REVALUATIONOF ASSETS AND LIABILITIES

and
Whena new partneris admittedin a firm, he acquires right over the assets
liabilitiesof the firm. In other words, he becomes the owner of the assets of the
businessand is responsiblefor the liabilities of the business. Hence, the new partner
proposesto assess the financial position of the partnership.
It is proper for both the new and the old partners to revalue the assets and
liabilitiesof the businessat the time of admissionof a new partner. New partner is in
the positionof a buyer and the old partner is in the position of a seller. If the actual
valueof the assetsis more than the value appearing in the books, then it will lead to
capitalprofitsand the new partner will also become entitled to share in it. This will be
unjustifiedfor the old partners, because this profit belongs to them only. Under this
situationit will be favourable for the old partners to bring the assets to their true value
before the admission of the new partner. Similarly, reduction in liabilities,due to
revaluation, will also be beneficial for the old partners. Revaluation of assets &
liabilitiesis also beneficial for the new partner.M the true value of assets are less or the
liabilitiesare more than before, then this loss will have to be shared by him after
admission,if true values are not brought in books. If revaluation is done then the new
partnercan safeguard himself from such losses.
On the basis of above it is clear that new and old partnerseveryonewish to
revaluethe assets and liabilitiesat the time of admission.
Note : When a partner retires or there is any change in the partnership, then also the asseß
and liabilitiesare revalued.
• Revaluation Account
At the time of admission or retirement,it becomes necessary to
assets and liabilities in the books of the firm. To give effect to it, an revalue
the
VRevaluation• Account is opened in the books of the firm. This account
known as 'Profit and Loss AdjustmentA/c' as revaluation of assets and liabilities
capital profit or loss.
Due to tevaluation the effectof changes in the value of assets and liabilities
tvfiected in the balance sheet of the firm. In other words new balance sheet is
after the adjustment of revaluation of assets and liabilities with new revaluedprepared
values
Accounting treatment in case of Revaluation :
(i) Fim suffets loss when the value of assets reduce, liabilities increaseand
reserves are created. Therefore, Revaluation Account is debited and
aset account, liability account and the reserve account is credited.
(ii) As opposed to this when the value of assets increase, liabilities decreaseor
reserves are reduced, then it results in the profits for the firm. In thiscase
the Revaluation Account is credited and the respective asset account,
liability account and the reserveaccount is debited.
(iii) After making all entries in the Revaluation Account, the accountis
balanced, which shows either the profit or loss. This is a nominal account.
The balance is transferredto Partners' Capital Account in profit and loss
sharing ratio, this way this account is closed.
Journal Entries for Revaluation
Transaction Journal Entries
1. Increase in the value of asset Assets (Name) A/c Dr.
To Revaluation A/c
(Increasein the value of asset)
2. Decrease in the value of asset Revaluation A/c Dr.
To Assets (Name) A/c
(Decreasein the value of asset)
3. Decrease in the liabilities Liabilities A/c (Name)
To Revaluation A/c
(Decrease in liabilities)
4. Increase in the liabilities
Revaluation A/c
To Liabilities A/c (Name)
(Increase in liabilities)
5. Loss on revaluation
Old Partners' Capital A/c Dr.
To Revaluation A/c
(Loss on revaluationhansfen•edto partners)
6. Profiton revaluation
Revaluation A/c Dr.
To Old Partners' Capital NC
(Profiton revaluation
distributed to partners)
Note : Ifgoodwill already
exists in the books, then
be revalued and shown in goodwill alongwith other assets can
the Revaluation
Account.
Dr. Effects on Increase or Decrease on RevaluationAccount Cr.
Debit Items (Losses) Credit Items (Gains)
1. Decrease in value of assets 1.Increase in value of assets
2. Incæase in value of liabilities 2, Decrease in value of liabilities
3. Incæase in Reserves 3. Decrease in Reserves
Increase in provision for
Increase in provision for discount
doubtful debts
allowed
Decrease in provision for
Decrease in provision for doubtful
discountreceived debts
Decrease in provision for Increase in provision for discount
discount allowed received
4. Recording unrecorded liabilities 4. Recording unrecordedassets
Note : (1) Difference between the two sides shows profits or loss. If debit total is more
then the difference is loss and if credit total is more than the differenceif
profit.

(2) This profit or loss is transferred to old partners in old ratio to partners'
capital or partners' current account.
(3) When debit side is more the difference (i.e. loss) is transferredto debit side
of partners' capital account and when credit side is more then the
difference (i.e. profit) is credit side of capital account.
 X and Y are partners sharing profitsand losses in the ratio of 3 : 1. They
decided to admit Z as a new partnerfor 1/5thshare. On Z's admissionassetsand
liabilitieswere revalued as under:
(1) Machine of 12,000 was depreciatedby 15%.
(2) Value of stocks in books 6,000 was increasedto 7,500.
(3) Create a provision for doubtful debts @10% on debtorsof 8,000.
(4) Create a provision for discount on creditors@ 6% on creditorsof 5,000.
(5) Unrecorded furniture of 2,000 is to be recorded.
Prepare Revaluation Account.
Dr. Revaluation A/c Cr.
Particulars Amount Particulars Amount
To Machinery 1,800 By Stock 1,500
To Reserve for Bad debts 800 By Reserve for discount
To Partner's Capital AS on creditors 300
x 900 By Furniture A/c 2.000
300 1,200 (unrecorded assets)
3,800 3,800
 and Liabilities of the fin-n
A and B are partners in the ratio of 2 : 1. Assets
Debtors 2,000 ; stock 5,000 ; Building 8,000 and Creditors 8,000. on
admission of C they decide to create a reserve for doubtful debts at 3% on debtors,to
increase the value of building by 1, 100 and to create reserve for discount on creditors
at 2%. The marketvalue of stock is detemined at 5,500.
You are required to prepare Revaluation A/c.