Book-Keeping and Accountancy · Ch 3 — Reconstitution of Partnership (Admission of Partner)
Revaluation of Assets and Liabilities
Revaluation of Assets and Liabilities
By the date a new partner is admitted, the book values of many assets and liabilities may no longer reflect their true current worth — a building bought years ago may now be worth much more, while a debt once thought fully recoverable may have become doubtful. Since the new partner will share in profits calculated on these assets and liabilities going forward, they must first be revalued to their true current worth, and any resulting profit or loss must be settled among the OLD partners only, since it relates entirely to the period before the new partner joined.
Revaluation Account
A nominal account opened at the time of admission (or any reconstitution) to record the increase or decrease in the value of assets and liabilities, the net result of which (profit or loss on revaluation) is transferred to the OLD partners' capital accounts in their OLD profit-sharing ratio.
Rules for recording entries in the Revaluation Account
| Change | Effect on Revaluation A/c |
|---|---|
| Increase in the value of an asset | Credit (gain) |
| Decrease in the value of an asset | Debit (loss) |
| Increase in the amount of a liability | Debit (loss) |
| Decrease in the amount of a liability | Credit (gain) |
| An unrecorded asset now brought into the books | Credit (gain) |
| An unrecorded liability now brought into the books | Debit (loss) |
If the Credit side total exceeds the Debit side total (before transferring the balancing figure), the difference is a Profit on Revaluation, transferred to the credit of each old partner's Capital Account in the old ratio. If the Debit side exceeds the Credit side, the difference is a Loss on Revaluation, transferred to the debit of each old partner's Capital Account in the old ratio.
Worked illustration. On admission of a partner, Furniture is appreciated by ₹8,000, and an unrecorded liability of ₹3,000 for an outstanding electricity bill is now brought into the books. The two old partners, M and N, share profits equally.
Revaluation Account
| Dr. | Amount (₹) | Cr. | Amount (₹) |
|---|---|---|---| …
A nominal account opened on reconstitution to record the increase or decrease in the value of assets and liabilities; its net balance (profit or loss) is transferred to the old partners' …