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Revaluation of assets

Partnership

When one of the following occurs in a partnership, revaluation of the assets will have to be done:

  • Admission of a new partner
  • Withdrawal of a partner
  • Change in the profit and loss sharing ratios

The sale values of the assets may exceed their book values and if revaluation is not undertaken, a partner joining the partnership will benefit from their higher values. This is unfair as the assets were purchased before he joins the partnership. Similarly, it would be unfair to him if the sale values of the assets have fallen below their book values without any revaluation and adjustments made as he would have to share the loss of values.

If the sale price of the assets is higher than their book values, a profit will result from the sale. The profit will be shared in accordance with their profit and loss sharing ratios. A loss on sale will be similarly shared.

In the revaluation process, the following entries are made:

An increase in the value of the asset
Debit asset account with the gain
Credit revaluation account

A decrease in the value of the asset
Debit revaluation account
Credit asset account with the loss

For example:
Flue and Glue are partners sharing profits and losses in the ratios: Flue 3/5; Glue 2/5. They agreed to share profits and losses equally from 1 January 20X2. Their balance sheet as at 31 December 20X1 is below.

On 1 January 20X2 the assets are revalued: Building $19,000; Machinery $5,800.


Balance sheet as at 31 December 20X1


$

$
Building at cost
15,500
Capital: Flue 18,000
Machinery at cost (less dep'n)
6,400
Capital: Glue 14,000
Stock 4,600


Debtors 4,300


Bank
1,200








32,000

32,000





Balance b/d 32,000



Revaluation Account


$

$
Machinery (reduced in value)
600
Building (increased in value)
3,500
Gain on revaluation:



Capital: Flue 3/5
1,740


Capital: Glue 2/5
1,160








3,500

3,500





Balance b/d 3,500



Building Account


$

$
Balance b/f
15,500
Balance c/d 19,000
Revaluation: increase in value
3,500








19,000

19,000





Balance b/d 19,000



Machinery Account


$

$
Balance b/f
6,400
Revaluation: decreased in value
600



Balance c/d
5,800






6,400

6,400





Balance b/d 5,800



Flue Capital Account


$

$
Balance c/d
19,740
Balance b/f
18,000



Revaluation: share of profit 3/5 1,740






19,740

19,740








Balance b/d 19,740


Glue Capital Account


$

$
Balance c/d
15,160
Balance b/f
14,000



Revaluation: share of profit 2/5 1,160






15,160

15,160








Balance b/d 15,160


Last Updated (Sunday, 10 October 2010 17:09)