Revaluation of assets and Liabilities

At the time of retirement of a partner, it is necessary to revalue the assets and liabilities of the firm. It is necessary that the retiring partner is given a share of all profits that have arisen till his retirement. Further, he is made to bear his share of losses that had occurred till his retirement.

A Revaluation account is opened and credited with all the profit items and debited with all the loss items. The profit or loss on revaluation will be transferred to partners’ capital accounts including the retiring partner in the old profit sharing ratio.

Entries for revaluation here are similar to those in admission. They are:

1. For profit items: a) Increase in the value of assets b) Decrease in the amount of Liabilities & c) Unrecorded assets recorded

2. For Loss items: a) Decrease in the Value of assets b) Increase in the amount of Liabilities c) Unrecorded liabilities recorded and d) New liability created.

3. For transfer of profit or loss on revaluation

Illustration :
Prabha, Kavitha and Meena were partners of a firm sharing profit and loss in the ratio of 3 : 2 : 1. Meena wanted to retire. They decided to revalue the assets and liabilities of the firm as indicated below:

a) To write down Machinery by Rs.10,000 and Stock by Rs.4,000

b) To bring into books as unrecorded Investments Rs.5,000

c) To write off Rs.3,000 from sundry creditors as it was no longer liability.

Pass entries to give effect to the above adjustments. Show also Revaluation account.

Solution:

Journal Entries

Date	Particulars	L.F.	Debit ‘Rs.	Credit Rs.
	Investments A/c                            Dr.		5,000
	Sundry creditors A/c                    Dr.		3,000
	To Revaluation A/c			8,000
	(Profit items of revaluation
	Revaluation A/c                             Dr.		14,000
	To Machinery A/c			10,000
	To Stock A/c			4,000
	(Loss items of revaluation)
	Prabha’s capital A/c                      Dr.		3,000
	Kavitha’s capital A/c                     Dr.		2,000
	Meena’s capital A/c                      Dr.		1,000
	To Revaluation A/c			6,000
	(Loss on revaluation transferred to old partners in the old ratio)

Revaluation Account
Dr.                                                                                                                                                                                                                                                 Cr. 

Date	Particulars	Rs.	Date	Particulars	Rs.
	To Machinery A/c	10,000		By Investments A/c	5,000
	To Stock A/c	4,000		By Sundry creditors A/c	3,000
				By Loss transferred to capital account
				Prabha        3,000
				Kavitha        2,000
				Meena         1,000	6,000
		14,000			14,000