What is Memorandum Revaluation Account?
Whenever an account is prefaced with a "Memorandum," double-entry accounting is not being utilised. In cases when the partnership is unwilling to reevaluate the Fresh Balance sheet's debts and assets upon admission or retirement, the memorandum of revaluation would be set up.
Defining the meaning of Memorandum Revaluation Account
Although normally, a 'Revaluation Account' would be established by the partnership company at the moment of admission/retirement, even in this circumstance, the revaluation impact would be shown solely in the Members' Capital Accounts and not in the Financial Statements.
At the moment of an alteration in the profit share ratio, the retirement of a mate, the acceptance of a new partner, or the fatality of an existing partner, the deal may establish a revaluation account to convey and allocate any gain or loss caused by the rise or reduce in the valuation of the company's assets and debts.
Meaning and the Objective of the Memorandum Revaluation Account
Objective of the Memorandum Revaluation Account
Suppose a new partner is admitted or a retiring partner is dissolved. In that case, the partnership may choose to reflect the change in the values of property and debts via a memorandum revaluation section rather than on the income statement. It is a Nominal Account. When the office provides assurance and audit solutions, it does so on an entire cost recovery approach, and any surpluses or deficits that occur as a result are recorded in a memorandum account.
Such dealings are included in the surplus/deficit as a component of the Company's operational revenue and costs but are not considered for determining the surplus repayment. A part of a company's equity is its accumulated memorandum account excess or shortfall.
It is ready to learn the final result of factoring in the asset revaluation and obligations on the capitalisation of both existing and prospective partners. This document is written when partners do not want to update or adjust the asset value and obligations.
Difference between a Revaluation and Memorandum Revaluation Account
Differentiating between Revaluation Account and Memorandum Revaluation Account
Below are the differences between a revaluation account and a memorandum revaluation account:
When nonfinancial and financial liabilities and assets are revalued, any profits or losses accruing to their owners are recorded in the revaluation account for that accounting cycle. On the other hand, a Memorandum Revaluation Account is formed upon admission or resignation. It is done in case when a partnership doesn't want to amend assets and debts in the New Balance Sheet but instead wants to use the members' Capital Accounts.
The Revaluation Account must be created whenever a company's assets and debts are repriced and reflected in a revised income statement. But a Memorandum Revaluation Account must be drafted whenever the fresh balance sheet displays assets and debts at their previous or unmodified values.
There is no central dividing point between the two halves. It's all set to keep track of assets and debts as their values rise and fall. Yet, Memorandum Account is dual-sided. The first half tracks changes in assets and obligations, and the second half cancels them out.
Conclusion
Memorandum revaluation accounts are created if the assets and debts of a company have to be displayed at their pre-revaluation values rather than their adjusted values. This is a declaration formatted in two sections. An increase or reduction in the value of assets and liabilities is reported in the first section. The ensuing gain (or loss) is credited to the capital account of a previous partner according to the old profit-sharing ratio. In the next section of this declaration, the order of the items is switched. The second portion of the profit or loss is distributed to the capital accounts of all members, along with the new member, based on the revised profit distribution formula.
FAQs on Memorandum Revaluation Account: Definition and Use
1. What exactly is a Memorandum Revaluation Account?
A Memorandum Revaluation Account is a special account prepared in partnership accounting. Its main purpose is to record the effect of changes in the value of assets and liabilities when a firm is reconstituted (like when a new partner joins), but without actually changing their original values in the company's books.
2. Why is a Memorandum Revaluation Account prepared instead of a regular Revaluation Account?
This account is prepared when the partners agree to see the financial impact of revaluation but decide not to alter the book values of assets and liabilities. It allows them to adjust the profit or loss of revaluation among themselves while the Balance Sheet continues to show the original figures.
3. What is the main difference between a Revaluation Account and a Memorandum Revaluation Account?
The key difference lies in their impact on the books of accounts:
- A Revaluation Account records changes that are permanent. The new, revised values of assets and liabilities are shown in the new Balance Sheet.
- A Memorandum Revaluation Account is for record purposes only. After adjusting partners' capital, its effect is cancelled out, and assets and liabilities continue to appear at their old values in the Balance Sheet.
4. How is a Memorandum Revaluation Account structured or prepared?
The preparation involves two distinct parts:
- Part 1: This part works exactly like a normal Revaluation Account. It calculates the net profit or loss from revaluation, which is then distributed among the old partners in their old profit-sharing ratio.
- Part 2: This part immediately reverses all the entries made in Part 1. The resulting profit or loss is then distributed among all partners (including the new or incoming partner) in their new profit-sharing ratio.
5. How does preparing a Memorandum Revaluation Account affect the final Balance Sheet?
It has no direct effect on the asset and liability values shown in the Balance Sheet. Since the purpose of this account is to record and then reverse the revaluation entries, the assets and liabilities are shown at their original (old) book values in the new Balance Sheet. The only impact is on the balances of the Partners' Capital Accounts.
6. What type of account is a Memorandum Revaluation Account in accounting?
A Memorandum Revaluation Account is a nominal account. It is prepared solely to determine the profit or loss that arises from the revaluation of assets and reassessment of liabilities during the reconstitution of a partnership. Like other nominal accounts, it is closed after its purpose is served.
7. Can you give a simple example of when a Memorandum Revaluation Account would be used?
Imagine a partnership where land was bought for ₹5 lakhs, which is now worth ₹8 lakhs. When a new partner joins, the old partners want to get credit for this ₹3 lakh increase but want the Balance Sheet to continue showing the land at its historical cost of ₹5 lakhs. In this case, they would use a Memorandum Revaluation Account to adjust this gain in their capital accounts without changing the land's value in the books.
