liability A/c |
| (iv) | Decrease in amount of a liability (gain) | Liability A/c Dr. | To Revaluation A/c |
| (v) | Unrecorded asset discovered | Asset A/c Dr. | To Revaluation A/c |
| (vi) | Unrecorded liability discovered | Revaluation A/c Dr. | To Liability A/c |
| (vii) | Transfer of net gain (credit balance) | Revaluation A/c Dr. | To Old Partners’ Capital A/cs (individually, in old ratio) |
| (viii) | Transfer of net loss (debit balance) | Old Partners’ Capital A/cs Dr. (individually, in old ratio) | To Revaluation A/c |
Entries (i) through (vi) are recorded with the amount of increase or decrease, not the full value. For example, if an asset was ₹10,000 and is revalued to ₹12,000, you debit the asset by ₹2,000 only.
Key Points to Remember
- The Revaluation Account is a temporary account. Its balance is always closed by transfer to the old partners’ capital accounts.
- The new partner does not share in revaluation profit or loss — it belongs entirely to the old partners in their old ratio.
- Unrecorded assets are credited to Revaluation Account; unrecorded liabilities are debited. …