Revaluation account is a nominal account. It is prepared for the purpose of distributing and transferring the profit or loss arising out of increase or decrease in the book value of assets and/ or liabilities of the partnership firm at the time of Change in profit sharing ratio, admission of a partner, retirement of a partner as well as at the time of death of a partner.

Revaluation account is also called Profit and loss adjustment account.

 

Revaluation Profit/Loss in case of Admission of Partner

The profits arising out of revaluation are shared by the old partners in their old profit sharing ratio by passing the following journal entry:

Revaluation A/c                           Dr.

     To Old Partner's Capital A/c (in old ratio)

Reverse entry is passed in case of loss on revaluation. (No share is given to the new partner.)

 

Revaluation Profit/Loss on Retirement/Death of Partner

For profit on revaluation of assets and liabilities:

Revaluation A/c                                   Dr

         To All Partners Capital A/c (including retiring/deceased partner in old ratio)

Reverse entry is passed in case of loss on revaluation.

 

Format of Revaluation account

Since it is a nominal account, it is easy to prepare its format.

Particulars( Losses) ₹ Particulars(Gains) ₹
Decrease in asset

Increase in liability

Unrecorded liability

Balance(profit)

 Increase in asset

Decrease in liability

Unrecorded Asset

Balance (loss)
Total Total

 

Now, it has become easier to give its proper format:

Dr.                                                           Revaluation Account                                                                Cr.

Particulars ₹ Particulars ₹
To Asset (decrease)

To Liability (increase)

To liability (unrecorded)

To Partners’ capital accounts (profit as balancing figure)

 By Asset(increase)

By Liability ( decrease)

By Asset (unrecorded)

By Partners’ capital accounts

(loss as balancing figure)

 

Note: It is to be noted down that only the amount of change is to be recorded in revaluation account, in no case the full value of the asset or liability is to be recorded here.

Some special cases have been dealt with here for the proper understanding of all this:

 

Transactions regarding debtors and provision for doubtful debts:

Example:

The book value of debtors as on 31st Dec.2011 was ₹ 60,000, and the provision for bad debts amounted to ₹ 3000.

Effect of Transaction On Revaluation account On Balance sheet
1. ₹4000 proved bad. Dr. with ₹1000. Debtors to be shown at ₹56000.
2. Provision for bad debts to be created @ 6%. Dr. with ₹600. Debtors to be shown at ₹56400.
3. Provision for bad debts to be increased to ₹5000. Dr. with ₹2000. Debtors to be shown at ₹55000.
4. Provision for bad debts to be increased by ₹5000. Dr. with ₹5000. Debtors to be shown at ₹ 52000.
5. Provision for bad debts found to be in excess by ₹ 1000. Cr. with ₹1000. Debtors to be shown at ₹ 58000.
6. Provision for bad debts found to be short by ₹ 2000. Dr. with ₹2000. Debtors to be shown at ₹55000.
7. All debtors are good. Cr. with ₹3000. Debtors to be shown at ₹ 60000.
8.90% debtors are good. Dr. with₹3000. Debtors to be shown at ₹54000.
9. Provision for bad debts is to be increased to 10%. Dr. with₹3000. Debtors to be shown at ₹54000.
10. Provision for bad debts is to be brought down to ₹1800. Cr. with ₹1200. Debtors to be shown at ₹58200.
11. Provision for doubtful debts to be reduced by ₹1000. Cr. with ₹1000. Debtors to be shown at ₹ 58000.

 

It is very interesting to note that almost all the tangible fixed assets decrease in value, but land and building have a special feature of increase in value. Some cases have been taken here relating to land and building:

Example:

Land and Building appears at ₹ 1, 00,000 in the Balance Sheet of the firm as on 31st Dec.2021. 

Effect of Transaction On Revaluation account On Balance sheet
1. The value of Land and building has appreciated by ₹10000. Cr. with ₹10000. Land and Building to be shown at ₹110000.
2. The value of Land and building has appreciated by12%. Cr. with ₹ 12000. Land and Building to be shown at ₹112000.
3. The value of Land and building has appreciated to 110%. Cr. with ₹ 10000 Land and Building to be shown at ₹110000.
4. The land and building has been valued at ₹120000. Cr. with ₹20000 Land and Building to be shown at ₹120000.
5. The value of land and building to be brought up to ₹ 110000. Cr. with ₹ 10000 Land and Building to be shown at ₹110000.
6. The value of land and building be brought to its market value, which is ₹ 5000 more. Cr. with ₹ 5000 Land and Building to be shown at ₹105000.
7. The value of land and building to be brought to its market value which is at 110% of its book value. Cr. with ₹ 10000 Land and Building to be shown at ₹110000.

