Revaluation of Assets and Liabilities on Admission of a Partner :

A new partner is not to be benefitted by any appreciation in the values of assets of the firm or by any decrease in the values on liabilities of the firm. Similarly, he is not to bear any part of the loss that is due to decrease in the values of the assets or increase in the values of the liabilities of the firm till the date of his admission. Therefore, before a new partner is admitted, the assets and liabilities of the firm are revalued and any profit or loss resulting from such a revaluation is transferred to old partners’ capital accounts in the old profit sharing ratio. For this purpose, the following entries are passed:

Sometimes, all the partners including the new partner may agree not to alter the book value of assets and liabilities even when they agree to revalue them. In order to record this, Memorandum Revaluation Account is opened. It has two parts. In the first part, the entries for revaluation of assets and liabilities are made in the usual manner. But no record of revaluation of assets and liabilities is made through the respective ledger accounts. The resultant profit or loss on revaluation in the first part is transferred to the capital accounts of old partners in the old profit sharing ratio. In order to complete the double entry, entries regarding assets and liabilities made in the first part are reversed in the second part so that the values of assets and liabilities remain unchanged. The balance in the second part is transferred to the capital accounts of all the partners including the new partner in their new profit sharing ratio. If there is a profit, the following entries are passed.

Note: If there is a loss on revaluation, the above entries will be reversed.