Partners reevaluate market value of Fixed Assets and remeasure Current Assets and Current Liabilities. Any change in the value of Assets/Liabilities is dealt via Revaluation Account and the resultant gain/loss is shared amongst the existing partners in their current profit-sharing ratio.
Case-1 When Partners decide to show the effect of Revaluation in the Balance Sheet
A. Accounting Treatment under various scenarios
Important to Note:
Language in the question: AT/To means new value of the Asset/Liability.
Language in the question: By means difference between existing value and new value of the Asset/Liability.
B. Preparation of Revaluation Account
On the Revaluation of Assets and Reassessment of Liabilities, a new account is opened Revaluation Account
Revaluation Account is a nominal account. As per nominal rule all the expenses & losses are debited and all the incomes/gains/profits are credited
Revaluation Account
* Only one will appear at a time
When Revaluation Account is prepared, assets and Liabilities appear in the Balance Sheet of the reconstituted firm at their revised (changed) values
C. Expenses on reconstitution of the Firm
Firm gives contract to partner including expenses or excluding expenses
Treatment when contract to partner is inclusive of expenses
Case-2 When Partners decide to carry old values in the Balance Sheet-Memorandum Revaluation Account
Applicable when revised (changed) values of assets and liabilities are not to be recorded
Gain (Profit) or Loss on Revaluation of Assets and Reassessment of Liabilities is adjusted through Capital Accounts by passing an adjustment entry by debiting/crediting the Capital/Current Accounts of gaining partners and crediting/debiting the sacrificing partners
STEPS
a) Calculation of the Net Effect of Revaluation
b) Calculate Sacrificing/Gaining Ratio = Old Share – New Share
c) Calculate share of Gaining and Sacrificing Partner in the Net Effect (computed in step a)
Journal Entry – In case of Gain/Profit on Revaluation
Journal Entry – In case of Loss on Revaluation
Important to Note: The Assets and Liabilities remain at the book value. No adjustment in the Balance Sheet of the revalued assets/liabilities