Asset Revaluation

It is prepared to show assets and liabilities at correct values on admission. Its purpose is to find profit or loss.

Profit before admission belongs to old partners. Do not include the new partner in old profit or loss.

Profit or loss of Revaluation Account is closed to old partners' capital accounts. Use the old ratio.

The governing concept is that the larger side of the Revaluation Account determines the nature of the result. Here, the credit side is ₹18,000 and the debit side is ₹12,000. The difference is ₹18,000 − ₹12,000 = ₹6,000. Because the credit side is larger, the account shows a revaluation profit of ₹6,000. This profit is transferred to the old partners’ capital accounts in their old profit-sharing ratio. Option B is incorrect because a loss would occur only if the debit side were larger. Option C incorrectly adds both sides, while option D ignores the existing difference.

The correct answer is B: ₹4,000 loss. The Revaluation Account compares gains and losses caused by changes in asset and liability values. A debit balance or a debit side larger than the credit side indicates a loss. Here, debit total = ₹25,000 and credit total = ₹21,000. Difference = ₹25,000−₹21,000=₹4,000. Since the debit side is larger, the account has a debit balance of ₹4,000, which is revaluation loss. Option B is correct. Option A is wrong because a profit occurs when the credit side is larger, not the debit side. Option C, ₹46,000 loss, incorrectly adds the two totals instead of finding their difference. Option D, ₹21,000 profit, mistakes the credit total for the final result. The amount of ₹4,000 loss is transferred to the old partners’ Capital or Current Accounts in their old profit-sharing ratio. Exam cue: debit greater means loss; credit greater means profit.

When asset increases the asset is debited and gain is credited to Revaluation Account. Remember debit for asset increase.

When asset decreases there is loss so Revaluation Account is debited and Asset Account is credited. Record only the decrease.

Gain on revaluation = revalued value − book value = ₹95,000 − ₹90,000 = ₹5,000. This gain is credited to the Revaluation Account and distributed among the old partners in their old profit-sharing ratio. In the exam, calculate the difference between the new and book values rather than treating either full value as the gain.

The governing concept is that a fall in the value of an asset is recorded as a revaluation loss. The loss is not the new value or the old value; it is the difference between them. Calculation: book value ₹40,000 − revalued value ₹34,000 = ₹6,000. Therefore, ₹6,000 is debited to the Revaluation Account. It will later be transferred to the old partners’ capital accounts in their old ratio. Option B gives only the revised value, option C gives only the original book value, and option D incorrectly adds the two values. Thus option A correctly states the loss.

Additional provision reduces the realizable amount of debtors so it is a loss. Debit additional provision.

A provision for doubtful debts is created to cover the possible loss from customers who may not pay. If the existing provision is reduced from ₹5,000 to ₹3,500, the firm no longer needs ₹1,500 of the earlier provision. This released amount is a gain on revaluation. The calculation is ₹5,000 − ₹3,500 = ₹1,500. Therefore option A is correct.

In revaluation accounting, a decrease in an existing liability or provision is treated as an increase in net assets and is credited to the Revaluation Account. The entry is generally: Provision for Doubtful Debts Account Dr. ₹1,500, to Revaluation Account ₹1,500, depending on the exact ledger presentation. The amount is not ₹3,500, because that is the new balance, and it is not ₹8,500, because the two provisions should not be added. Thus the gain is only the reduction, ₹1,500.

This loss belongs to the period before admission so old partners bear it in old ratio. Do not use new ratio.

An unrecorded insurance claim is an asset so it is credited as a gain in Revaluation Account. Credit unrecorded assets.

Outstanding expense is a liability so it is treated as unrecorded liability. Debit it to Revaluation Account.

The correct answer is C: an unrecorded asset is credited to the Revaluation Account. An unrecorded asset is an asset that exists but was not previously shown in the books. When it is discovered during reconstitution, the firm gains value because it now recognizes an asset. Gains are credited in the Revaluation Account, so Unrecorded Asset Account is debited and Revaluation Account is credited. Option C is correct. Option A, decrease in machinery, is a loss and is debited. Option B, increase in liability, creates an additional obligation and is a loss, so it is debited. Option D, additional provision, generally represents an extra expected loss or liability and is also debited. The basic rule is: increase in an asset and decrease in a liability are gains and are credited; decrease in an asset and increase in a liability are losses and are debited. Memory cue: beneficial changes go to the credit side of Revaluation Account.

A decrease in the value of an asset causes a loss to the firm, so it is recorded on the debit side of the Revaluation Account. In contrast, an increase in building value and an unrecorded investment are gains and are credited; a decrease in creditors is also a gain because it reduces a liability. Exam tip: debit losses and increases in liabilities, and credit gains and decreases in liabilities.

Revaluation profit is distributed among the old partners in their old profit-sharing ratio. Bhavesh’s fraction is \(1/(2+1)=1/3\). Therefore, his share is \(₹9000 \times 1/3 = ₹3000\). ₹4500 would represent half the profit, not Bhavesh’s share under the 2:1 ratio. Exam tip: Add the ratio terms first, then multiply the total profit by the concerned partner’s fraction.

Lata’s share in the old ratio is 1/(4+1) = 1/5. Therefore, her share of the revaluation loss is ₹10,000 × 1/5 = ₹2,000. ₹4,000 represents 2/5 of the total loss, so it is not Lata’s share. Exam tip: Revaluation profit or loss is generally distributed among the partners in their old profit-sharing ratio.

Under fixed capital method adjustments are made through current accounts. If capital is fixed use current accounts.

Under fluctuating capital method profit or loss goes directly to capital accounts. Choose the account according to the method.

After revaluation assets are shown at their corrected values. In final balance sheet use revalued values.

Asset increase is gain ₹4000 and liability increase is loss ₹1500 so net profit is ₹2500. Subtract losses from gains.

Asset decrease is loss ₹7000 and liability decrease is gain ₹2000 so net loss is ₹5000. Take the difference of opposite effects.

This account shows the net profit or loss from revaluation. Link its objective and distribution with old partners.

An unrecorded liability creates a new burden on the firm so it is a loss. Put such liability on the debit side.