Revaluation and Reserves

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		Amount (Dr.)	Amount (Cr.)
1. Increase in the value of assets	Assets A/c (Individually)	Dr.	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.	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		Amount (Dr.)	Amount (Cr.)
1. In case of revaluation profit	Remaining Partners Capital A/c (Individually)	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)	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		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)

 

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		Amount (Dr.)	Amount (Cr.)
1. Distribution of reserves	Reserves A/c	Dr.	xxx
	To Retiring Partners’ Capital A/c			xxx
	(Being retiring partners share of reserves transferred to his capital A/c)

 

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 31^st 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.

 

Ans:

                                                                   In the books of A, B, and C

Journal Entries

 

Date	Particulars		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