Meaning

In case of Revaluation of assets and liabilities, Revaluation account is prepared. It is also called Profit and loss adjustment account.

Revaluation account is a nominal account 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 of Profits/Losses 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 Partner’s Capital A/c (Old partners only, in old ratio)

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

 

Revaluation of Assets and Liabilities in case of 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.

 

Preparation of Revaluation account

Since it is a nominal account, it is easy to construct 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.Show the effect of these transactions on the revaluation account and their effect on the balance sheet.

Transaction Effect on Revaluation account Effect on Balance sheet

(Revised figure of debtors).

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.2011. Show the effect of these transactions on the revaluation account and their effect on the balance sheet.

Transaction Effect on Revaluation account Effect on Balance sheet

(Revised figure of Land and building).

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:

Some examples of treatment of unrecorded assets have been taken here with their effect on the Revaluation account and on the Revised Balance Sheet.

Transaction Effect on Revaluation account Effect 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. wi900. 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:

Some examples of treatment of unrecorded liabilities have been taken here with their effect on the Revaluation account and on the Revised Balance Sheet.

Transaction Effect on Revaluation account Effect 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 dishonored, ₹1000. Dr. with ₹ 1000. Bank Balance will decrease by ₹ 1000.
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.

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