Revaluation account

What is a Revaluation Account? Its Format and Journal Entries

A revaluation account is an account that is opened at the time of reconstitution of a partnership firm. That is, whenever a new partner is admitted, on the death or retirement of a partner, or at the time of change in the profit-sharing ratio amongst partners, a revaluation account is prepared to account for adjustments in the value of assets and liabilities.

It is also known as a profit and loss adjustment account.

Why is the revaluation account prepared?

It is always desirable to examine whether the book values of assets and liabilities of a partnership firm are correct or not when admitting a new partner. If assets and liabilities are overstated or undervalued in the books, they should be revalued and the profit or loss resulting from such revaluation must be accounted for. The idea behind this adjustment is to prevent the incoming partner from getting any undue gain or loss.

For example, if there is an appreciation in the value of assets or a decrease in the value of liabilities, the advantage should be shared only by the old partners because it occurred prior to the admission. The new partner should not benefit from such appreciation in the value of assets or a decline in the value of liabilities.

Similarly, if there is a fall in the value of assets or an increase in the value of liabilities up to the date of admission, this loss should be borne solely by the old partners. The same should not have an impact on the new partner.

Thus, the revaluation of assets and liabilities is in the interest of both the old and new partners.

Not just admission, revaluation is also necessary to be done on the death or retirement of a partner. All of the firm’s assets and liabilities must be revalued, and any profit or loss resulting from this must be adjusted in all of the partners’ capital accounts, including the retiring or deceased partner, in their old profit-sharing ratio.

It is which type of account?

A revaluation account is a nominal account.

The debit balance of the revaluation A/c represents a loss while the credit balance represents a profit.

How to prepare a revaluation account?

The following steps should be followed for the preparation of a revaluation account:

1. Any increase in the value of assets or decrease in the value of liabilities is a gain and it should be credited to the Revaluation Account.

2. Any decrease in the value of assets or increase in the value of liabilities is a loss and it should be debited to the Revaluation Account.

3. It is also possible that certain assets and liabilities are yet to be recognized in the books of the firm. These will be treated in the same way as any increase in assets and liabilities and will be brought into books through the Revaluation Account. In other words, if there is an unrecorded asset, it is credited to the Revaluation Account; if there is an unrecorded liability, it is debited to the Revaluation Account.

4. The balance of the Revaluation Account, indicating profit or loss derived from the revaluation of assets and liabilities, should be transferred to the capital accounts of the old or existing partners in their old profit-sharing ratio.

5. The altered values of assets and liabilities will be reflected in the new Balance Sheet prepared upon the reconstitution of the firm. However, sometimes the partners may decide not to alter the Balance Sheet values of assets and liabilities, in such a case, another method called “Memorandum Revaluation Account” is employed to give effect to the adjustments of revaluation.

Journal Entries and Format

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:

Format of revaluation account

Takeaway

A revaluation account is prepared in order to ascertain the profit or loss on the revaluation of assets and liabilities. It is prepared in the following instances:

  • Admission of a partner
  • Death or insolvency of a partner
  • Retirement of a partner
  • Change in the profit-sharing ratio

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