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Admission of a New Partner

Revaluation Account

At the time of admission of a new partner, we need to revalue the existing assets and liabilities and thus, prepare the revaluation account. The value of assets may be different from its book value because, with time, the value of some assets increases while that of some decreases. Also, the value of liabilities may be different from their book values. Also, there must be some assets or liabilities that are not recorded in the books need to be recorded.

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Revaluation Account

Revaluation account or profit and loss adjustment account are the same.

We need to bring the value of assets and liabilities to their current values otherwise the incoming partner may have an advantage because of the change in values.

  • Credit the increase in the value of assets or decrease in the number of liabilities to revaluation account, being profit.
  • Debit the decrease in value of assets or increase in the number of liabilities to revaluation account, being a loss.
  • The difference between the two sides of the revaluation account is either profit or loss.

Revaluation account

If the credit side is more than debit side there is profit and if the debit side is more than the credit side there is a loss.

Transfer the Profit or loss of revaluation account to the partners capital accounts (old partners account)  in their old profit sharing ratio.

Understand the concept of New Profit Sharing Ratio here in detail.

There are two ways to revalue assets and liabilities:

1. Assets and Liabilities may appear in books at revised values.

2. Assets and Liabilities may appear at old values in books.

1. When assets and liabilities appear in the books at revised values.

Accounting entries are:

Date Particulars   Amount (Dr.) Amount (Cr.)
1. Increase in value of assets Assets a/c Dr.
To Revaluation a/c
(Being value of assets increased)
2. A decrease in value of assets Revaluation a/c Dr.
To Assets a/c
(Being value of assets decreased)
3. Increase in the number of liabilities Revaluation a/c

 

Dr.
To Liabilities a/c
(Being increase in liabilities)
4. A decrease in the amount of liabilities Liabilities a/c

 

Dr.
To Revaluation a/c
(Being decrease in liabilities)
5. Unrecorded assets Unrecorded assets a/c Dr.
To Revaluation a/c
(Being unrecorded asset now recorded)
6. Unrecorded liabilities Revaluation a/c

 

Dr.
To Unrecorded liabilities a/c
(Being unrecorded liability now recorded)
7. Revaluation profit Revaluation a/c Dr.
To partners capital a/c
(Being profit transferred to partners capitals accounts)
8. Revaluation loss Partners capital a/c Dr.
To revaluation a/c
(Being loss transferred to partners capital accounts)

Revaluation  Account

Particulars Amount Particulars Amount
To Decrease in assets By Increase in assets
To Increase liabilities By Decrease in liabilities
To Unrecorded liabilities By Unrecorded assets
To Profit transferred to old partners capital accounts By Loss transferred to old partners capital accounts

When we prepare the Revaluation a/c, we show the assets and liabilities at their revised values in the balance sheet.

2. When assets and liabilities are to appear in the books at old values.

The partners may decide that the value of assets and liabilities will continue to appear in the books at their existing values. In such a case, we record an increase or decrease in the number of assets and liabilities in the Memorandum Revaluation Account.

This account has two parts:

  1. The first part is much alike the revaluation account. Thus, we transfer the balance of the first part to old partners capital accounts in their old ratio.
  2. In the second part, we reverse the entries of the first part.

Thus, if the first part shows a profit than the second part will show loss and vice versa.

We now transfer the profit or loss in the second part to all the partners capital account including the new partner in their new profit sharing ratio.

Solved Example on Revaluation Account

A and B were partners sharing profits equally. Their balance sheet as at 31st March 2018 was:

Liabilities Amount Assets Amount
Creditors 50,000 Cash 12,000
Bills payable 15,000 Cash at bank 15,000
Outstanding expenses 3,000 Debtors                             20,000
Capital a/cs: Less: provision for doubtful debts                                     500 19,500
A 60,000 Stock 20,000
B 40,000 Furniture 10,000
Machinery 8,000
Land and Building 73,500
1,68,000 1,68,000

A and B admit C as a partner from 1st April 2018 on the following terms:

  1. He will get the 1/5th share in profits and he will bring in Rs 20,000 as his capital and Rs 5,000 as his share of goodwill.
  2. C brings Goodwill and A and B withdraw it.
  3. Bring Provision of doubtful debts up to 5% on debtors.
  4. Depreciate Machinery by Rs 2,000 and furniture by 12.5%.
  5. Value of Stock is Rs 23,000.
  6. Appreciate Land and Building by 20%.
  7. Record Investments of Rs 2,000 which do not appear in books.
  8. Out of the amount of insurance premium which was debited to profit and loss account, Rs 5,000 be carried forward as unexpired insurance.
  9. A bill of Rs 5,000 for electricity expenses was omitted to be accounted for.

Prepare revaluation account,partner’s capital account, and balance sheet.

Ans:

                                                             Revaluation Account

Particulars Amount Particulars Amount
To Provision for doubtful debts 500 By Stock a/c 3,000
To Machinery a/c 2,000 By Land and Building a/c 14,700
To Furniture a/c 1,250 By Investments 2,000
To Outstanding electricity a/c 5,000 By Prepaid insurance a/c 5,000
To Profit transferred to:
A                                           7,975
B                                           7,975 15,950
24,700   24,700

 

                                                           Partners Capital Account

Particulars A B C Particulars A B C
To Cash a/c 2,500 2,500 —- By Balance b/d 60,000 40,000
To Balance c/d 67,975 47,975 20,000 By Cash a/c —- —- 20,000
By Premium for goodwill a/c 2,500 2,500 —-
By Revaluation a/c 7,975 7,975 —-
  70,475 50,475 20,000   70,475 50,475 20,000

Balance Sheet as at 1st April 2018

Liabilities Amount Assets Amount
Bills payable 15,000 Cash in hand (Working note) 32,000
Creditors 50,000 Cash at bank 15,000
Outstanding expenses 8,000 Stock 23,000
Capital a/cs Debtors                              20,000
A 67,975 Less: Provision for doubtful debts                                    1,000
B 47,975 Prepaid insurance 5,000
C 20,000 Furniture 8,750
Machinery 16,000
Land and Building 88,200
Investments 2,000
2,08,950   2,08,950

 

Working note:

Cash A/c

Particulars Amount Particulars Amount
To Balance b/d 12,000 By A 2,500
To C 20,000 By B 2,500
To Premium for goodwill a/c 5,000 By Balance c/d 32,000
  37,000   37,000

 

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Pawan Kumar

New ratio of question no. 5 is 17:16:8 among all three partners. Please check your answer

Pawan Kumar
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Pawan Kumar

Sory 17:15:8

Rtdyy
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Rtdyy

1/8X7/8=4/32 how?

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