Admission of a Partner: Revaluation A/c
Revaluation of Assets
and Reassessment of Liabilities
It is always desirable to ascertain whether the assets of the firm are
shown in books at their current values. In case the assets are overstated or
understated, these are revalued. Similarly, a reassessment of the liabilities
is also done so that these are brought in the books at their correct and
current values. For this purpose, the firm has to prepare the Revaluation
Account. The gain or loss on revaluation of each asset and liability is
transferred to this account and finally its balance is transferred to the
capital accounts of the old partners in their old profit-sharing ratio. In other words, the revaluation account is
credited with increase in the value of each asset and decrease in its
liabilities because it is a gain and is debited with decrease in the value of
assets and increase in its liabilities is debited to revaluation account
because it is a loss. Similarly unrecorded assets are credited and unrecorded
liabilities are debited to the revaluation account. If the revaluation account
finally shows a credit balance, then it indicates net gain and if there is a
debit balance then it indicates net loss. Which will be transferred to the
capital accounts of the old partners in old ratio. Revaluation of Assets and Reassessment of
Liabilities
The journal entries recorded for revaluation of assets and
reassessment of liabilities are as follows:
|
(i) For increase in the value of an asset Asset A/c Dr. To Revaluation A/c (Gain) (ii) For reduction in the value of an asset Revaluation A/c Dr. To Asset A/c (Loss) (iii) For appreciation in the amt. of a liability Revaluation A/c Dr. To Liability A/c (Loss) (iv) For reduction in the amt. of a liability Liability A/c Dr. To Revaluation A/c (Gain) (v) For an unrecorded asset Asset A/c Dr. To Revaluation A/c (Gain) (vi) For an unrecorded liability Revaluation A/c Dr. To Liability A/c (Loss) (vii) For increase in Prov. on asset
Revaluation A/c Dr. To Prov. on asset A/c (Loss) |
(viii) For decrease in Prov. on asset
Prov. on asset A/c Dr. To Revaluation A/c (Gain) (ix) For Overvalued Asset Revaluation A/c Dr. To Overvalued Asset A/c (Loss) (x) For Undervalued Asset Undervalued Asset A/c Dr. To Revaluation A/c (Gain) (xi) For transfer of gain on Revaluation if credit balance Revaluation A/c Dr. To Old Partners Cap. A/cs (Individually in old ratio) (xii) For transferring loss on revaluation Old partner’s Capital A/cs Dr. To Revaluation A/c (Individually in old ratio) |
|
Particulars |
Amt. (Rs.) |
Particulars |
Amt. (Rs.) |
|
Decr. in the value of an asset
Incr. in the value of liability Increase in prov. on asset Unrecorded Liability Overvalued Asset Outstanding Expenses Unearned Income Advance Income Profit transferred to: A’s Capital xxxx B’s Capital xxxx |
xxxx
xxxx xxxx xxxx xxxx xxxx xxxx xxxx |
Incr. in the value of an asset
Decr. in the value of liability Decrease in prov. on asset Unrecorded Asset Undervalued Asset Prepaid Expenses Accrued/Earned Income B/D recovered (Cash) Or, Loss transferred to: A’s Capital xxxx B’s Capital xxxx |
xxxx
xxxx xxxx xxxx xxxx xxxx xxxx xxxx |
|
|
xxxx |
|
xxxx |
Following in Balance Sheet of A and B who share profits in the ratio of 3:2.
Balance Sheet of A and B as on April 1, 2025
|
Liabilities |
Amt. (Rs.) |
Assets |
Amt. (Rs.) |
|
Sundry creditors Capitals A 3,00,000 B
2,00,000 |
2,00,000 5,00,000 |
Cash in hand Debtors Stock Furniture Plant and Machinery |
30,000 1,20,000 1,50,000 1,00,000 3,00,000 |
|
|
7,00,000 |
|
7,00,000 |
1. C is to bring in Rs. 1,50,000 as capital and Rs. 50,000 as premium for goodwill for 1/6 share.
2. The value of stock is reduced by 10% while plant and machinery is appreciated by 10%.
3. Furniture is revalued at Rs. 90,000.
4. A provision for doubtful debts is to be created on sundry debtors at 5% and Rs. 4,000 is to be provided for an electricity bill.
5. Investment worth Rs. 10,000 (not mentioned in the balance sheet) is to be taken into account.
6. A creditor of Rs. 10,000 is not likely to claim his money and is to be written off.
Record journal entries and prepare revaluation account, capital account and balance sheet.
