On admission, an unrecorded liability for refund of a government grant amounting to ₹33,000 is found. How will it be treated?

Correct answer: Revaluation loss

The governing concept is that a liability discovered during reconstitution reduces the firm’s net assets and therefore creates a loss. The obligation to refund the government grant was not recorded earlier, so it must now be recognised at ₹33,000. This amount is debited to the Revaluation Account as an unrecorded liability and is ultimately transferred to the old partners in their old profit-sharing ratio. It is not a capital gain because no increase in owners’ capital or asset value has occurred. It is not a cash receipt, since the finding represents an obligation to pay, not money received. A revaluation gain would require an increase in assets or decrease in liabilities.