Revaluation Of Assets And Reassessment Of Liabilities A/c Entries

Revaluation Of Assets And Reassessment Of Liabilities: Revaluation accounts are used to enter a company’s assets and liabilities at their actual, true, or most recent market worth. In other words, When assets and liabilities are revalued, a Revaluation Account is set up to calculate net profit or loss, taking into account any items that are not yet recorded in the books.

Assets can be revalued in the following instances;

• Introduction of New Partner
• Retirement or death of a partner
• Changes in the profit or loss-sharing ratio

Preparing a Revaluation account is necessary because the value in the books of account may be greater or less than the current market price. Also, When a partner dies or retires, the revaluation profit or loss is transferred to each partner’s capital account according to their previous profit-sharing ratio (PSR).

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What Is Revaluation Of Assets And Reassessment Of Liabilities?

In order to determine the assets’ true value, a revaluation is required. Asset values may have changed over time and their amounts on the old balance sheet may be overstated or understated. It is also possible that certain assets go unregistered. These reasons clarify the significance of revaluing both assets and liabilities;

• Assets and liabilities are revalued and reassessed so that the assets and liabilities are recorded in the books of account at their current market values.
• Every asset and liability that has been revalued incur a profit or loss, and the balance of this account is transferred to the capital accounts of the former partners according to their prior profit-sharing ratio.

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Accounting Entries For Revaluation Account

• Increase in value of Asset
  • Dr Asset a/c
  • Cr Revaluation a/c
• Reduction in value of Asset
  • Dr Revaluation a/c
  • Cr Asset a/c
• Increase in value of liabilities
  • Dr Revaluation a/c
  • Cr Liabilities a/c
• Reduction in value of liabilities
  • Dr Liabilities a/c
  • Cr Revaluation a/c
• When goodwill is introduced
  • Dr Goodwill a/c
  • Cr Revaluation a/c
• When goodwill is written off
  • Dr Capital a/c
  • Cr Goodwill a/c
• Profit on revaluation
  • Dr Revaluation a/c
  • Cr Capital a/c
• Loss on Revaluation
  • Dr Capital a/c
  • Cr Revaluation a/c

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Revaluation Account Format

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Solved Example

illustration: Ifeoluwa, Esther, and Caramia are in partnership sharing profit and loss equally. The following is the balance sheet of the business as of 31st December 2021.

Additional Information: it was agreed as follows

1. On 31st December 2021, Dami was admitted into the partnership.
2. profit or loss would be shared equally
3. Tunde shall bring $145,000 as capital
4. Goodwill shall be valued at $35,000 and it is to be retained in the book.
5. The following assets were revalued;
   • Premises – $300,000
   • Furniture and fitting – $152,000
   • Motor Van – $63,000
   • Plant and Machinery – $45,000
   • Stock – $16,000
6. Finally, a provision of $3,500 is to be made for bad debts.

You’re required to prepare:

• Revaluation account
• Current account
• Balance sheet after admission of Dami

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Solution:

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What Type Of Account Is Revaluation?

The Revaluation account is a nominal account. An expense, gain, loss, or income must exist in order to classify an account as nominal. The company creates a revaluation account to keep track of the profits and losses associated with the revaluation of its assets and reassessment of its liabilities. The output is therefore a nominal account because it can only be a profit or a loss.

Generally, An account that stores accounting transactions for a single fiscal year is referred to as a nominal account. Additionally, The balances in these accounts are moved into permanent accounts at the end of the fiscal year.

By doing this, the nominal accounts’ balances are reset to zero and they are made ready to accept new transactions for the upcoming fiscal year.

Also, Accounting transaction data for revenue, expense, gain, and loss transactions—all of which show up in the income statement—is gathered using nominal accounts.

Furthermore, Nominal account balances may be put straight into the retained earnings account when they are cleared out at the end of the year, or they may first be transferred into an income summary account and then transferred immediately from that account to the retained earnings account.

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What Do We Record In Revaluation Account?

In the revaluation account changes in the value of its assets and liabilities. Unquestionably, The value of the items in the balance sheet of the company is changed by this account to reflect their current market worth.

A nominal account is a revaluation account. Because the value in the books of account may be higher or lower than the actual market price, preparing a revaluation account is important.

Additionally, the revaluation profit or loss is transferred to each partner’s capital account in accordance with their prior profit-sharing ratio when a partner passes away or retires. (PSR).

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What are Revolution Accounts?

Revolution account means rechecking the value of both assets and liabilities in order to detect any changes in the worth.