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

Yes, it is advisable to revalue the assets and liabilities at the time of admission of a new partner for ascertaining the true and fair value of the assets and liabilities. This is done because the value of assets and liabilities may have increased or decreased and consequently their corresponding figures in the old balance sheet may either be understated or overstated. Moreover, it may also be possible that some of the assets and liabilities are left unrecorded. Thus, in order to record the increase and decrease in the market value of the assets and liabilities, Revaluation Account is prepared and any profits or losses associated with this increase or decrease are distributed among the old partners of the firm.

Accounting Entries in the Books of Accounts:
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:
Assets A/c                                                                   Dr.
           To Revaluation A/c
(Increase in the value of assets)

ii) For decrease in value of assets:
Revaluation A/c                                                         Dr.
        To Asset A/c
(Decrease in the value of assets)

iii) For increase in liabilities:
Revaluation A/c                                                        Dr.
          To Liabilities
(Increase in the value of liabilities)

iv) For decrease in liabilities:
Liability A/c                                                              Dr.
      To Revaluation A/c
  (Decrease in the value of liabilities)

v) For recording of unrecorded assets:
Unrecorded Assets A/c                                            Dr
      To Revaluation A/c
(Recording of unrecorded assets)

vi) For recording of unrecorded liabilities:
Revaluation A/c                                                        Dr
      To Unrecorded Liabilities A/c 
    (Recording of unrecorded liabilities)  

vii) For transfer of credit balance of Revaluation Account:
Revaluation                                                               Dr
        To Old Partner’s Capital A/c
(Profit on revaluation is transferred to the Old Partner’s Capital Account in their old profit sharing ratio)
                                                Or,

vii) For transfer of debit balance of Revaluation Account:
Old Partner’s Capital A/c                                        Dr.
        To Revaluation A/c
(Loss on revaluation is transferred to the Old Partner’s Capital Account in their old profit sharing ratio)