Study Material & Notes for the Chapter 3
Partnership - Change in Profit Sharing Ratio
IV. REVALUATION OF ASSETS / LIABILITIES
Partners reevaluate market value of Fixed Assets and remeasure Current Assets and Current Liabilities. Any change in the value of Assets/Liabilities is dealt via Revaluation Account and the resultant gain/loss is shared amongst the existing partners in their current profit-sharing ratio.
Case-1 When Partners decide to show the effect of Revaluation in the Balance Sheet
A. Accounting Treatment under various scenarios
Important to Note:
- Language in the question: AT/To means new value of the Asset/Liability.
- Language in the question: By means difference between existing value and new value of the Asset/Liability.
B. Preparation of Revaluation Account
- On the Revaluation of Assets and Reassessment of Liabilities, a new account is opened Revaluation Account
- Revaluation Account is a nominal account. As per nominal rule all the expenses & losses are debited and all the incomes/gains/profits are credited
* Only one will appear at a time
- When Revaluation Account is prepared, assets and Liabilities appear in the Balance Sheet of the reconstituted firm at their revised (changed) values
C. Expenses on reconstitution of the Firm
- Firm gives contract to partner including expenses or excluding expenses
- Treatment when contract to partner is inclusive of expenses
Case-2 When Partners decide to carry old values in the Balance Sheet-Memorandum Revaluation Account
- Applicable when revised (changed) values of assets and liabilities are not to be recorded
- Gain (Profit) or Loss on Revaluation of Assets and Reassessment of Liabilities is adjusted through Capital Accounts by passing an adjustment entry by debiting/crediting the Capital/Current Accounts of gaining partners and crediting/debiting the sacrificing partners
b) Calculate Sacrificing/Gaining Ratio = Old Share – New Share
c) Calculate share of Gaining and Sacrificing Partner in the Net Effect (computed in step a)
Important to Note: The Assets and Liabilities remain at the book value. No adjustment in the Balance Sheet of the revalued assets/liabilities