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.

When a firm revalues its assets and liabilities, the revised figures appear in the new Balance Sheet prepared immediately after revaluation. The Revaluation Account itself is a temporary account — it records the net increase or decrease in the value of assets and liabilities, and the resulting profit or loss is transferred to the partners’ capital accounts. After that, the Revaluation Account is closed.

The revised values of assets and liabilities are shown in the new Balance Sheet at their revalued amounts, not at the old book values. Any asset not revalued continues at its original book value.

Below is an imaginary Balance Sheet to illustrate this.

Imaginary Balance Sheet of A & B (after revaluation)

as at 31st March 2024

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.

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:

They decide to admit C as a new partner on 1st April 2024. The following revaluations are agreed upon:

1. Land & Building is to be appreciated by 25%
2. Plant & Machinery is to be depreciated by 10%
3. Debtors are to be valued at ₹28,000 (provision for doubtful debts)
4. 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

Step 2: Journal Entries for Revaluation

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

Step 4: The Revaluation Account (Ledger) …