Revaluation of Assets Before Admission Of New Partner(s)

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

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