Revaluation of assets and reassessment of liabilities

The essentials

At reconstitution, the book values of assets and liabilities may not reflect their current values. They are revalued so that any gain or loss up to that date goes to the partners who were entitled to it, that is, the old partners in their old ratio. The changes are recorded in a Revaluation Account (also called Profit and Loss Adjustment Account).

Key points

• Credit Revaluation A/c: increase in assets, decrease in liabilities, unrecorded assets.
• Debit Revaluation A/c: decrease in assets, increase in liabilities, unrecorded liabilities, new or increased provisions.
• Balance: profit (credit balance) or loss (debit balance), transferred to old partners' capital accounts in the old ratio.
• Reserves, general reserve and credit balance of Profit and Loss A/c are credited to old partners in the old ratio.
• A debit balance of Profit and Loss A/c (accumulated loss) and deferred revenue expenditure are debited to old partners in the old ratio.

Exam tips

List each change and ask: does it increase or decrease the firm's net worth? An increase in net worth is a gain (credit), a decrease is a loss (debit).

Common mistakes

• Crediting the Revaluation Account for an increase in a liability.
• Distributing revaluation profit in the new ratio.
• Including reserves inside the Revaluation Account instead of transferring them directly to capital accounts.