Solution Journal Entries
|
Date |
Particulars |
L.F. |
Dr. (Rs.) |
Cr. (Rs.) |
|
2015
Apr. 01 |
To C’s capital account To Goodwill A/c (Capital and goodwill/premium brought in by C) Goodwill A/c Dr. To A’s Capital A/c To B’s Capital A/c (Premium divided between A and B in S.R. 3:2) Revaluation A/c Dr. To Stock A/c To Furniture To Provision for Doubtful Debt A/c |
|
10,000 |
50,000 20,000 10,000 6,000 6,000 |
Plant and Machinery A/c Dr.
Investment A/c Dr.
To O/s Electricity A/c
(Amount provided for o/s electricity bill)
Sundry Creditors A/c Dr.
To Revaluation A/c
(Creditors not likely to be claimed written off)
To A’s Capital A/c
To B’s Capital A/c
|
Particulars |
Amt. (Rs.) |
Particulars |
Amt. (Rs.) |
|
Stock
Furniture Provision for Doubtful Debts Outstanding Electricity Profit transferred to: A’s Capital 9,000 B’s Capital 6,000 |
15,000
10,000 6,000 4,000 |
Plant and Machinery
Investments Sundry Creditors |
30,000
10,000 10,000 |
|
|
50,000
|
|
50,000
|
|
Particulars |
A (Rs.) |
B (Rs.) |
C (Rs.) |
Particulars |
A (Rs.) |
B (Rs.) |
C (Rs.) |
|
Balance c/d |
3,39,000 |
2,26,000 |
1,50,000 |
Balance b/d
Rev. A/c Cash A/c Prem. for G/W |
3,00,000
9,000 ------- 30,000 |
2,00,000
6,000 -------- 20,000 |
------
------ 1,50,000 ------- |
|
|
3,39,000 |
2,26,000 |
1,50,000 |
|
3,39,000 |
2,26,000 |
1,50,000 |
|
Liabilities |
Amt. (Rs.) |
Assets |
Amt. (Rs.) |
|
Creditors
O/s electricity bill Capitals A 3,39,000 B 2,26,000 C 1,50,000 |
1,90,000
4,000 |
Cash in hand
Debtors 1,20,000 Less- prov. for D/D 6,000 Stock Investment Furniture Plant and Machinery |
2,30,000
1,35,000 10,000 90,000 3,30,000 |
|
|
9,09,000 |
|
9,09,000 |
Given below is the Balance Sheet of A and B, who are carrying on partnership business as on March 31, 2025. A and B share profits in the ratio of 2:1.
Balance Sheet of A and B as on March 31, 2025
|
Liabilities |
Amt. (Rs.) |
Assets |
Amt. (Rs.) |
|
Bills Payable
Creditors Outstanding expenses Capitals A 2,00,000 B 1,60,000 |
30,000
88,000 12,000 |
Cash in hand
Cast at bank Debtors Stock Plant and Machinery Land & Building |
16,000
70,000 80,000 64,000 1,00,000 1,60,000 |
|
|
4,90,000 |
|
4,90,000 |
1. C will bring in Rs 1,00,000 as his capital and Rs 45,000 as his share of goodwill for 1/4 share in profits. Goodwill will be withdrawn by A & B.
2. Plant is to be appreciated to Rs 1,20,000 and Buildings is to be appreciated by 10%.
3. Stock is found overvalued by Rs 4,000.
4. A provision for doubtful debts is to be created at 5% of debtors.
5. Creditors were unrecorded to the extent of Rs 10,000.
Record revaluation account, partners’ capital accounts, and the Balance Sheet of the constituted firm after admission of the new partner.
Solution
Dr. Revaluation Account Cr.
