Steps for Revaluation of Assets and Liabilities with Journal Entry Examples
The revaluation of assets and reassessment of liabilities is a vital concept in partnership accounting. It means updating the book values of all assets and liabilities to their fair or current market value during major changes, such as the admission or retirement of a partner. Understanding this topic helps students excel in school and competitive exams, besides building crucial business knowledge.
| Item | Increase in Value | Decrease in Value | Unrecorded (New Item) |
|---|---|---|---|
| Asset | Credited to Revaluation Account | Debited to Revaluation Account | Credited to Revaluation Account |
| Liability | Debited to Revaluation Account | Credited to Revaluation Account | Debited to Revaluation Account |
What is Revaluation of Assets and Reassessment of Liabilities?
Revaluation of assets and reassessment of liabilities refers to adjusting the book values of a firm’s assets and liabilities to reflect their current fair values. This accounting step is usually taken during changes in a partnership, like when a new partner is admitted or an existing partner retires. The aim is to ensure that profits or losses from these changes are shared fairly among all partners, according to their agreed profit-sharing ratios.
Why is Revaluation of Assets and Reassessment of Liabilities Needed?
There are several important reasons why businesses conduct revaluation of assets and reassessment of liabilities. This section is crucial for understanding exam questions and real-life business situations.
- To show assets and liabilities at current, true values in financial records.
- To calculate and distribute profit or loss from such revaluation among all old partners.
- To ensure fair treatment of incoming or outgoing partners (admission/retirement/death).
- To bring unrecorded assets and liabilities into the books properly.
- To protect the interests of both existing and new partners.
How to Prepare the Revaluation Account: Format and Process
The Revaluation Account is a special account prepared to find out profit or loss due to changes in the values of assets and liabilities. Here is the typical format used in exams and business:
| Revaluation Account | |
|---|---|
| Debit | Credit |
|
Decrease in asset value Increase in liabilities Unrecorded liabilities found |
Increase in asset value Decrease in liabilities Unrecorded assets found |
| Profit transferred to Partners' Capital A/c (if loss) | Profit transferred to Partners' Capital A/c (if gain) |
Steps to prepare the revaluation account:
- Note every increase or decrease in asset and liability values.
- Record all such changes in the revaluation account (as described above).
- Consider unrecorded assets/liabilities and adjust accordingly.
- Calculate net profit or loss and transfer it to all existing (old) partners’ capital accounts in their old ratio.
Example of Revaluation of Assets and Reassessment of Liabilities with Journal Entries
Let’s look at a simple example for clear understanding, based on exam-style questions:
- Land increases from ₹60,000 to ₹70,000 (₹10,000 increase).
- Machinery decreases from ₹50,000 to ₹45,000 (₹5,000 decrease).
- A previously unrecorded liability (outstanding salary ₹2,000) is found.
- Unrecorded asset (investment ₹4,000) is now brought into books.
The journal entries would be:
- Land: Dr. Land A/c ₹10,000 Cr. Revaluation A/c ₹10,000
- Machinery: Dr. Revaluation A/c ₹5,000 Cr. Machinery A/c ₹5,000
- Outstanding Salary: Dr. Revaluation A/c ₹2,000 Cr. Outstanding Salary A/c ₹2,000
- Investment: Dr. Investment A/c ₹4,000 Cr. Revaluation A/c ₹4,000
At the end, if there is a net profit on revaluation (credits exceed debits), it is transferred to the old partners’ capital accounts in their old profit-sharing ratio. If there is a loss, it is distributed similarly.
For further solved illustrations and numericals, check resources like DK Goel Solutions Class 12 Chapter 4 or TS Grewal Solutions.
Rules and Treatment of Unrecorded Assets and Liabilities
When unrecorded assets or liabilities are detected during this process, use these rules:
- Unrecorded asset: Credited to the revaluation account (it increases total assets).
- Unrecorded liability: Debited to the revaluation account (it increases total liabilities).
This ensures the financial statements show the true status of the firm at the time of major partnership changes.
Common Mistakes and Exam Tips
- Remember to always use the old profit-sharing ratio for distributing profit/loss on revaluation.
- Do not include items already correctly valued in the books.
- Handle unrecorded items separately; do not miss them in adjustment.
- Check all figures and calculations carefully to avoid errors in the revaluation account.
Smart tip: Use tables and work out answers stepwise in exams for clarity and partial marking where possible.
