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.
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.
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.
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
|To Liabilities a/c|
|(Being increase in liabilities)|
|4. A decrease in the amount of liabilities||Liabilities a/c
|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
|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)|
|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:
- 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.
- 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:
|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|
|Land and Building||73,500|
A and B admit C as a partner from 1st April 2018 on the following terms:
- 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.
- C brings Goodwill and A and B withdraw it.
- Bring Provision of doubtful debts up to 5% on debtors.
- Depreciate Machinery by Rs 2,000 and furniture by 12.5%.
- Value of Stock is Rs 23,000.
- Appreciate Land and Building by 20%.
- Record Investments of Rs 2,000 which do not appear in books.
- Out of the amount of insurance premium which was debited to profit and loss account, Rs 5,000 be carried forward as unexpired insurance.
- 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.
|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:|
Partners Capital Account
|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||—-|
Balance Sheet as at 1st April 2018
|Bills payable||15,000||Cash in hand (Working note)||32,000|
|Creditors||50,000||Cash at bank||15,000|
|Capital a/cs||Debtors 20,000|
|A||67,975||Less: Provision for doubtful debts 1,000|
|Land and Building||88,200|
|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|