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 we need to record in the books. The profit or loss from Revaluation Reserve profit is transferred to the capital account of all partners including retiring or deceased partners in their old profit sharing ratio.
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Revaluation Reserve
Revaluation Account
In order to ascertain net gain or loss on revaluation of assets and liabilities and bringing unrecorded items into books, partners prepare a Revaluation Account.
Revaluation Reserve Journal Entries
Particulars | Â | Amount (Dr.) | Amount (Cr.) | |
1. Increase in the value of assets | Assets A/c (Individually) | Dr. | Â xxx | |
   To Revaluation A/c | xxx | |||
(Being increase in the value of assets on revaluation) | ||||
2. Decrease in the value of assets | Revaluation A/c | Dr. | xxx | |
   To Assets A/c (Individually) | xxx | |||
(Being decrease in the value of assets on revaluation) | ||||
3. Increase in the amount of liabilities | Revaluation A/c | Dr. | xxx | |
   To Liabilities A/c (Individually) | xxx | |||
(Being increase in the amount of liabilities on revaluation) | ||||
4. Decrease in the amount of liabilities
|
Liabilities A/c (Individually) | Dr. | xxx | |
   To Revaluation A/c | xxx | |||
(Being decrease in the amount of liabilities on revaluation) | ||||
5. For an unrecorded asset | Assets A/c | Dr. | Â xxx | |
   To Revaluation A/c | xxx | |||
(Being unrecorded asset recorded in books) | ||||
6. For an unrecorded liability | Revaluation A/c | Dr. | xxx | |
   To Liability A/c | xxx | |||
(Being unrecorded liability recorded in books) | ||||
7. Transfer profit on revaluation | Revaluation A/c | Dr. | xxx | |
   To All Partners’ Capital A/c         (Individually) | xxx | |||
(Being Profit on revaluation transferred to all partner’s capital A/c in old ratio) | ||||
8. Transfer loss on revaluation | All Partners’ Capital A/c (Individually) | Dr. | xxx | |
   To Revaluation A/c | xxx | |||
(Being Loss on revaluation transferred to partner’s capital A/c in old ratio) |
Alternatively, 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 is adjusted in the remaining partners’ capital accounts in their gaining ratio.
Learn more about Adjustment and Revaluation of Assets here in detail.
The Journal entries are:
Particulars | Â | Amount (Dr.) | Amount (Cr.) | |
1. In case of revaluation profit | Remaining Partners Capital A/c (Individually) | Â Dr. | xxx | |
   To Retiring Partners Capital A/c | xxx | |||
(Being a share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio) | ||||
2. In case of revaluation loss | Remaining Partners Capital A/c (Individually) | Â Dr. | xxx | |
   To Retiring Partners Capital A/c | xxx | |||
(Being the share of retiring partner in revaluation profit adjusted in remaining partners’ capital in gaining ratio)
|
Reserves
The retiring partner also has a share in the reserves of the firm. Remaining partners need to pay him this amount also. For this purpose, distribute the amount of the Reserves among all the partners and there will appear no Reserve A/c in the books.
The Journal Entry will be:
Particulars | Â | Amount (Dr.) | Amount (Cr.) | |
1. Distribution of reserves | Reserves A/c | Dr. | xxx | |
   To All Partners’ Capital A/c | xxx | |||
(Being reserves distributed among all the partners in old ratio) |
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Alternatively, the partners may decide to reduce the amount of reserve only to the extent of the retiring partner’s share.
The Journal Entry will be:
Particulars | Â | Amount (Dr.) | Amount (Cr.) | |
1. Distribution of reserves | Reserves A/c | Dr. | xxx | Â |
   To Retiring Partners’ Capital A/c |  |  xxx | ||
(Being retiring partners share of reserves transferred to his capital A/c) |
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Solved Example on Revaluation and Reserve
A, B and C are partners sharing profits and losses in the ratio of 3:2:1 respectively. On 31st March 2018, their Balance Sheet is as under:
                   Liabilities |    Amt. |                    Assets |   Amt. |
Capital Accounts: | Buildings | 100000 | |
                       A           150000 | Machinery | 90000 | |
                       B           100000 | Patents | 70000 | |
                       C             50000 | 300000 | Stock | 40000 |
Reserve Fund | 36000 | Debtors | 60000 |
Sundry Creditors | 50000 | Cash | 26000 |
386000 | 386000 |
C retires on the above date. The partners agreed to value Machinery at Rs.1,05,000, Patents at Rs.65,000 and Buildings at Rs.1,20,000. Partners decide to distribute the Reserves and pay C’s share in cash. Pass the necessary journal entries and prepare the Revaluation Account and Partner’s Capital A/Cs.
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Ans:
                                  In the books of A, B, and C
Journal Entries
Date | Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Particulars | Â | Amount (Dr.) | Amount (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 among all partners in old ratio) | ||||
Mar. 31 | Reserve Fund A/c | Dr. | 36000 | |
To A’s Capital A/c | 18000 | |||
To B’s Capital A/c | 12000 | |||
To C’s Capital A/c | 6000 | |||
(Being reserves distributed among all the partners in old ratio) | ||||
Mar. 31 | C’s Capital A/c | Dr. | 61000 | |
To Cash A/c | 61000 | |||
(Being C’s share paid to him in cash) |
Revaluation A/c
            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 | ||
35000 | 35000 |
Partners’ Capital A/c
Particulars | A | B | C | Particulars | A | B | C |
To Cash A/c | 61000 | By balance b/d | 150000 | 100000 | 50000 | ||
To balance c/d | 183000 | 122000 | By Revaluation A/c | 15000 | 10000 | 5000 | |
By Reserve Fund A/c | 18000 | 12000 | 6000 | ||||
183000 | 122000 | 61000 | 183000 | 122000 | 61000 |
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