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.

Browse more Topics under Admission Of A Partner

• Reconstitution of a Partnership Firm
• Adjustment of Capital and Change in Profit Sharing Ratio Among Existing Partners
• Goodwill

Learn more about Financial statement here in detail

Revaluation Account

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