Question

Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also, describe how is this treated in the book of account?

Answer 1

When a new partner gets admission in a firm, it is always advised to revalue all the assets and liabilities of the firm, only after doing that a true and fair value of a firm can be determined.

Moreover, it is required to be exercised because the value of some assets may have increased or decrease, in the same manner, some of the liabilities may have increased or paid off. Sometimes some assets and liabilities remain unrecorded, they must also be recorded now.

Hence, it is always advisable to revalue the assets and liabilities at the time admission of a partner and any profit or loss on revaluation must be transferred to old partners' capital account in their old profit sharing ratio.

Treatment in the Books of Account: The following Journal entries are recorded in the Revaluation Account on the date of admission of a new partner.

(I) For Increase in Value of Assets and for Recording of Unrecorded Asset

Note The entry will be same because when an unrec orded asset is recorded. It will consider as increase in asstes.

$\begin{array}{ccccc}\text{Date}& \text{Particulers}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Asset / Unrecorded Asset A/c}\text{Dr}& & & \\ & \text{To Revaluation A/c}& & & \\ & \text{(Increase in the value of assets recorded}& & & \\ & \text{or unrecorded assets recorded in the}& & & \\ & \text{books)}& & & \end{array}$

(ii) For Decrease in value of assets

$\begin{array}{ccccc}\text{Date}& \text{Particulers}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Revaluation A/c}\text{Dr}& & & \\ & \text{To Asset A/c}& & & \\ & \text{(Decrease in the value of assets}& & & \\ & \text{recorded)}& & & \end{array}$

(iii) For Increase in Liabilities and for Recording of Unrecorded Liability

Note : The entry will be same because when an unrecorded liability is recorded it will consider as increase in liability.

$\begin{array}{ccccc}\text{Date}& \text{Particulers}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Revaluation A/c}\text{Dr}& & & \\ & \text{To Liabilities / Unrecorded Liabilities A/c}& & & \\ & \text{(Increase in the value of liability recorded}& & & \\ & \text{or unrecorded liabilities recorded)}& & & \end{array}$

(iv) Journal Entry for Decrease in Liabilities.

$\begin{array}{ccccc}\text{Date}& \text{Particulers}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Liabilities A/c}\text{Dr}& & & \\ & \text{To Revaluation A/c}& & & \\ & \text{(Decrease in the value of liabilities}& & & \\ & \text{recorded)}& & & \end{array}$

(v) Journal Entry for Transfer of credit Balance of Revalution Account.

$\begin{array}{ccccc}\text{Date}& \text{Particulers}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Revalution A/c}\text{Dr}& & & \\ & \text{To Old Partners Capital A/c}& & & \\ & \text{(Profit on revalution of assets and}& & & \\ & \text{liabilities transfered to old partners capital}& & & \\ & \text{account in their old profit sharing ratio)}& & & \end{array}$

(vi) Journal Entry for Transfer of Debit Balance of Revaluation Account.

$\begin{array}{ccccc}\text{Date}& \text{Particulers}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Old Partners' Capital A/c}\text{Dr}& & & \\ & \text{To Revaluation A/c}& & & \\ & \text{(Loss on revaluation of assets and}& & & \\ & \text{liabilities transfered to old partners' capital}& & & \\ & \text{account in their old profit sharing ratio)}& & & \end{array}$