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Accountancy > Admission of a Partner > Adjustment and Revaluation of Assets
Admission of a Partner

Adjustment and Revaluation of Assets

Before we introduce a new partner to the partnership firm, we must ensure all the assets and liabilities are valued correctly. So just prior to introducing a new partner revaluation account is made and subsequent adjustments are made in books of accounts. Let us take a look.

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Adjustment and Revaluation of Assets

At the time of admission of a new partner, the assets are re-valued and liabilities are reassessed. The assets are re-valued and liabilities are reassessed so that:

  • The assets are overstated or understated are revalued.
  • The liabilities are brought in the books at their correct values
  • Unrecorded assets and liabilities of the firm are brought into the books of the firm
  • The actual position of the firm is calculated.
  • Profit and loss arriving on account of such revaluation up to the date of admission of a new partner may be adjusted in the partner’s capital accounts in their old profit sharing ratio.

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Learn more about Financial statement here in detail

Revaluation Account

Revaluation

For this purpose, the firm has to prepare the Revaluation Account. In this account:

  • An increase in the assets and decrease in its liabilities is credited because it is gain,
  • A decrease in the value of assets and increase in its liabilities is debited because it is a loss,
  • Unrecorded assets are credited, and
  • Unrecorded liabilities are debited.

If the account finally shows a credit balance then it indicates net gain and if there is a debit balance then it indicates the net loss. Profit or loss will be transferred to the capital accounts of the old partners in old ratio.

Journal Entries

The journal entries recorded for revaluation of assets and reassessment of liabilities are as follows:

For an increase in the value of an asset: 

Asset A/c Dr.
To Revaluation a/c  

For a decrease in the value of a liability:

Liability A/c Dr.
To Revaluation a/c  

For a decrease in the value of an asset:

Revaluation A/c Dr.
To Asset a/c  

 For an increase in the value of a liability:

Revaluation A/c Dr.
To  Liability a/c  

  For an unrecorded asset:

Asset A/c Dr.
To  Unrecorded asset a/c  

For an unrecorded liability:

Revaluation A/c Dr.
To  Unrecorded Liability a/c  

The profit on revaluations will be transferred to old partners’ capital accounts in the old profit sharing ratio:

Revaluation A/c Dr.
To  Old partners Capital a/c’s  

The loss on revaluations will be transferred to old partners’ capital accounts in the old profit sharing ratio:

Old partners Capital a/c’s Dr.
To  Revaluation A/c  

Solved Example for You

Q: Following is the Balance Sheet of Suhani and Sonia who share profits in the ratio of 3:2.

Balance Sheet of A and B as on April 1, 2018

Liabilities Amount Assets Amount
Capital:  Plant & machinery 30000
Suhani 30000 Furniture 20000
Sonia 20000 Sundry Debtors 20000
Sundry Creditors 50000 Stock 20000
Cash in hand 10000
100000 100000

On that date Keshav is admitted into the partnership on the following terms:

  1. Keshav is to bring in Rs. 10,000 as capital and Rs. 5,000 as a premium for goodwill for 1/6 share.
  2. The value of a stock is reduced by 10% while plant and machinery are appreciated by 10%.
  3. Furniture is revalued at Rs. 15,000.
  4. A provision for doubtful debts is to be created on sundry debtors at 5% and Rs. 1000 is to be provided for an electricity bill.
  5. Investment worth Rs. 5,000 (not mentioned on the balance sheet) is to be taken into account
  6. A creditor of Rs. 2000 is not likely to claim his money and is to be written off.

Record journal entries and prepare revaluation account and capital account of partners.

Solution:

Books of A, B, and C

Date Particulars L.F Amount Amount
April 01 Cash a/c Dr. 15000
To Keshav’s Capital a/c 10000
To Goodwill 5000
(Cash brought in by Keshav as capital and goodwill)
April 01 Goodwill a/c Dr. 5000
To Suhani’s Capital A/c 3000
To Sonia’s Capital A/c 2000
(Goodwill divided between Suhani and Sonia in sacrificing ratio 3:2)
April 01 Revaluation a/c Dr. 2000
 To Stock A/c 2000
 (Revaluation in the value of assets )
April 01 Revaluation a/c Dr. 5000
To Furniture 5000
(Revaluation in the value of assets)
April 01 Revaluation a/c Dr. 1000
To Provision for Doubtful Debt A/c 1000
(Revaluation in the value of assets)
April 01 Plant and Machinery A/c Dr. 3000
 Investment A/c Dr. 5000
To Revaluation A/c 8000
(Increase in the value of assets on revaluation)
April 01 Revaluation A/c Dr. 1000
To Outstanding Electricity A/c 1000
(Amount provided for outstanding electricity bill)
April 01 Sundry Creditors A/c Dr. 2000
To Revaluation a/c 2000
(Amount not likely to be claimed by the creditors written off)
April 01 Revaluation A/c Dr. 1000
To Suhani’s Capital A/c 600
To Sonia’s Capital A/c 400
(Profit on revaluation of assets and re-assessment of liabilities transferred to Suhani and Sonia in old profit sharing ratio)


Revaluation Account

Particulars Amount (Rs.) Particulars Amount (Rs.)
Stock

Furniture

Provision for Doubtful Debts

Outstanding electricity bill

Profit on Revaluation transferred to:

Suhani’s Capital

Sonia’s Capital

2000

5000

1000

1000

 

 

600

400

Plant And Machinery

Investments

Sundry Creditors

 

3000

5000

2000

 

10000   10000

 

Partner’s Capital Accounts

Date 2018 Particulars Suhani Sonia Keshav Date 2018 Particulars Suhani Sonia Keshav
April 01 Balance c/d 33600 22400 15000 April 01 Balance b/d 30000 20000
  Cash 15000
  Goodwill 3000 2000
  Revaluation (Profit) 600 400
    33600 22400 15000     33600 22400 15000

 

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Kanaka
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Kanaka

to transfer deceased partner share to his legal heirs will it attract stamp duty

Raghavendra Bhat
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Raghavendra Bhat

We have a partnership firm with three partners without any immovable property. Our partnership ratios are 46%, 34% and 20%. The partnership is at will. Now the 34% partner has decided to move on without any immovable property. Retirement Deed has been signed too and the goodwill amount is already paid. This results in Reconstitution of the firm including the retirement of a partner and change in the partnership ratio of the two continuing partners (74% and 26% respectively). Do we need to submit two different Form 5s to the Registrar of Firms (along with the deed of retirement)?

Samyak
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Samyak

Is goodwill of firm distributed among existing partners without any admission retirement or death??

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