Application and Relevance for Students
Mastering revaluation of assets and reassessment of liabilities helps you tackle typical Class 12 Accountancy questions, as well as topics in competitive exams like CA Foundation, CMA, and even practical partnership business scenarios. This knowledge also prepares you for advanced commerce studies, and day-to-day business adjustments for transparent and fair partnerships.
For related topics, refer to:
- Admission of a Partner
- Reconstitution of Partnership Firm
- Realisation Account
- Difference Between Assets and Liabilities
- Methods of Depreciation
At Vedantu, we simplify these Commerce topics to make learning faster and clearer for all students.
In summary, revaluation of assets and reassessment of liabilities ensures current and fair value representation in partnership accounts, especially during major changes. This process protects the interests of all partners, keeps records accurate, aids in exam performance, and is essential for honest business practice.
FAQs on Revaluation of Assets and Reassessment of Liabilities in Partnership Accounting
1. What is the journal entry for revaluation of assets and reassessment of liabilities?
Revaluation of assets and reassessment of liabilities involves adjusting values to reflect current market prices. Journal entries depend on whether assets increase or decrease in value and similarly for liabilities. For example, an increase in asset value is debited to the Revaluation Account, while a decrease is credited. The corresponding adjustments are then made to the partners' capital accounts. Profit or loss on revaluation is shared among partners according to their profit-sharing ratio.
2. Why do firms revalue their assets and liabilities during partner admission or retirement?
Revaluation is crucial during partner admission or retirement to ensure fairness. It updates asset and liability values to their current market values, reflecting true financial position. This prevents existing partners from benefiting or losing due to outdated valuations when a new partner joins or an old partner leaves. The revaluation ensures a fair distribution of profits and losses based on updated figures, leading to a more equitable division of assets and liabilities.
3. Which account is used for revaluation of assets and reassessment of liabilities?
The Revaluation Account is specifically used to record adjustments to the values of assets and liabilities. This account shows the profit or loss arising from the revaluation process, which is then transferred to the partners' capital accounts based on their agreement. It is a temporary account closed after the revaluation process is complete and the entries are posted to the permanent accounts.
4. How are unrecorded assets and liabilities treated in revaluation?
Unrecorded assets and liabilities are brought into the books during the revaluation process. Unrecorded assets are debited to the Revaluation Account, increasing the overall value. Similarly, unrecorded liabilities are credited to this account, reflecting the increase in obligations. This ensures a complete and accurate representation of the firm's financial position.
5. Is profit on revaluation transferable to all partners?
Yes, generally, the profit or loss from revaluation is shared among existing partners in their prevailing profit-sharing ratio unless otherwise specified in the partnership agreement. This ensures fairness in reflecting the impact of changes in asset and liability valuations on all partners' shares.
6. What is the treatment of revaluation of assets?
The treatment of revaluation of assets involves debiting the Revaluation Account for increases in value and crediting it for decreases. Any resulting profit or loss is then distributed among partners according to their agreed-upon profit-sharing ratio. The updated values are reflected in the balance sheet and subsequent financial statements.
7. What is the journal entry of revaluation of assets?
Journal entries for asset revaluation depend on whether the value increases or decreases. An increase is debited to the Revaluation Account and credited to the respective asset account. A decrease is credited to the Revaluation Account and debited to the asset account. Subsequent entries adjust partner capital accounts based on their share of the revaluation profit or loss.
8. Why is revaluation of assets and liabilities done in partnership business?
Revaluation in partnerships ensures fairness and accuracy. It updates asset and liability values to reflect current market conditions, especially important during events like partner admission, retirement, or changes in the profit-sharing ratio. It ensures that profits and losses are distributed equitably based on the true value of assets and liabilities.
9. Why do firms revalue assets on retirement class 12?
Revaluation before a partner's retirement is crucial for fairness and accuracy. It updates asset values to current market prices, ensuring that the retiring partner receives a fair share of the firm's net assets. Skipping revaluation could result in an unfair distribution of assets among the remaining partners.
10. What is revaluation accounting example?
Imagine a building initially recorded at ₹10,00,000 is revalued at ₹15,00,000. The Revaluation Account is debited with ₹5,00,000 (the increase), and the Building Account is credited with the same amount. This ₹5,00,000 profit on revaluation is then allocated to the partners' capital accounts.
11. Revaluation of assets and reassessment of liabilities example
Let’s say a machine initially valued at ₹200,000 is now worth ₹150,000 (decrease). The Revaluation Account would be credited with ₹50,000, and the Machine Account would be debited. This ₹50,000 loss is then shared amongst partners according to their profit-sharing ratio.
