Revaluation of Assets and Liabilities

On the date a new partner is admitted, the firm's assets and liabilities are almost never still worth exactly what they were recorded at years earlier — a building may have appreciated, stock may have become partly obsolete, a debt once considered good may now look doubtful, or a liability may have quietly gone unrecorded. Because any such gain or loss relates entirely to the period BEFORE the new partner joined, it is fair that it belongs only to the OLD partners, in their OLD profit-sharing ratio — the incoming partner should neither benefit from a hidden gain he had no part in creating, nor be burdened with a hidden loss that occurred before he arrived. A Revaluation Account (sometimes called a Profit and Loss Adjustment Account) is opened specifically to capture this reassessment, kept entirely separate from the firm's ordinary trading profit or loss.

The Revaluation Account is written up exactly like a Nominal Account:

If the credit side of the Revaluation Account exceeds the debit side, the difference is a PROFIT on revaluation, transferred to the old partners' Capital Accounts (credited) in their old ratio. If the debit side exceeds the credit side, the difference is a LOSS on revaluation, transferred to the old partners' Capital Accounts (debited) in the same old ratio. The new partner's Capital Account is never touched by this entry at all — a point Andhra Pradesh Intermediate second-year Commerce students are frequently tested on directly, since it is easy to mistakenly include the new partner's share out of habit once a new ratio has already been calculated earlier in the same problem. …