An old bill payable amounted to ₹96,000. The creditor accepted ₹88,800 in full and final settlement. What will be the effect at the time of revaluation of assets and liabilities?

Correct answer: Gain of ₹7,200

The liability decreased from ₹96,000 to ₹88,800, resulting in a reduction of ₹7,200. A decrease in liability is treated as a revaluation gain, so ₹7,200 will be credited to the Revaluation Account. ₹88,800 is the settlement amount, not the gain. Exam tip: A decrease in liability creates a revaluation gain, while an increase creates a revaluation loss.