Memorandum Revaluation Account: How is it different from Revaluation Account?
Understanding Memorandum Revaluation Account:
Whenever there is a change in a partnership business in the form of admission of a new partner, retirement or death of a partner, or a change in the profit-sharing ratio, revaluation of assets and liabilities becomes necessary. This is so because any profit or loss arising from the value of assets and liabilities up to the date of reconstitution should not be distributed to the new partner(s). It belongs to the old or existing partners.
The book value of assets as shown in the Balance Sheet on the date of reconstitution may not reflect the current realizable value. Similarly, the book value of liabilities may not reflect their actual position. Hence, revaluation becomes necessary.
There are two ways to give effect to this revaluation:
1) By incorporating changes in the Balance Sheet values (Preparing Revaluation Account)
2) Without changing the Balance Sheet values (Preparing Memorandum Revaluation Account)
What is Memorandum Revaluation Account?
Before understanding what is a memorandum revaluation account, it is imperative to know what is revaluation account.
Normally, on the revaluation of assets and liabilities, a revaluation account is prepared to find out the profit or loss on such revaluation. Entries are made in this account in such a manner that the Balance Sheet values get affected. That is, entries are made by altering the values of assets and liabilities appearing in the books.
1. For a decrease in the value of assets, increase in the value of liabilities, and provision for unrecorded liabilities, the following entry is passed:
Revaluation A/c – Debit
To Assets A/c (with the decrease in value)
To Liabilities A/c (with the increase in value)
2. For an increase in the value of assets, decrease in the value of liabilities, and unrecorded assets, the following entry is passed:
Assets A/c – Debit (with the increase in value)
Liabilities A/c – Debit (with the decrease in value)
To Revaluation A/c
3. For recording profit on revaluation, the following entry is passed:
Revaluation A/c – Debit
To Old Partners’ Capital A/cs (in their old profit sharing ratio)
[The entry is reversed in case of loss.]
The revaluation account looks like this:
Besides this, there is another way to account for revaluation. This method does not alter the values of assets and liabilities appearing in the books rather the effect of revaluation is adjusted through the capital accounts of all partners. Here, instead of a Revaluation Account, a Memorandum Revaluation Account is prepared.
The following steps are followed for the preparation of a Memorandum Revaluation Account:
1. First, the increase or decrease in the value of assets and liabilities is recorded in the same manner as discussed above.
Memorandum Revaluation A/c – Debit
To Assets A/c (with the decrease in value)
To Liabilities A/c (with the increase in value)
and
Assets A/c – Debit (with the increase in value)
Liabilities A/c – Debit (with the decrease in value)
To Memorandum Revaluation A/c
2. Similarly, the share of profit or loss on revaluation is also distributed amongst the old partners in their old profit sharing Ratio.
Memorandum Revaluation A/c – Debit
To Old Partners’ Capital A/cs (in their old profit sharing ratio)
[or vice versa in case of loss]
3. Next the entries of increase/decrease in the value of assets and liabilities are reversed.
4. After such reversal of entries, the resultant profit/loss disclosed by the reversed entries is shared amongst all the partners (including the new partner) in their new profit-sharing ratio.
All Partners’ Capital A/cs – Debit (in their new profit sharing ratio)
To Memorandum Revaluation A/c
[or vice versa as the case may be]
A Format
The memorandum revaluation account looks like this (with fictitious figures):
Sometimes, all partners including the new partner may decide not to alter the book value of assets and liabilities even after revaluation. In order to do so, Memorandum Revaluation Account is opened. Once the profit or loss on revaluation is transferred to old partners, the ledger accounts of assets and liabilities are brought back to their original values, and to make this restoration, adjustments are made through all partners’ capital accounts including the new partner. The idea is that the new partner should also contribute to the restoration of the old figures.
In other words, Memorandum Revaluation Account has two parts. In the first part, entries of revaluation are made in the usual manner and the resultant profit or loss on revaluation is transferred to old partners in the old profit sharing ratio. Thereafter, the entries regarding assets and liabilities are reversed in the second part so that their values remain unchanged on the Balance Sheet. The adjustment balance of the second part is transferred to all the partners including the new partner in their new profit sharing ratio. Needless to say, if there is a retirement or death of a partner, the said amount is transferred to the remaining partners’ accounts.
Difference between Revaluation Account and Memorandum Revaluation Account
From the above discussion, the following points of difference can be set out between Revaluation Account and Memorandum Revaluation Account.
| Basis | Revaluation Account | Memorandum Revaluation Account |
| Purpose | A revaluation account is prepared to find out the profit or loss on the revaluation of assets and liabilities. The assets and liabilities appear on the Balance Sheet at revalued figures. | A memorandum revaluation account is also prepared to record the effect of the revaluation of assets and liabilities. However, the values of assets and liabilities are not altered. They appear on the Balance Sheet at old figures. |
| Parts | It has only one part. | It has two parts. The first part is prepared to calculate the profit or loss on revaluation. And the second part is used to close the account. |
| Transfer | The profit or loss of revaluation goes to old partners only. | The balance of the first part is transferred to old partners. Thereafter, the Memorandum Revaluation Account is closed by transfer of the amount to all the partners’ capital accounts in their new ratio. |
Hope the information provided in this blog is helpful!
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