The compilation of this Retirement or Death of a Partner Notes makes students exam preparation simpler and organised.
Adjustment for Revaluation of Assets and Liabilities
Whenever a partner exits a partnership, the books of accounts of such a firm have to be settled. The outgoing partner or his legal representatives have to be paid their dues. This means a revaluation of assets and liabilities must be done. Let us take a look at the accounting treatment.
Adjustment for Revaluation of Assets and Liabilities
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 need to be recorded in the books.
A Revaluation Account is prepared in order to ascertain net gain or loss on revaluation of assets and liabilities and bringing unrecorded items into books. The Revaluation profit or loss is transferred to the capital account of all partners including retiring or deceased partners in their old profit sharing ratio.
The following Journal entries are passed:
1. For the increase in the value of Assets
Assets A/c (Individually) Dr.
To Revaluation A/c
(Being increase in the value of assets on revaluation)
2. For a decrease in the value of Assets
Revaluation A/c Dr.
To Assets A/c (Individually)
(Being decrease in the value of assets on revaluation)
3. For an increase in the value of Liabilities
Revaluation A/c Dr.
To Liabilities A/c (Individually)
(Being increase in the value of liabilities on revaluation)
4. For a decrease in the value amount of Liabilities
Liabilities A/c (Individually) Dr.
To Revaluation A/c
(Being decrease in the value of liabilities on revaluation)
5. For an unrecorded Asset
Assets A/c Dr.
To Revaluation A/c
(Being unrecorded asset recorded in books)
6. For an unrecorded Liability
Revaluation A/c Dr.
To Liability A/c
(Being unrecorded liability recorded in books)
7. For transferring Profit on Revaluation
Revaluation A/c Dr.
To All Partners’ Capital A/c (Individually)
(Being Profit on revaluation transferred to all partner’s capital A/c in old ratio)
8. For transferring Loss on Revaluation
All Partners’ Capital A/c (Individually) Dr.
To Revaluation A/c
(Being Loss on revaluation transferred to partner’s capital A/c in old ratio)
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 are adjusted in the remaining partners’ capital A/cs in their gaining ratio.
The journal entries that will be passed are:
9. In case of Revaluation Profit
Remaining Partners Capital A/c (Individually) Dr.
To Retiring Partners Capital A/c
(Being the share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio)
10. In case of Revaluation Loss
Remaining Partners Capital A/c (Individually) Dr.
To Retiring Partners Capital A/c
(Being the share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio)
Example:
Question:
A B and C are partners sharing profits in the ratio of 3 : 2 : 1 respectively. On 31st March 2018, their Balance Sheet is as under:
C retires on the above date. It was agreed that Machinery is valued at Rs.1,05,000, Patents at Rs.65,000 and Buildings at Rs.1,20,000. Pass the necessary journal entries and prepare the Revaluation Account.
Answer:
In the books of A, B, and C
Journal Entries
