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Many times, a firm admits a new partner for several reasons then it becomes mandatory to revalue the assets and liabilities as they may differ from their previous values. The actual values of assets and liabilities may differ from the previous ones; hence, to get the true and fair values of these assets and liabilities, a revaluation account is maintained. The importance of revaluation of assets and reassessment of liabilities is to protect the new partner from the loss of reduced value of assets or to restrict from taking advantage of the increased value of assets. So, the profit and loss are then distributed between the old partners in their old profit sharing ratio arising from the revaluation.
Revaluation Account
The revaluation account is however maintained to write down negative or positive effects on assets and liabilities during the accounting period. A revaluation account is sometimes called ‘Profit and Loss Adjustment A/c’. Revaluation account is prepared for the owners of financial and non–financial assets and liabilities. The transaction occurs if there is a profit because of revaluation then the revaluation account is credited and if there is a loss because of revaluation then it is debited in the revaluation account. The profit and Loss adjustment account is an extension of the profit and loss account.
Reasons for Revaluation of Assets and Reassessment of Liabilities
Some of the Reasons for Revaluation of Assets and Reassessment of Liabilities are as follows:
- The revaluation of assets and reassessment of liabilities may be done to show the fair view of the company.
- The revaluation and reassessment are necessary to share the profits among the partners.
Ways of Revaluation of Assets and Reassessment of Liabilities
There can be two ways of Revaluation of Assets and Reassessment of Liabilities, these are as follows:
- Showing the revised assets and liabilities in the books.
- Not showing the revised assets and liabilities in the books.
Example of Revaluation of Assets and Reassessment of Liabilities
The necessary journal entries which we have to pass for revaluation are as follows:
- Journal entry concerned for an increase in the value of assets
Assets A/c Dr.
To Revaluation A/c
(The value of assets are increased of the firm)
- Journal entry concerned for the decrease in the value of assets
Revaluation A/c Dr.
To Assets A/c
(The value of assets are decreased of the firm)
- Journal entry concerning decrease in the value of liabilities
Liabilities A/c Dr.
To Revaluation A/c
(The value of liabilities is decreased of the firm)
- Journal entry concerning increase in the value of liabilities
Revaluation A/c Dr.
To Liabilities A/c
(The value of liabilities is increased of the firm)
After recording the above entries in the Revaluation Account or Profit And Loss Adjustment Account, the next step is to transfer the profit or loss on revaluation in their existing ratios between the old partners. If the debit side of the revaluation account is in surplus, it shows a loss and if the credit side of the revaluation account is in surplus, it shows a profit. To divide the profit or loss, the following entries passed for this purpose:
- If there is a loss in the revaluation account
Old Partner’s Capital A/cs Dr.
To Revaluation A/c
(The loss gets debited to Old Partner’s Capital Accounts in old profit sharing ratio)
- If there is a profit in the revaluation account
Revaluation A/c Dr.
To Old Partner’s Capital A/c
(The profit gets credited to Old Partner’s Capital Accounts in old profit sharing ratio)
Proforma of Revaluation Account
Dr. REVALUATION ACCOUNT Cr.
Particulars | ₹ | Particulars | ₹ |
To fall in value of assets To rise in value of liabilities To uncounted liability To Profit on revaluation transferred to old partner’s capital accounts in old profit sharing ratio | ……… ……… ………
| By rise in the value of assets By fall in the value of liabilities By uncounted assets By Loss on revaluation transferred to old partner’s capital account in old profit sharing ratio | ……… ……… ………
|
Example: – Pass the necessary journal entries in the books of account in order to record the transactions given below:
a) Stock is increased by ₹10,000
b) Value of land and building is decreased by ₹1,00,000
c) Outstanding expenses were not recorded of ₹1,500
Date | Particulars | L.F. | Dr. (₹) | Cr.( ₹) |
(a) | Revaluation A/c Dr. To Stock A/c ( There is an increase in the value of the stock) | 10,000 | 10,000 | |
(b) | Land and Building A/c Dr. To Revaluation A/c (There is a decrease in the value of land and building ) | 1,00,000 | 1,00,000 | |
(c)) | Revaluation A/c Dr. To Outstanding Expenses A/c (There was an unrecorded outstanding expense now recorded ) | 1,500 | 1,500 |
Conclusion
Revaluation of assets and reassessment liabilities is necessary for every enterprise as when a new partner gets admission, the profit-sharing ratio changes to ensure correctness and fair values. Subsequent adjustments are then made on the re-value of these assets and liabilities in the books of accounts. To deal with the revaluation of assets and liabilities, there are two ways; firstly to show the revised value in the books and secondly not to show the revised value in the books. Firstly a revaluation account is open and in the second way a memorandum revaluation account is open in which the net result of revaluation is adjusted. It is a temporary account.
