Revaluation Account Explained: Format, Journal Entries & Practical Problem (Retirement of Partner)

 Retirement or Death of a Partner - Reserves and Accumulated Profits/Losses (With Practical Problem)

Reserves and Accumulated Profit or Loss. In the Balance Sheet of a partnership firm, accumulated profits may appear as:

1. General Reserve
2. Credit balance of Profit & Loss Account
3. Any other specific reserve created for a purpose

Why are these distributed on retirement?

Because the retiring partner is also entitled to his share of undistributed profits or reserves to the extent, they are free of any liability. Similarly, accumulated losses must also be borne by all partners in their profit-sharing ratio.

Journal Entries

• For distributing reserves and accumulated profits

General Reserve A/c Dr.  

Profit & Loss A/c (Cr. balance) Dr.  

Workmen Compensation Reserve A/c Dr.  

        To All Partners’ Capital A/c's (Individually)

• For writing off accumulated losses (e.g., Profit & Loss A/c having a debit balance)

All Partners’ Capital A/c's Dr.  

        To Accumulated Loss A/c

Illustration - X, Y and Z are partners sharing profits and losses in the ratio 3 : 2 : 1. Z retires on 1 April 2016. On that date, the following balances appear:

• General Reserve – ₹90,000
• Profit & Loss Account (Dr. balance) – ₹15,000
• Workmen Compensation Reserve – ₹12,000 (no longer required)

Pass the Journal Entries for the adjustments.

Solution

Journal

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
2016 April 1	General Reserve A/c Dr.		90,000
	To X’s Capital A/c			45,000
	To Y’s Capital A/c			30,000
	To Z’s Capital A/c			15,000
	(Being General Reserve distributed among partners)
April 1	X’s Capital A/c Dr.		7,500
	Y’s Capital A/c Dr.		5,000
	Z’s Capital A/c Dr.		2,500
	To Profit & Loss A/c			15,000
	(Being accumulated loss transferred to partners’ capital accounts)
April 1	Workmen Compensation Reserve A/c Dr.		12,000
	To X’s Capital A/c			6,000
	To Y’s Capital A/c			4,000
	To Z’s Capital A/c			2,000
	(Being unrequired WCR distributed among partners)

Retirement or Death of a Partner - Accounting Treatment of Goodwill (With Practical Problem)

Accounting Treatment of Goodwill

At the time of retirement or death of a partner, an adjustment for goodwill becomes necessary. The value of goodwill is calculated as given in the partnership deed.

Why is this adjustment required?

The retiring or deceased partner is entitled to his share of goodwill, because goodwill represents the reputation and earnings of the firm built during the period when he was also a partner.

Journal Entries

Step 1 — Write off Existing Goodwill (if appearing in the Balance Sheet)

All Partners’ Capital A/c's Dr.  (In Old Ratio)

        To Goodwill A/c

Step 2 — Credit Outgoing Partner for His Share of Goodwill (Without opening the Goodwill Account)

Continuing Partners’ Capital A/c's Dr.  (In Gaining Ratio)

        To Outgoing Partner’s Capital A/c   (Share of Goodwill)

Illustration - Surender, Ramesh, Naresh and Mohan are partners sharing profits in the ratio 2 : 1 : 2 : 1.

On Naresh’s retirement, goodwill is valued at ₹72,000. The continuing partners — Surender, Ramesh and Mohan — decide to share future profits equally. Pass the adjustment entry for goodwill without opening the Goodwill Account. (Show clear working notes.)

Solution

Journal Entry

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
—	Ramesh’s Capital A/c Dr.		12,000
	Mohan’s Capital A/c Dr.		12,000
	To Naresh’s Capital A/c			24,000
	(Being adjustment for goodwill through partners’ capital accounts)

Working Note

Naresh’s Share of Goodwill

Old share = 2/6

Goodwill value = ₹72,000

Naresh’s Share=72,000×2/6= ₹ 24,000

This amount will be borne by continuing partners in their gaining ratio.