 

Example:

Treatment of unrecorded assets:

Effect of Transaction On Revaluation account On Balance Sheet
1. There was prepaid rent to the extent of ₹2000. Cr.with₹2000. Asset side, Prepaid rent, ₹2000.
2 .An old piece of machinery completely written off in the books of the firm, now sold for ₹ 300. Cr. with ₹ 300. Cash Increases with ₹ 300.
3. Firm owned 300 shares of a company, face value being ₹ 3000, completely written off, now taken over by C, a partner at ₹ 3 each. Cr. with ₹900. Capital of C decreases by ₹900.
4. Joint life policy having surrender value ₹ 3400 unrecorded.***** Cr. with ₹3400. Asset side, Joint Life Policy, ₹3400.
5. A debtor who owed ₹ 4000 to the firm, and whose account had been written off, now paid ₹ 1000. Cr. with ₹1000. Asset side, Cash increases with ₹ 1000.
6. Accrued rent ₹500. Cr. with ₹500. Asset side, Accrued rent ₹ 500.

 

Example:

Treatment of unrecorded liabilities:

Effect of Transaction On Revaluation account On Balance Sheet
1. A contingent liability worth ₹ 500 became actual liability. Dr. with ₹ 500. Liability side ₹ 500.
2. Outstanding rent ₹4000. Dr. with ₹ 4000. Liability side, Outstanding rent ₹ 4000.
3. Bill discounted by the firm now dishonoured, ₹1000. nil Bank Balance will decrease by ₹ 1000 and Debtors will be increased by the same amount.
4. Commission received in advance ₹356. Dr. with ₹ 356. Liability side ₹ 356.
5. A worker met with an accident, paid ₹ 50000, now. Dr. with ₹ 50000. Asset side ,Bank balance decreases by ₹ 50000.
6. A case was pending in the court; firm had to pay ₹ 20000. Dr.₹ 20000. Asset side, Bank Balance decreases by ₹ 20000.

 

Some more typical transactions:

Effect of Transaction On Revaluation account On Balance Sheet
1.Creditors amounting to ₹1,000 were not likely to be claimed. Hence, be written back. Cr. with ₹1,000 Subtract from Creditors
2. A debtor whose dues of ₹12,000 were written off as bad debts last year,

paid ₹9,000 in full settlement.

 Cr. with ₹9,000 Bank increases by ₹9,000
3. Rajesh was to carry out reconstitution of the firm at a remuneration of ₹5,000. Dr. with ₹5,000 Rajesh’s capital increases by ₹5,000
4. Machinery taken by P (Partner) for ₹10,000 (Book Value of Machinery is ₹6,000). Cr. with ₹4,000 P’s Capital decreases by ₹10,000

Machinery decreases by ₹6,000
5. Stock is overvalued by 10% (Book Value of Furniture is ₹22,000)

Present value of Stock is 110% i.e. ₹22,000

If 110% is equal to = 22,000

Then, 1% …………… =  22,000/110

So, 100%...... = (22,000/110) X 100 = 20,000

 Dr. with ₹2,000 Stock decreases by ₹2,000
6. Stock is undervalued by 10% (Book Value of Stock is ₹18,000). Cr. with ₹2,000 Stock increases by ₹2,000
7. Stock was found overvalued by ₹7,000. Dr. with ₹7,000 Stock decreases by ₹7,000
8. Half of the Stock is taken by Q (Partner) for ₹20,000 and the balance is revalued at ₹30,000 (Book Value of Stock is ₹45,000). Cr. with ₹5,000 Q’s capital decreases by ₹20,000

Stock decreases by ₹15,000
9. Stock included ₹2,000 for obsolete items. Hence are to be written back. Dr. with ₹2,000 Stock decreases by ₹2,000
10. A Bill Receivable of ₹7,000 previously discounted with the banker, was dishonoured on 31st March, 2022 but no entry has been passed for dishonor. NIL ₹7,000, Debtors increase

₹7,000, Bank decreases
11. Out of the amount of the insurance premium which was debited to Profit and Loss A/c, ₹800 to be carried forward to next year. Cr. with ₹800 Asset side ₹800 Prepaid Insurance
12. Mahesh an old customer whose account was written off as bad debts, has promised to pay ₹4,000 in settlement of his dues. Cr. with ₹4,000 Debtors increase by ₹4,000
Alternatively, The above transaction can be ignored, as only a promise is there. NIL NIL
13. Bill accepted of ₹5,000 issued by creditors were not recorded in the books. NIL Creditors decrease

Bills Payable increase
14. Expenses debited in the Profit & Loss A/c included ₹1,000 paid for a partner’s personal expenses. Cr. with ₹1,000 Partner’s Capital Account decreases by ₹1,000
15. A credit purchase of goods for ₹1,200 were not recorded in the books but had been included in stock. Dr. with ₹1,200 Increase in Creditors ₹1,200

 

Revaluation Account Video

Treatment of Accumulated Profits and Losses