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At the time of the reconstitution of the partnership firm, the actions related to the revaluation of assets and liabilities are taken and the number of changes is to be distributed among the partners’ in their old profit sharing ratio.
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What is Revaluation of Assets: –
The revaluation of assets means when we have compared the book value of assets with the current Market value of the assets. We have to revaluate the assets when there is a reconstruction of the firm like change in the profit-sharing. The difference amount if increased then it will be credited to the Partners’ Capital/Current account and if Decreased then it will be Debited to the Partners’ Capital/Current account in the old profit sharing ratio.
What is Revaluation of Liabilities: –
The process of revaluation of Liabilities is the same as the above-explained process of revaluation of assets but the treatment of liabilities is opposite from the assets account. So, The difference amount if increased then it will be Debited to the Partners’ Capital/Current account and if Decreased then it will be Credited to the Partners’ Capital/Current account in the old profit sharing ratio.
Accounting Treatment of Revaluation of Assets and Liabilities: –
The partners have to decide first about the recording of the revaluation of assets and liabilities in the books or not. The accounting treatment in both cases are different and explained as under: –
1. When the changes in the value of assets and liabilities are to be recorded in the books: –
When partners decided to record all changes in the boos of the account then One account Revaluation account or Profit and Loss Adjustment account in opened. The increase in the value of assets and a decrease in the value of liabilities is Debited to the revaluation account and The Decreased in the value of assets and an increase in the value of liabilities are Debited to the revaluation account. then after if the balance of the revaluation account is debit then it will be debited to the partners’ capital or current account or if the balance of the revaluation account is debit then it will be debited to the partners’ capital or current account.
The Accounting journal entries are passed: –
| Date | Particulars | L. F. | Debit | Credit | ||
| (i) For an increase in the value of assets: | ||||||
| Asset A/c (Individually) | Dr. | XXXX | ||||
| To Revaluation A/c | XXXX | |||||
| (Being adjustment made for the increase in the value of assets ) | ||||||
| (ii) For a decrease in the value of assets: | ||||||
| Revaluation A/c | Dr. | XXXX | ||||
| To Asset A/c (Individually) | XXXX | |||||
| (Being adjustment made for the Decrease in the value of assets.) | ||||||
| (iii) For an increase in the value of Liability: | ||||||
| Revaluation A/c | Dr. | XXXX | ||||
| To Liability A/c (Individually) | XXXX | |||||
| (Being adjustment made for the increase in the value of assets ) | ||||||
| (iv) For a decrease in the value of Liability: | ||||||
| Liability A/c (Individually) | Dr. | XXXX | ||||
| To Revaluation A/c | XXXX | |||||
| (Being adjustment made for the Decrease in the value of the liability .) | ||||||
| (v) For the recording of unrecorded assets: | ||||||
| Unrecorded Asset A/c | Dr. | XXXX | ||||
| To Revaluation A/c | XXXX | |||||
| (Being adjustment made for the recording of the value of assets.) | ||||||
| vi) For the recording of unrecorded liability: | ||||||
| Revaluation A/c | Dr. | XXXX | ||||
| To Unrecorded Liability A/c | XXXX | |||||
| (Being adjustment made for the recording of the value of liabilities) | ||||||
| (vii) For the balance of Revaluation Account: – | ||||||
| (i) if there is the Credit balance (Net Gain) | ||||||
| Revaluation A/c | Dr. | XXXX | ||||
| To Partners’ Capital/Current A/c | XXXX | |||||
| (Being adjustment made for transfer the balance of revaluation a/c to partners’ capital/current a/c) | ||||||
| (ii) if there is the Debit balance (net loss) | ||||||
| Partners’ Capital/Current A/c | Dr. | XXXX | ||||
| To Revaluation a/c | XXXX | |||||
| (Being adjustment made for transfer the balance of revaluation a/c to partners’ capital/current a/c) | ||||||
2. When the changes in the value of assets and liabilities are not to be recorded in the books: –
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When the partners decided to not show the changes in the value of assets and liabilities in the books of account. The adjustment is made for the share of retiring or admitting a partner of the profit or loss of the revaluation account bypassing the following journal entry: –
| Date | Particulars | L. F. | Debit | Credit | |
| For the balance of Revaluation Account: – | |||||
| (i) if there is the Credit balance (Net Gain) | |||||
| Remaining Partners’ Capital A/c | Dr. | XXXX | |||
| To Retiring Partners’ Capital A/c | XXXX | ||||
| (Being adjustment made for transfer the balance of revaluation a/c to retiring partners’ capital a/c) | |||||
| (ii) if there is the Debit balance (net loss) | |||||
| Retiring Partners’ Capital A/c | Dr. | XXXX | |||
| To Remaining Partners’ Capital A/c | XXXX | ||||
| (Being adjustment made for transfer the balance of revaluation a/c to retiring partners’ capital/current a/c) | |||||
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