Calculation of Gaining Ratio - Gain = New Share - Old Share

Partner	New Share	Old Share	Gain / Sacrifice	Gaining Ratio
Surender	1/3	2/6 (=1/3)	0	—
Ramesh	1/3	1/6	1/6 (Gain)	1 : 1
Mohan	1/3	1/6	1/6 (Gain)

Ramesh and Mohan gain equally, so Naresh’s goodwill share of ₹24,000 is divided equally:

• Ramesh’s Capital A/c Dr. = ₹12,000
• Mohan’s Capital A/c Dr. = ₹12,000

Hidden Goodwill

If the firm settles the retiring partner’s dues by paying a lump-sum amount, then:

Share of Goodwill

Share of Goodwill = Amount Paid - Adjusted Capital

Example

A, B, and C are partners. B retires. After all adjustments, B’s capital stands at ₹1,28,000. A and C agree to pay him ₹1,50,000 in full settlement.

B’s Share of Goodwill =1,50,000 - 1,28,000= ₹ 22,000

Journal Entry

A’s Capital A/c Dr.  

C’s Capital A/c Dr.     (₹22,000 in gaining ratio)  

        To B’s Capital A/c     ₹22,000

Retirement of a Partner - Revaluation of Assets and Reassessment of Liabilities

Why is Revaluation Necessary?

At the time of retirement or death of a partner, the firm must revalue its assets and liabilities.

This is done so that:

1. The retiring partner receives his correct share of any increase in the value of assets or decrease in liabilities.
2. The retiring partner bears his share of any decrease in the value of assets or increase in liabilities.
3. He should neither be at an advantage nor disadvantage due to changes in values that occur after retirement.

Timeline Illustration

Date	Partners	Land Value
1 Jan 2017	X & Y	₹2,00,000
1 Jan 2019	X, Y & Z	₹5,00,000
1 Jan 2020	X & Y (Z retires)	₹8,00,000

Z should get credit for the increase that occurred while he was a partner.

How is Revaluation Done?

To adjust asset and liability values, the firm prepares a Revaluation Account (or Profit & Loss Adjustment Account), similar to the process followed at the time of admission of a partner.

Proforma of Revaluation Account

Revaluation Account

Particulars	Amount (₹)	Particulars	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 Loss transferred to Old Partners’ Capital A/c's (in old PSR)	…	By Profit transferred to Old Partners’ Capital A/c's (in old PSR)	…

Note: Profit or loss—only one will appear.

Important Points

1. Profit on revaluation → Credited to partners’ capital accounts.
2. Loss on revaluation → Debited to partners’ capital accounts.
3. All adjustments are made in the old profit-sharing ratio.
4. Revised values appear in the new Balance Sheet.

Illustration Mitali, Indu and Geeta share profits in the ratio 3 : 2 : 1. Balance Sheet as on 31-03-2015:

Balance Sheet

Liabilities

• Sundry Creditors – ₹55,000
• Reserve Fund – ₹30,000
• Capital Accounts:
• Mitali – ₹1,50,000
• Indu – ₹1,25,000
• Geeta – ₹75,000
• Total Liabilities – ₹4,35,000

Assets

• Goodwill – ₹25,000
• Buildings – ₹1,00,000
• Patents – ₹30,000
• Machinery – ₹1,50,000
• Stock – ₹50,000
• Debtors – ₹40,000
• Cash – ₹40,000
• Total Assets – ₹4,35,000

Additional Information

• Geeta retires on 31-03-2015.

Revaluation adjustments:

• Machinery valued at ₹1,40,000 (↓ ₹10,000)
• Patents valued at ₹40,000 (↑ ₹10,000)
• Buildings valued at ₹1,25,000 (↑ ₹25,000)

Revaluation Account

Liabilities / Expenses	Amount (₹)	Assets / Gains	Amount (₹)
To Machinery (Decrease)	10,000	By Patents (Increase)	10,000
		By Buildings (Increase)	25,000
To Profit transferred to:
– Mitali’s Capital A/c	12,500
– Indu’s Capital A/c	7,500
– Geeta’s Capital A/c	5,000
Total	35,000	Total	35,000

Journal Entries

Books of Mitali and Indu

Date	Particulars	L.F.	Dr (₹)	Cr (₹)
31-03-2015	Revaluation A/c Dr.		10,000
	To Machinery A/c			10,000
	(Decrease in value of machinery)
31-03-2015	Patents A/c Dr.		10,000
	Buildings A/c Dr.		25,000
	To Revaluation A/c			35,000
	(Increase in value of patents and buildings)
31-03-2015	Revaluation A/c Dr.		25,000
	To Mitali’s Capital A/c			12,500
	To Indu’s Capital A/c			7,500
	To Geeta’s Capital A/c			5,000
	(Profit on revaluation transferred to partners’ capital accounts in old ratio)

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