Adjustment for Revaluation of Assets and Liabilities

Whenever a partner exits a partnership, the books of accounts of such a firm have to be settled. The outgoing partner or his legal representatives have to be paid their dues. This means a revaluation of assets and liabilities must be done. Let us take a look at the accounting treatment.

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Adjustment for Revaluation of Assets and Liabilities

At the time of retirement or death of a partner, there may be some assets and liabilities which are not recorded in books at their current values. Also, there may be some unrecorded assets and liabilities which need to be recorded in the books.

A Revaluation Account is prepared in order to ascertain net gain or loss on revaluation of assets and liabilities and bringing unrecorded items into books. The Revaluation profit or loss is transferred to the capital account of all partners including retiring or deceased partners in their old profit sharing ratio.

The following Journal entries are passed:

1] For the increase in the value of Assets

Assets A/c (Individually) Dr.

To Revaluation A/c

(Being increase in the value of assets on revaluation)

2] For a decrease in the value of Assets

Revaluation A/c Dr.

To Assets A/c (Individually)

(Being decrease in the value of assets on revaluation)

3] For an increase in the value of Liabilities

Revaluation A/c Dr.

To Liabilities A/c (Individually)

(Being increase in the value of liabilities on revaluation)

4] For a decrease in the value amount of Liabilities

Liabilities A/c (Individually) Dr.

To Revaluation A/c

(Being decrease in the value of liabilities on revaluation)

5] For an unrecorded Asset

Assets A/c Dr.

To Revaluation A/c

(Being unrecorded asset recorded in books)

6] For an unrecorded Liability

Revaluation A/c Dr.

To Liability A/c

(Being unrecorded liability recorded in books)

7] For transferring Profit on Revaluation

Revaluation A/c Dr.

To All Partners’ Capital A/c (Individually)

(Being Profit on revaluation transferred to all partner’s capital A/c in old ratio)

8] For transferring Loss on Revaluation

All Partners’ Capital A/c (Individually) Dr.

To Revaluation A/c

(Being Loss on revaluation transferred to partner’s capital A/c in old ratio)

The partners may decide that the revalued figures of assets and liabilities will not appear in the books of the firm. In this case, the share of retiring or deceased partner of profit or loss from revaluation of assets and liabilities are adjusted in the remaining partners capital A/cs in their gaining ratio.

The journal entries that will be passed are:

9] In case of Revaluation Profit

Remaining Partners Capital A/c (Individually)                   Dr.

To Retiring Partners Capital A/c

(Being the share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio)

10]  In case of Revaluation Loss

Remaining Partners Capital A/c (Individually)                   Dr.

To Retiring Partners Capital A/c

(Being the share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio)

Solved Example for You

A, B and C are partners sharing profits in the ratio of 3:2:1 respectively. On 31^st March 2018, their Balance Sheet is as under:

Liabilities	Amt.	Assets	Amt.
Capital Accounts: A             150000		Buildings	100000
B            100000		Machinery	90000
C              50000	300000	Patents	70000
Reserve fund	40000	Debtors	60000
Sundry Creditors	50000	Stock	40000
		Cash	30000
Total	390000	Total	390000

C retires on the above date. It was agreed that Machinery is valued at Rs.1,05,000, Patents at Rs.65,000 and Buildings at Rs.1,20,000. Pass the necessary journal entries and prepare the Revaluation Account.

 Answer:

In the books of A, B, and C

Journal Entries

Date 2018	Particulars	L.F.	Amt. (dr.)	Amt. (cr).
Mar.31	Machinery A/c                                                  Dr.		15000
	Buildings A/c                                                    Dr.		20000
	To Revaluation A/c			35000
	(Being increase in the value of machinery and buildings)
Mar.31	Revaluation A/c                                                 Dr.		5000
	To Patents A/c			5000
	(Being decrease in the value of patents)
Mar.31	Revaluation A/c                                                 Dr.		30000
	To A’s Capital A/c			15000
	To B’s Capital A/c			10000
	To C’s Capital A/c			5000
	(Being profit on revaluation distributed in old ratio)

Revaluation A/c

Dr.                                                                                                                                                                                                     Cr.

Particulars	Amount	Particulars	Amount
To Patents A/c	5000	By Machinery A/c	15000
To A’s Capital A/c	15000	By Buildings A/c	20000
To B’s Capital A/c	10000
To C’s Capital A/c	5000
Total	35000	Total	35000