Revaluation of Assets and Liabilities on Retirement of a Partner :

Before a partner retires, all the assets and liabilities of the firm are revalued as in the case of admission of a partner. Any profit or loss resulting from such revaluation is transferred to all the partners’ capital accounts in their profit sharing ratio. A Revaluation Account or Profit and Loss Adjustment Account is opened which is debited for all decrease in the book values of assets and all increases in liabilities and is credited for all increases in the values of assets and all decreases in liabilities. The balance is transferred to the capital accounts of all the partners.

If adjustments have to be made for profit or loss on revaluation without altering the values of assets and liabilities, a Memorandum Revaluation Account is opened. In this case, besides the entries required for recording the profit or loss on revaluation of assets and liabilities some additional entries are necessary.

These additional entries are made by reversing the original entries. The profit or loss disclosed by the original entries is transferred to all partners’ capital accounts in the old ratio, but the profit or loss disclosed by the reversed entries is transferred to remaining partners’ capital accounts in the new ratio. Hence, revaluation account under this method is called memorandum revaluation account.

If there is a loss on revaluation, first all the partners’ capital accounts are debited and Memorandum Revaluation Account is credited with the amount of such a loss. Then after retirement has taken place, Memorandum Revaluation Account is closed by transfer of the amount to the remaining partners’ capital accounts in the new profit sharing ratio.

Illustration :

A, B and C are partners sharing profits and losses in the ratio of 3:2:1 and on the retirement of C, the various assets and liabilities are revalued as under:

	Book Value Rs.	Revalued Value Rs.
Plant and machinery	35,000	43,000
Sundry creditors	10,000	9,000
Stock	15,000	13,000

 

Pass journal entries on revaluation of these assets and liabilities.

Solution:

Journal Entries

particulars	Rs	Rs.
Revaluation Account                                                     Dr.	2,000
To Stock		2,000
(Fall in value of stock debited to revaluation account)
Plant and machinery A/c                                              Dr.	8,000
Sundry creditors                                                             Dr.	1,000
To Revaluation A/c		9,000
(Gain on revaluation of plant and machinery and sundry creditors credited to revaluation account)
Revaluation Account                                                     Dr.	7,000
To A’s Capital A/c		3,500
To B’s Capital A/c		2,333
To C’s Capital A/c		1,167
(Revaluation profit transferred to all partners in the old profit sharing ratio.)