Q.Fill in the blank: Decrease in value of liabilities is firm's ________.
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🔒 Start your 14-day free trial to unlock the full solution →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.
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 | ... |
A decrease in the value of a liability reduces what the firm owes, so it is a gain (profit) for the firm. …
Answer: Profit (gain).
When the value of a liability decreases, the firm owes less, which is a gain. It is credited to the Revaluation Account (the liability account being debited). So a de …
Showing the 12 most recent of 64 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.At the time of the reconstruction of a partnership firm _____ is prepared.(a) Trading account(b) Revaluation account(c) Realisation account(d) Profit and loss appropriation account
›Reveal solutionSolution
A Revaluation Account is prepared at reconstitution of a partnership firm, so the answer is (b).
When a partnership is reconstituted (admission, retirement, death or change in ratio) the firm keeps running; only the values of its assets and liabilities are re-stated to their fair values. These changes are recorded in the Revaluation Account, and its profit or loss is shared among the old partners in the old r …
- CBSE 2026Set MARCH1 markMCQQ.Profit or loss of revaluation account is transferred to _____ account in _____ ratio.(a) Old partner, equal(b) All partners, new profit-loss sharing ratio(c) Old partners, sacrificing ratio(d) Old partners, old ratio
›Reveal solutionSolution
Profit or loss of the Revaluation Account is transferred to the old partners in the old ratio, so the answer is (d).
The revaluation of assets and liabilities reflects value changes that accrued while only the old partners were carrying on the business. Therefore the balancing profit or loss of the Revaluation Account is credited or debited t …
- CBSE 2026Set MARCH1 markQ.Unrecorded asset is ______ to revaluation account.
›Reveal solutionSolution
An unrecorded asset is credited to the Revaluation Account.
The Revaluation (Profit and Loss Adjustment) Account records the effect of re-valuing assets and liabilities when a firm is reconstituted (admission, retirement or death). By convention:
Item Treatment in Revaluation A/c Increase in asset / decrease in liability / unrecorded asset Credit (gain) Decrease in asset / increase in liability / unrecorded liability Debit (loss) … - CBSE 2026Set ANNUAL1 markQ.At the time of admission of a new partner, where is the value of the unrecorded liabilities transferred?
›Reveal solutionSolution
The value of unrecorded liabilities is transferred to the debit side of the Revaluation Account.
At admission, assets and liabilities are revalued. Bringing an unrecorded (previously omitted) liability into the books increases the firm's liabilities, which is a loss; therefore it is debited to the Revaluation Account. The net result of the Revaluation Account (profit or loss) i …
- CBSE 2026Set ANNUAL1 markQ.State whether True or False: Revaluation account is a real account.
›Reveal solutionSolution
The statement is False.
The Revaluation Account records increases and decreases in the values of assets and liabilities at the time of reconstitution and its balance (profit or loss) is transferred to the partners' capital accounts. Since it deals wit …
- CBSE 2026Set ANNUAL1 markMCQQ.On the admission of a new partner, decrease in value of assets is debited to:(a) Revaluation Account(b) Assets Account(c) Old Partners Capital Account(d) Profit and Loss Appropriation Account(a) Revaluation Account(b) Assets Account(c) Old Partners Capital Account(d) Profit and Loss Appropriation Account
›Reveal solutionSolution
A decrease in asset value on admission of a partner is debited to the Revaluation Account.
On admission of a new partner, the firm's assets and liabilities are revalued to their current/fair values because any gain or loss on this revaluation belongs only to the OLD partners (in their old profit-sharing ratio) — the incoming partner should not share in profits/losses that relate to the period before he joined.
To record this, a Revaluation Account (also called Profit and Loss Adjustment Account) is opened:
- Any INCREASE in the value of an asset, or DECREASE in a liability, is credited to the Revaluation Account.
- Any DECREASE in the value of an asset, or INCREASE in a liability, is debited to the Revaluation Account.
So a decrease in the value of an asset is recorded as:
Particulars Amount Revaluation A/c ... Dr xxx To Asset A/c xxx … - CBSE 2026Set ANNUAL1 markQ.What is Revaluation A/c?
