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Revaluation of Assets and Liabilities

On admission of a new partner, the firm stands reconstituted and consequently, the assets are re-valued and liabilities are reassessed. It is necessary to show the true position of the firm at the time of admission of a new partner.
 

If the values of the assets are raised, gain will increase the capital of the existing partners. Similarly, any decrease in the value of assets, i.e. loss, will decrease the capital of the existing partners. For this purpose, a ‘Revaluation account’ is prepared.
 

This account is credited with the all increases in the value of assets and decreases in the value of liabilities. It is debited with the decrease in the value of assets and the increase in the value of liabilities. The balance of this account shows a gain or loss on revaluation which is transferred to the Existing partners’ capital account in existing profit sharing ratio.
 

The journal entries made for this purpose are:
 


 

Note: Revaluation A/c is also known as Profit & Loss adjustment A/c.

 

Specimen of Revaluation account





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