Admission of Partner -Revaluation of Asset and Liabilities - Revaluation Account

Revaluation of Assets and Reassessment of Liabilities

Revaluation of assets and reassessment of liabilities becomes necessary in the following situations:

1. At the time of admission of a new partner
2. At the time of retirement or death of an existing partner
3. When the profit-sharing ratio among partners changes
4. Whenever it is desirable to present the true and fair value of assets and liabilities

Why is Revaluation Necessary?

Revaluation ensures that all assets and liabilities are brought to their correct and updated values. This prevents the incoming or outgoing partner from gaining an unfair advantage or suffering a disadvantage due to outdated book values.

How is Revaluation Done?

The increase or decrease in the value of assets and liabilities is recorded through the Revaluation Account (also known as the Profit & Loss Adjustment Account).

Key Points

1. All increases or decreases in the value of assets and liabilities are recorded in the Revaluation Account.
2. Any profit or loss arising from revaluation is transferred to the old partners’ capital accounts in their old profit-sharing ratio, since they are the ones entitled to such adjustments.

Revaluation Account (Proforma)

Revaluation Account

Particulars Dr.	Amount	Particulars Cr.	Amount
To Decrease in Value of Assets	……	By Increase in Value of Assets	……
To Increase in Value of Liabilities	……	By Decrease in Value of Liabilities	……
To Unrecorded Liabilities	……	By Unrecorded Assets	……
To Gain (Profit) transferred to the Old Partners’ Capital Accounts (in the old profit-sharing ratio) *	……	By Loss transferred to the Old Partners’ Capital Accounts (in the old profit-sharing ratio) *	……
	———		———

*Either of the two will appear (Profit or Loss).

Revaluation Account (Purpose)

A Revaluation Account is prepared to record:

1. Increase or decrease in the value of assets
2. Increase or decrease in the value of liabilities
3. Any unrecorded assets or liabilities

The resulting profit or loss is transferred to the old partners’ capital accounts in the old profit-sharing ratio.

How the Proforma Works

Debit Side (Dr.)

Recorded when the firm suffers a loss due to revaluation:

1. Decrease in value of assets
2. Increase in liabilities
3. Unrecorded liabilities
4. Transfer of profit (if any) to old partners (only one of profit/loss appears)

Credit Side (Cr.)

Recorded when the firm gains due to revaluation:

1. Increase in value of assets
2. Decrease in liabilities
3. Unrecorded assets
4. Transfer of loss (if any) to old partners

Revaluation Example 

Balance Sheet of Karan & Varun as on 31st March, 2022

Liabilities	Amount	Assets	Amount
Capital – Karan	90,000	Building	1,20,000
Capital – Varun	60,000	Machinery	70,000
Creditors	40,000	Furniture	18,000
		Stock	30,000
		Debtors	22,000
		Cash	10,000
Total	1,90,000	Total	1,90,000

Revaluation Adjustments

Item	Old Value (₹)	New Value (₹)	Increase/Decrease (₹)
Building	1,20,000	1,50,000	+30,000
Machinery	70,000	60,000	–10,000
Stock	30,000	35,000	+5,000
Furniture	18,000	15,000	–3,000
Unrecorded Asset	—	4,000	+4,000
Unrecorded Liability	—	2,500	–2,500

Journal Entries

Date	Particulars	L.F.	Dr Amount (₹)	Cr Amount (₹)
1 Apr 2022	Bank A/c Dr.		80,000
	To Rohan’s Capital A/c			80,000
	(Being capital brought in)
	Revaluation A/c Dr.		10,000
	To Machinery A/c			10,000
	(Decrease in Machinery)
	Revaluation A/c Dr.		3,000
	To Furniture A/c			3,000
	(Decrease in Furniture)
	Revaluation A/c Dr.		2,500
	To Outstanding Liability A/c			2,500
	(Unrecorded liability recorded)
	Building A/c Dr.		30,000
	Stock A/c Dr.		5,000
	To Revaluation A/c			35,000
	(Increase in assets)
	Unrecorded Asset A/c Dr.		4,000
	To Revaluation A/c			4,000
	(Unrecorded asset added)

Revaluation Profit Calculation

Particulars	Amount (₹)
Total Increases	30,000 + 5,000 + 4,000 = 39,000
Total Decreases	10,000 + 3,000 + 2,500 = 15,500
Net Profit	23,500

Profit shared in old ratio (2: 1):

• Karan = 23,500 × 2/3 = 15,667
• Varun = 23,500 × 1/3 = 7,833

Date	Particulars	Dr Amount (₹)	Cr Amount (₹)
	Revaluation A/c Dr.
	To Karan’s Capital A/c		15,667
	To Varun’s Capital A/c		7,833
	(Profit transferred to old partners)

Revaluation Account

Revaluation Account	Dr Amount (₹)	Cr Amount (₹)
To Machinery (Decrease)	10,000	By Building (Increase)
To Furniture (Decrease)	3,000	By Stock (Increase)
To Unrecorded Liability	2,500	By Unrecorded Asset
To Karan’s Capital A/c	15,667
To Varun’s Capital A/c	7,833
Total	39,000	Total

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