Revaluation of Assets and Reassessment of Liabilities: Sometimes the value of the assets and liabilities of a firm does not appear at its current value in the books of account. With the passage of time, their values in the books may differ from their current values. It means there could be an increase or decrease in the values. Therefore, at the time of admission of a new partner, it is desirable to ascertain the true current value of all the assets and liabilities. There may also be a situation when some assets or liabilities of a firm are not recorded in the books of account.
So, in order to reveal the assets and liabilities of a firm at their current values, an account in the name of a Revaluation Account is prepared. This account may sometimes be called a Profit and Loss Adjustment Account. Any increase in the value of assets and decrease in the value of liabilities is credited to the revaluation account. This is because it is a profit or gain for a firm. On the other hand, any decrease in the value of assets and increase in the value of liabilities are debited to this account. This is because it is a loss to the firm.
Also, any unrecorded assets of the firm will be credited and unrecorded liability of the firm will be debited to this account. If the credit side of the revaluation account is more than its debit side then it reveals the profit. On the other hand, if the debit side is more than its credit side it will be considered as a net loss. Any profit or loss from this account will be transferred to the old partner’s capital in their old profit sharing ratio.
Procedure to Prepare Revaluation Account
The following are the various steps involved in the preparation of the Revaluation Account.
- First of all, any decrease in the value of assets and increase in the value of liabilities are recorded on the Debit side of the Revaluation Account.
- Secondly, any increase in the value of assets and decrease in the value of liabilities is recorded on the Credit side of the account.
- If there is any Unrecorded Asset of the firm then it is shown on the Credit side of the account.
- Similarly, any Unrecorded Liabilities are shown on the Debit side of the Revaluation Account.
- Then, Outstanding expenses of the firm are recorded on the Debit side and Prepaid expenses are recorded on the Credit side of the Revaluation Account.
- Similarly, any income that is received in advance is shown on the Debit side and Prepaid expenses (i.e. expenses incurred in advance) are recorded on the Credit side of the Revaluation Account.
- Lastly, if the total of the debit side exceeds the total of the credit side, then it is regarded as Revaluation Loss and is transferred to the Debit Side of the Partners’ Capital Account in their old profit sharing ratio. On the other
- hand, if the total of the debit side is short of the total of the credit side, then it is regarded as Revaluation Profit and is transferred to the Credit Side of Partners’ Capital Account in their old profit sharing ratio.
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Revaluation of Assets and Reassessment of Liabilities