Q.Decrease in liability is a ________. (Gain/Loss)

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 Proforma (Format) of Revaluation Account

Here is the standard format as per NCERT Class 12 Accountancy: