1. Why Revaluation is Needed
Book values of assets and liabilities in a firm's accounts may differ from their actual current values due to:
- Appreciation in land and building values
- Obsolescence or wear reducing machinery value
- Stock that has become obsolete or increased in value
- Debtors that have become partly irrecoverable (need provision)
- Liabilities that have changed (creditor amount revised)
Before any change in partnership arrangement, assets and liabilities must be restated at their revised (fair) values. The profit or loss from revaluation belongs to the partners in their old profit-sharing ratio — because it accrued while they were partners under the old arrangement.
2. Revaluation Account — Structure and Rules
| Revaluation Account | |||
|---|---|---|---|
| Dr (Losses / Decreases) | ₹ | Cr (Profits / Increases) | ₹ |
| Assets DECREASED in value | xxx | Assets INCREASED in value | xxx |
| Liabilities INCREASED | xxx | Liabilities DECREASED | xxx |
| Unrecorded liabilities/expenses | xxx | Unrecorded assets/income | xxx |
| Profit transferred to Partners' Capital/Current A/c (Old Ratio) | xxx | Loss transferred to Partners' Capital/Current A/c (Old Ratio) | xxx |
Key Rules (Debit or Credit side)
| Item | Side in Revaluation A/c | Effect |
|---|---|---|
| Asset value INCREASES | Credit | Revaluation profit → Cr partners |
| Asset value DECREASES | Debit | Revaluation loss → Dr partners |
| Liability INCREASES | Debit | More to pay → loss |
| Liability DECREASES | Credit | Less to pay → profit |
| Unrecorded asset found | Credit | Profit to partners |
| Unrecorded liability found | Debit | Loss to partners |
3. Fully Worked Example
A and B are partners sharing profits 3:2. They decide to change ratio to 2:3. On date of change:
- Land to be appreciated by ₹20,000
- Machinery to be depreciated by ₹8,000
- Stock to be reduced by ₹4,000
- Provision for bad debts to be created ₹3,000
- Creditors reduced by ₹5,000
Revaluation Account:
| Revaluation Account | |||
|---|---|---|---|
| Dr | ₹ | Cr | ₹ |
| Machinery A/c (depreciation) | 8,000 | Land A/c (appreciation) | 20,000 |
| Stock A/c (reduction) | 4,000 | Creditors A/c (decrease) | 5,000 |
| Provision for Bad Debts | 3,000 | ||
| Profit transferred to: | |||
| A's Capital A/c (3/5) | 6,000 | ||
| B's Capital A/c (2/5) | 4,000 | ||
| Total | 25,000 | Total | 25,000 |
Verification: Profit = (20,000 + 5,000) − (8,000 + 4,000 + 3,000) = 25,000 − 15,000 = ₹10,000 ✓
A's share = 10,000 × 3/5 = ₹6,000; B's share = 10,000 × 2/5 = ₹4,000 ✓
Journal entries:
Dr Land A/c 20,000 | Cr Revaluation A/c 20,000 (asset up)
Dr Revaluation A/c 8,000 | Cr Machinery A/c 8,000 (asset down)
Dr Revaluation A/c 4,000 | Cr Stock A/c 4,000 (asset down)
Dr Revaluation A/c 3,000 | Cr Provision for Bad Debts A/c 3,000 (liability up)
Dr Creditors A/c 5,000 | Cr Revaluation A/c 5,000 (liability down)
Dr Revaluation A/c 10,000 | Cr A's Capital A/c 6,000; B's Capital A/c 4,000 (profit in old ratio)