›Reveal solutionSolution
Revaluation Account records the real (current) worth of assets/liabilities at the point a partner joins, retires, or dies, so that gains/losses accrued before that event are settled fairly among the old partners.
Over time, the book values of a firm's assets and liabilities (recorded historically) can drift away from their true current worth — a building may have appreciated, machinery may have depreciated faster than the books show, or a provision for doubtful debts may need revising. Whenever the firm is reconstituted — i.e., a partner is admitted, retires, or dies — it becomes necessary to restate these values to their fair figures before the new partner's share or the departing partner's settlement is worked out, so that nobody unfairly gains or loses from changes that happened while the old partners alone owned the business.
The Revaluation Account (sometimes called "Profit and Loss Adjustment Account") is the nominal account opened specifically for this purpose:
- It is debited with any decrease in the value of assets, and any increase in the value of liabilities (or a newly discovered/unrecorded liability).
- It is credited with any increase in the value of assets, and any decrease in the value of liabilities (or a newly discovered unrecorded asset). …
- CBSE 2026Set ANNUAL1 markMCQQ.State the Accounting treatment for unrecorded liability on admission of a partner.(a) Debited to Revaluation Account(b) Credited to Revaluation Account(c) Debited to Bank Account(d) Debited to Cash Account
›Reveal solutionSolution
An unrecorded liability found at the time of admission is debited to the Revaluation Account.
When a new partner is admitted, the firm revalues its assets and liabilities to their current, true worth through the Revaluation Account (also called Profit and Loss Adjustment Account), so that any gain or loss arising from items existing before admission is borne only by the OLD partners in their old profit-sharing ratio — not by the incoming partner.
An "unrecorded liability" is an actual obligation of the firm (e.g., an outstanding expense, a claim, or a bill) that was never entered in the books for some reason. When such a liability surfaces:
- The journal entry passed is: Revaluation A/c Dr. To Unrecorded Liability A/c …
- CBSE 2026Set ANNUAL1 markQ.Which account is debited when there is increase in PDD on admission of a partner ?
›Reveal solutionSolution
An increase in PDD on admission is debited to the Revaluation Account, since it represents an additional expected loss on debtors.
At the time of admission of a new partner, debtors are often revalued and the Provision for Doubtful Debts (PDD) is adjusted to reflect the current, more realistic estimate of bad debts. If the NEW (required) provision is HIGHER than the existing provision, this means the firm now expects more of its debtors to turn bad — an additional anticipated loss.
The journal entry passed is:
Revaluation A/c Dr. (with the increase in PDD)
To Provision for Doubtful Debts A/c
…
- CBSE 2025Set MARCH1 markMCQQ.Revaluation account is ______ type of account.(a) personal(b) nominal(c) real(d) temporary
›Reveal solutionSolution
Revaluation account records profit/loss on revaluation of assets and liabilities; being a profit-and-loss item account it is a nominal account. Correct option: (b).
In GSEB Class-12 Commerce Accountancy:
- The revaluation account is opened at admission/retirement to bring assets and liabilities to their current values. …
- CBSE 2025Set MARCH1 markMCQQ.At the time of reconstruction of a partnership firm ______ is prepared.(a) Trading account(b) Revaluation account(c) Realisation account(d) Profit and loss appropriation account
›Reveal solutionSolution
At reconstitution of a firm a Revaluation Account is prepared; a Realisation Account is only for dissolution. Correct option: (b).
In GSEB Class-12 Commerce Accountancy:
- Reconstruction/reconstitution = admission, retirement, death or change in profit-sharing ratio — the firm continues. …
- CBSE 2025Set MARCH1 markQ.Which is the other name known for the revaluation account?
›Reveal solutionSolution
Another name for the revaluation account is the Profit and Loss Adjustment Account.
In GSEB Class-12 Commerce Accountancy (reconstitution of a firm):
- The account opened to record increases/decreases in the value of assets and liabilities at admission/retirement is the Revaluation Account. …
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