|
Particulars |
Amt. (Rs.) |
Particulars |
Amt. (Rs.) |
|
Stock
Creditors Provision for Doubtful Debts Profit transferred to: A’s Capital 12,000 B’s Capital 6,000 |
4,000
10,000 4,000 |
Plant and Machinery
Land & Building |
20,000
16,000 |
|
|
36,000 |
|
36,000 |
|
Particulars |
A (Rs.) |
B (Rs.) |
C (Rs.) |
Particulars |
A (Rs.) |
B (Rs.) |
C (Rs.) |
|
Bank A/c
Balance c/d |
30,000
2,12,000 |
15,000
1,66,000 |
--------
1,00,000 |
Balance b/d
Revaluation A/c Bank A/c Prem. for G/W |
2,00,000 12,000 --------
30,000 |
1,60,000 6,000 --------
15,000 |
------ ------ 1,00,000
------ |
|
|
2,42,000 |
1,81,000 |
1,00,000 |
|
2,42,000 |
1,81,000 |
1,00,000 |
|
Liabilities |
Amt. (Rs.) |
Assets |
Amt. (Rs.) |
|
Bills Payable
Creditors Outstanding expenses Capitals A 2,12,000 B 1,66,000 C 1,00,000 |
30,000
98,000 12,000 |
Cash in hand
Cast at bank Debtors 80,000 Less- prov. for D/D 4,000 Stock Plant and Machinery Land & Building |
16,000
1,70,000 60,000 1,20,000 1,76,000 |
|
|
6,18,000 |
|
6,18,000 |
Illustration 03
The Balance Sheet of W and X who shared profits in the ratio of 3:2 was as follows:
Balance Sheet of W and X as on Jan. 01, 2025
|
Liabilities |
Amt. Rs. |
Assets |
Amt. Rs. |
|
Sundry Creditors
Capitals: W 40,000 X 30,000 |
20,000
|
Cash in hand
Sundry debtors 20,000 Less Prov. for D/D 700 Stock Machinery Building |
5,000
25,000 35,000 5,700 |
|
|
90,000 |
|
90,000 |
1. He was to get 4/15 share of profit.
2. He had to bring in Rs.30,000 as his capital.
3. He would pay cash for goodwill which would be based on 2 ½ years’ purchase of the profits of the past four years.
4. W and X would withdraw half the amount of goodwill premium brought by Y.
5. The assets would be revalued as: Sundry Debtors at book value less a provision of 5%; Stock at Rs 20,000; Plant and Machinery at Rs 40,000; and Patents at Rs 12,000.
6. Creditors were valued at Rs 23,000, one bill for goods purchased having been omitted.
7. Profit for the past four years were: 2011-15,000; 2013-14,000; 2012-20,000; 2014-17,000;
Give necessary journal entries and ledger accounts to record the above, and prepare the Balance Sheet after Y’s admission.
Solution
Value of goodwill
Average Profits = (15,000+20,000+14,000+17,000)/4 = 66,000/4 = Rs. 16,500
Goodwill at 2 ½ Years’ purchase = Rs. 16,500 × 5/2 = Rs. 41,250
B’s share of goodwill = Rs. 41,250 × 4/15 = Rs, 11,000.
Solution Journal Entries
|
Date |
Particulars |
L.F. |
Dr. (Rs.) |
Cr. (Rs.) |
|
2025
Jan. 01 |
To Y’s capital account To Prem. for Goodwill A/c (Capital and goodwill brought in by Y) Prem. for Goodwill A/c Dr. To W’s Capital A/c To X’s Capital A/c (Prem. divided between A and B in S.R. 3:2) W’s Capital A/c Dr. X’s Capital A/c Dr. To Cash A/c (Half G/W amt. withdrawn by the old partners) Revaluation A/c Dr. To Stock A/c To Provision for Doubtful Debt A/c To Sundry Creditors A/c (Revaluation in the value of assets on revaluation) Machinery A/c Dr. Patents A/c Dr. To Revaluation A/c (Increase in value of Machinery and Patents) Revaluation A/c Dr. To W’s Capital A/c To X’s Capital A/c (Profit on revaluation transferred to W and X in old profit sharing ratio) |
|
2,200 6,300 |
11,000 4,400 300 3,000 1,200 |
|
Particulars |
Amt. Rs. |
Particulars |
Amt. Rs. |
|
Stock
Provision for Doubtful Debts Sundry Creditors Profit transferred to: W’s Capital 1,800 X’s Capital 1,200 |
5,000
300 3,000 |
Machinery
Patent |
5,000
6,300 |
|
|
11,300 |
|
11,300 |
|
Particulars |
W (Rs.) |
X (Rs.) |
Y (Rs.) |
Particulars |
W (Rs.) |
X(Rs.) |
Y (Rs.) |
|
Cash A/c
Balance c/d |
3,300
45,100 |
2,200
|
---------
|
Balance b/d
Revaluation A/c Cash A/c Prem. for G/W |
40,000
1,800 -------- 6,600 |
30,000
1,200 -------- 4,400 |
-------
-------- |
|
|
48,400 |
35,600 |
30,000 |
|
48,400 |
35,600 |
30,000 |
|
Liabilities |
Amt. Rs. |
Assets |
Amt. Rs. |
|
Sundry Creditors
Capitals: W 45,100 X 33,400 Y 30,000 |
23,000
|
Cash in hand
Sundry debtor 20,000 Less Prov. for D/D 1,000 Stock Machinery Patents |
40,500
20,000 40,000 12,000 |
|
|
1,31,500 |
|
1,31,500 |
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