Revaluation of Assets and Liabilities & Accumulated Profits on Retirement or Death of a Partner

Book values of assets and liabilities rarely match their true worth by the time a partner retires or dies. A building bought years ago may now be worth much more; a debtor may have become doubtful. Before settling the outgoing partner’s claim, the firm must reflect these true values — and that’s exactly what the Revaluation Account is for.

Why a Revaluation Account Is Prepared

The purpose is simple: to ensure that any gain or loss arising from undervalued or overvalued assets and liabilities — up to the date of retirement or death — is shared by all partners, including the outgoing one, in their old profit sharing ratio. This way, the outgoing partner neither loses out on a gain they helped create, nor unfairly benefits from a loss that surfaces later.

Journal Entries for Revaluation

Increase in the Value of an Asset

Decrease in the Value of an Asset

Increase in the Amount of a Liability

Decrease in the Amount of a Liability

Unrecorded Assets and Liabilities

An unrecorded asset discovered at this stage is debited to the Asset A/c and credited to Revaluation A/c; an unrecorded liability is debited to Revaluation A/c and credited to the Liability A/c. These are amounts that existed but were never entered in the books — bringing them in ensures the reconstituted firm starts with accurate figures.

Distributing the Profit or Loss on Revaluation

Once all the above entries are passed, the Revaluation Account is balanced. If the credit side (gains/decreases in liabilities) exceeds the debit side (losses/increases in liabilities), it’s a profit on revaluation; otherwise, it’s a loss. This net figure is transferred to all partners’ capital accounts, including the retiring/deceased partner, in the old profit sharing ratio.

Profit entry: Revaluation A/c Dr. → To All Partners’ Capital A/cs Loss entry: All Partners’ Capital A/cs Dr. → To Revaluation A/c

Treatment of Accumulated Profits and Losses

Apart from asset/liability revaluation, a firm’s Balance Sheet may also carry accumulated profits (General Reserve) or accumulated losses (a debit balance in the Profit and Loss Account) from earlier years. Since these belong to all partners jointly, they too must be distributed before the outgoing partner’s claim is finalised — again, in the old profit sharing ratio.

For accumulated profits/reserves:

For accumulated losses:

Solved Example

Mitali, Indu and Geeta share profits 5:3:2. Geeta retires. It is agreed that Machinery (book value Rs. 1,50,000) be valued at Rs. 1,40,000; Patents (Rs. 30,000) at Rs. 40,000; and Buildings (Rs. 1,00,000) at Rs. 1,25,000.

• Machinery decreases by Rs. 10,000 → debit to Revaluation A/c

• Patents increase by Rs. 10,000 → credit to Revaluation A/c

• Buildings increase by Rs. 25,000 → credit to Revaluation A/c

Net profit on revaluation = Rs. 35,000 (credit) − Rs. 10,000 (debit) = Rs. 25,000, shared by Mitali, Indu and Geeta in their old ratio 5:3:2 — that is, Rs. 12,500, Rs. 7,500 and Rs. 5,000 respectively.

Format of the Revaluation Account

Exam Tips

1. Always use the old ratio for distributing revaluation profit/loss and accumulated reserves — this is the single most tested concept in this section.

2. Keep asset revaluation entries and reserve/accumulated loss entries separate; don’t mix them into one journal entry.

3. Double-check whether the question is asking you to revalue only for the retiring partner’s benefit (in which case a Memorandum Revaluation Account may be used) or to permanently revise the books.

4. Present your Revaluation Account neatly with a clear balancing figure — examiners award marks for correct format, not just the correct number.

Practise This Topic

Revaluation Account questions test both concept and presentation. Get topic-wise practice sets, model answer formats, and instant feedback on ChampionsPrep .

Test Your Knowledge

Q1.At the time of a partner's retirement or death, the profit or loss on revaluation of assets and liabilities is shared by:

Only the continuing partners in the new ratioAll partners, including the outgoing partner, in the old profit sharing ratioOnly the retiring or deceased partnerAll partners equally

Q2.An increase in the value of an asset on revaluation is recorded by:

Revaluation A/c Dr. To Asset A/cAsset A/c Dr. To Capital A/cRevaluation A/c Dr. To Liability A/cAsset A/c Dr. To Revaluation A/c

Q3.An increase in the amount of a liability on revaluation is recorded by:

Revaluation A/c Dr. To Liability A/cLiability A/c Dr. To Revaluation A/cLiability A/c Dr. To Capital A/cAsset A/c Dr. To Revaluation A/c

Q4.Mitali, Indu and Geeta share profits 5:3:2 and Geeta retires. Machinery decreases by Rs. 10,000, Patents increase by Rs. 10,000 and Buildings increase by Rs. 25,000. Geeta's share of the revaluation profit is:

Rs. 7,500Rs. 12,500Rs. 5,000Rs. 25,000

Q5.A General Reserve appearing in the Balance Sheet when a partner retires is transferred to the partners' capital accounts in:

The new profit sharing ratioThe old profit sharing ratioThe sacrificing ratioThe ratio of closing capitals