Revaluation of Assets Before Admission Of New Partner(s)

October 16th, 2008 Comments off
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When admitting a new partner/change in partnership, sometimes there is a need to assess true assets value of the existing partnership. This article deals with any profit or loss arising from such revaluation.

 

Revaluation Of Assets

·         Open a Revaluation Account to show the increase or decrease of the firm’s assets value:

 

Revaluation Account

Debit

$

Credit

$

Decrease in Assets Value

X

Increases in Assets Value

X

 

·         If total increases (credit) exceed decreases(debit), the difference namely profit upon revaluation of assets is transfer to  the existing or old partners capital accounts in their old profit sharing ratio

·         If total decreases (debit) exceed increases(credit), the difference namely the loss upon revaluation of assets is transfer to existing or old partners capital accounts in their old profit sharing ratio

 

 

Remember that the corresponding assets need to be adjusted too

 

·         Refer below to the T-Account

 

Assets Account

Debit

$

Credit

$

Increases in Assets Value

X

Decreases in Assets Value

X

 

 

Illustration:

 

Jim and John are partners sharing profits 50:50.

 

The firm’s Balance Sheet as at 31 December 2007 as follows:

 

 

Balance Sheet as at 31 December 2007

Debit

$

Credit

$

Capital:

 

Fixtures & Fittings

10,000

Jim

10,000

Stock

4,000

 

 

Debtors

2,000

 

 

Bank

4,000

John

10,000

 

 

 

20,000

 

20,000

 

 

On 1 January 2008, they admit Alex and the new profit sharing ratio is :40:40:20

The assets are to be valued as follows:

 

$

Fixtures & Fittings

12,000

Stock

5,000

Debtors

1,000

 

 

Required:

Show only the Revaluation Account and Partners’ Capital Accounts

 

 

Solution:

 

Revaluation Account

Debit

$

Credit

$

Decreases in Assets:

 

Increases in Assets:

 

Debtors

1,000

Fixtures & Fittings

2,000

 

 

Stocks

1,000

Profit on revaluation:

 

 

 

Partners’ Capital account:

 

 

 

Jim: 50% x $2,000

1,000

 

 

John: 50% x $2,000

1,000

 

 

 

3,000

 

3,000

 

 

 

 

Partners’ Capital Account

DR

$

$

$

CR

$

$

$

 

Jim

John

Alex

 

Jim

John

Alex

Balance c/d

11,000

11,000

 

Balance b/f

10,000

10,000

 

 

 

 

 

Profit on Revaluation

1,000

1,000

 

 

11,000

11,000

 

 

11,000

11,000

 

 

Click here for ALL articles under the heading of Partnership Account

 

 

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Financial Accounting

 
 

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