Q.State the nature of Profit and Loss Adjustment Account.
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Start your 14-day free trial to unlock the full solution →The Profit and Loss Adjustment Account (= Revaluation Account) is a nominal account prepared only at reconstitution, to record revaluation gains/losses, and it is closed off every single time it is opened.
When a partnership firm is reconstituted — on admission of a new partner, or on retirement/death of an existing partner — the assets and liabilities appearing in the old Balance Sheet may no longer reflect their true current values. To bring them to their correct worth at the date of reconstitution, firms prepare an account that some textbooks/boards call the "Profit and Loss Adjustment Account" and others call the "Revaluation Account" — the two names refer to the exact same account and are used interchangeably.
Nature of this account:
- It is a nominal account in character — it records gains (appreciation in assets, reduction in liabilities) on the credit side and losses (depreciation in assets, increase in liabilities, unrecorded liabilities) on the debit side, exactly like a Profit & Loss type account.
- It is not a recurring/annual account — it is opened only on the specific date of reconstitution (admission/retirement/death), never prepared year after year like the regular Trading and Profit & Loss Account.
- It records only the assets and liabilities already appearing in the firm's books at their changed values — it does not affect the figures shown to outsiders in the old Balance Sheet; a fresh Balance Sheet is drawn up afterwards with the revised (revalued) figures. …
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