Revaluation Account

A Revaluation Account is a temporary financial account used primarily in partnership accounting when there is a change in the partnership structure, such as the admission of a new partner, the retirement of an existing partner, or any other significant change that necessitates adjusting the book values of the firm's assets and liabilities to their current fair market values. The main purpose of the Revaluation Account is to ensure that the financial statements reflect accurate values and that any gains or losses from revaluation are appropriately allocated among the partners.

 

 

Key Features of a Revaluation Account

 

1. Purpose:

   • To adjust the book values of assets and liabilities to their fair market values.
   • To record any revaluation gains or losses and allocate them to the existing partners' capital accounts.

2. Nature:

   • It is a temporary account, created specifically for the revaluation process and closed once the revaluation is complete.

3. Events Triggering Revaluation:

   • Admission of a new partner
   • Retirement or death of an existing partner
   • Change in profit-sharing ratio
   • Significant changes in the value of assets and liabilities that need to be reflected in the financial statements

4. Transactions Recorded:

   • Increase or decrease in the value of assets (e.g., appreciation in land value, depreciation of machinery)
   • Increase or decrease in the value of liabilities (e.g., changes in the amount owed to creditors)

5. Closing the Account:

   • The Revaluation Account is closed by transferring the net gain or loss to the capital accounts of the existing partners according to their profit-sharing ratio.

 

 

Journal Entries in a Revaluation Account

 

1. Increase in Asset Values:

• Debit: Asset Account (e.g., Land, Building)
• Credit: Revaluation Account

2. Decrease in Asset Values:

• Debit: Revaluation Account
• Credit: Asset Account (e.g., Machinery, Inventory)

3. Increase in Liability Values:

• Debit: Revaluation Account
• Credit: Liability Account (e.g., Creditors)

4. Decrease in Liability Values:

• Debit: Liability Account (e.g., Loan Payable)
• Credit: Revaluation Account

5. Closing the Revaluation Account (if there's a net gain):

• Debit: Revaluation Account
• Credit: Partners’ Capital Accounts (in profit-sharing ratio)

6. Closing the Revaluation Account (if there's a net loss):

• Debit: Partners’ Capital Accounts (in profit-sharing ratio)
• Credit: Revaluation Account

 

 

Example

Suppose a partnership decides to admit a new partner. The existing partners agree to revalue the firm's assets and liabilities. The following adjustments are needed:

1. Increase in the value of land by $10,000.
2. Decrease in the value of machinery by $2,000.
3. Decrease in a liability (loan) by $3,000.

The journal entries would be:

1. Increase in Land Value:

   • Debit Land Account: $10,000
   • Credit Revaluation Account: $10,000

2. Decrease in Machinery Value:

   • Debit Revaluation Account: $2,000
   • Credit Machinery Account: $2,000

3. Decrease in Liability:

   • Debit Loan Payable Account: $3,000
   • Credit Revaluation Account: $3,000

4. Closing the Revaluation Account (Net Gain):

   • Total gain in Revaluation Account = $10,000 (increase in land) - $2,000 (decrease in machinery) + $3,000 (decrease in loan) = $11,000
   • Debit Revaluation Account: $11,000
   • Credit Partners’ Capital Accounts (allocated according to profit-sharing ratio, e.g., equally between two partners): $5,500 each

 

 

By properly adjusting the book values and closing the Revaluation Account, the partnership ensures that the financial statements are accurate and that any changes in value are fairly reflected in the partners' capital accounts.

 

 

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