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Revaluation of Assets and Liabilities

At the time of retirement of a partner, the assets and liabilities of the firm are re-valued and Revaluation Account is prepared in the same way as in the case of admission of a partner. This is done to adjust the changes in values of assets and liabilities at the time of retirement of a partner. Any profit or loss due to revaluation is divided amongst all the partners including the retiring partner in their existing profit sharing ratio. Revaluation account will be prepared in the similar way as in case of admission of a partner. The following journal entries are passed for this purpose:



Sometimes, the continuing partners decide to show the assets and liabilities at their original value. In such a case, Memorandum Revaluation A/c is prepared. In this account, the assets and liabilities are re-valued by passing revaluation entries through Memorandum Revaluation account. The resultant profit is shared among all the partners including the retiring partner in their old profit sharing ratio.


Then, the revaluation entries are reversed in order to bring back the assets and liabilities to their original values. The gain or loss arising on such reversal is shared among the continuing partners in the new profit sharing ratio.

 

Note: The entries to be passed on revaluation, memorandum revaluation and reversal of entries are as discussed in ‘Admission of a partner’.


 

Illustration - 7

 

X, Y and Z are partners sharing profits in the ratio 3 : 2 : 1. X retires from the partnership. In order to settle his claim, the following revaluation of assets and liabilities was agreed upon:

  • The value of machinery is increased by ₹ 50,000.
  • The value of investment is increased by ₹ 4,000.
  • A provision for outstanding bill standing in the books at ₹ 2,000 is now not required.
  • The value of land and building is decreased by ₹ 24,000.

Give journal entries if:

 

a) Partners decide to show the re-valued amount in the Balance Sheet
 



b) Partners decide to show the original value of assets and liabilities in the Balance Sheet and Y and Z agree to share profits in the ratio of 2 : 1

 



Solution:

 

Journal entries

 

(a) If the partners decide to show the re-valued amount in the Balance Sheet.
 



(b) If the partners decide to show the original amount in the Balance Sheet.







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