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Revaluation of Assets & Liabilities on Admission

Introduction

At the time of admission, the assets and liabilities of the firm must be revalued to their current market figures. Since the new partner belongs to the future, he should not benefit from past appreciation of assets, nor should he suffer from past losses. The profit or loss on revaluation belongs entirely to the Old Partners.

1. Revaluation Account (Nature & Rules)

It is a Nominal Account.

  • Credit Side: Gains (Increase in Asset, Decrease in Liability).
  • Debit Side: Losses (Decrease in Asset, Increase in Liability).

Format:

Dr.Particulars (Losses)₹Particulars (Gains)₹Cr.
To Decrease in Asset ValuexxBy Increase in Asset Valuexx
To Increase in LiabilityxxBy Decrease in Liabilityxx
To Unrecorded LiabilityxxBy Unrecorded Assetxx
To Profit on RevaluationxxBy Loss on Revaluationxx
(Trf to Old Partners in Old Ratio)(Trf to Old Partners in Old Ratio)

2. Journal Entries

For Increase in Value of Asset (Gain)

Asset A/c ...Dr                (Amount)
    To Revaluation A/c             (Amount)

For Decrease in Value of Asset (Loss)

Revaluation A/c ...Dr          (Amount)
    To Asset A/c                   (Amount)

For Profit on Revaluation (Closing Entry)

Revaluation A/c ...Dr          (Amount)
    To Old Partner's Capital A/c   (Amount)

(Being profit credited in Old Ratio)

3. Important Adjustments (Tricky Points)

  1. "Stock reduced BY 10%":
    • Debit Revaluation with 10% of Book Value.
  2. "Stock reduced TO 10%":
    • It means new value is 10%. Debit Revaluation with 90% (Loss).
  3. "Provision for Bad Debts":
    • Creating a provision is a Liability (Loss).
    • Entry: Revaluation A/c Dr to Provision for Doubtful Debts.

Comparison: Revaluation A/c vs Realisation A/c

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Exam Notes: Writing the Answer

Question: "Prepare Revaluation Account." (From a problem)

Checklist:

  1. Identify Old Ratio.
  2. Scan adjustments:
    • Building appreciated? -> Credit Side.
    • Stock Depreciated? -> Debit Side.
    • Creditors written back given up? -> Credit Side.
  3. Balance the account.
  4. Transfer the balancing figure ONLY to Old Partners in Old Ratio. (New partner gets nothing).

Summary

  • Purpose: To do justice to Old Partners for past efforts.
  • Nature: Nominal A/c.
  • Golden Rule: Debit all Losses, Credit all Gains.
  • Distribution: Old Ratio.
  • Common Mistake: Distributing profit to the New Partner (Wrong!).

Quiz Time! 🎯

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