Adjustment and Revaluation of Assets: Revaluation Account and Examples

The compilation of these Admission of a Partner Notes makes students exam preparation simpler and organised.

Adjustment and Revaluation of Assets

Before we introduce a new partner to the partnership firm, we must ensure all the assets and liabilities are valued correctly. So just prior to introducing a new partner revaluation account is made and subsequent adjustments are made in books of accounts. Let us take a look.

Adjustment and Revaluation of Assets

At the time of admission of a new partner, the assets are re-valued and liabilities are reassessed. The assets are re-valued and liabilities are reassessed so that:

• The assets that are overstated or understated are revalued.
• The liabilities are brought in the books at their correct values.
• Unrecorded assets and liabilities of the firm are brought into the books of the firm.
• The actual position of the firm is calculated.
• Profit and loss arriving on account of such revaluation up to the date of admission of a new partner may be adjusted in the partner’s capital accounts in their old profit sharing ratio.

Revaluation Account

For this purpose, the firm has to prepare the Revaluation Account. In this account:

• An increase in the assets and decrease in its liabilities is credited because it is gain,
• A decrease in the value of assets and increase in its liabilities is debited because it is a loss,
• Unrecorded assets are credited, and
• Unrecorded liabilities are debited.

If the account finally shows a credit balance then it indicates net gain and if there is a debit balance then it indicates the net loss. Profit or loss will be transferred to the capital accounts of the old partners in old ratio.

Journal Entries
The journal entries recorded for revaluation of assets and reassessment of liabilities are as follows:

For an increase in the value of an asset:

For a decrease in the value of a liability:

For a decrease in the value of an asset:

For an increase in the value of a liability:

For an unrecorded asset:

For an unrecorded liability:

The profit on revaluations will be transferred to old partners’ capital accounts in the old profit sharing ratio:

The loss on revaluations will be transferred to old partners’ capital accounts in the old profit sharing ratio:

Example:

Question:
Following is the Balance Sheet of Suhani and Sonia who share profits in the ratio of 3 : 2.

Balance Sheet of A and B as of April 1, 2018

On that date Keshav is admitted into the partnership on the following terms:

1. Keshav is to bring in Rs. 10,000 as capital and Rs. 5,000 as a premium for goodwill for 1/6 share.
2. The value of a stock is reduced by 10% while plant and machinery are appreciated by 10%.
3. Furniture is revalued at Rs. 15,000.
4. A provision for doubtful debts is to be created on sundry debtors at 5% and Rs. 1000 is to be provided for an electricity bill.
5. Investment worth Rs. 5,000 (not mentioned on the balance sheet) is to be taken into account
6. A creditor of Rs. 2000 is not likely to claim his money and is to be written off.

Record journal entries and prepare revaluation account and capital account of partners.

Solution:
Books of A, B, and C

Revaluation Account

Partner’s Capital Accounts