Class XII · Accountancy · Admission of a Partner
Revaluation of Assets and Liabilities
Chapter Notes
Why assets and liabilities are restated when a partner is admitted, how the Revaluation Account is prepared, and the ratio the profit is shared in.
When a new partner is admitted, the assets and liabilities of the firm are restated to their present values. Any gain or loss on this belongs to the old partners, because it accrued before the new partner joined.
Why it is done
Book values are historical. Land bought in 2008 is not worth its 2008 price, and a debtor who has stopped paying is not worth their full balance.
The Revaluation Account
It is a nominal account. Losses and increases in liabilities are debited; gains and decreases in liabilities are credited.
- Record every increase and decrease
- Balance the account
- Transfer the profit or loss to the old partners in their old ratio
A worked figure
| Item | Book value | Revalued | Effect |
|---|---|---|---|
| Building | 2,00,000 | 2,50,000 | Gain 50,000 |
| Stock | 40,000 | 36,000 | Loss 4,000 |
| Provision for doubtful debts | 2,000 | 5,000 | Loss 3,000 |
| Creditors | 60,000 | 57,000 | Gain 3,000 |
Net profit on revaluation is 50,000 + 3,000 - 4,000 - 3,000 = 46,000.
The commonest exam error is transferring revaluation profit in the NEW ratio. It is the old partners gain, so it goes in the OLD ratio.
See the CBSE academic site for the syllabus.