Revaluation of assets on admission or retirement
Before a partner joins or leaves, assets and liabilities are revalued. The gain or loss on the revaluation account belongs to the old partners in their old ratio.
Why revalue?
Book values are often out of date: land may be worth more than cost, equipment less, and some liabilities may not be recorded. If a new partner joined at book values, the old partners would lose gains made while they owned the business, or the newcomer would share losses he did not cause. So assets and liabilities are revalued at the date of the change. The differences go to a revaluation account, and its balance is shared by the old partners in the old ratio.
Amal and Nuwan (3:2): statement of financial position at 31 March 2026 (Rs.)
| Item | Rs. |
|---|---|
| Land and buildings | 2,000,000 |
| Equipment | 600,000 |
| Inventory | 400,000 |
| Trade receivables | 300,000 |
| Bank | 200,000 |
| Total assets | 3,500,000 |
| Trade payables | 250,000 |
| Capital: Amal | 1,850,000 |
| Capital: Nuwan | 1,400,000 |
| Total capital and liabilities | 3,500,000 |
Terms for admitting Chathura on 1 April 2026
- Land and buildings are revalued to Rs. 2,600,000.
- Equipment is reduced to Rs. 520,000.
- Inventory is reduced by Rs. 40,000.
- An allowance for doubtful debts of Rs. 15,000 is created.
- An unrecorded electricity bill of Rs. 25,000 is brought into the books.
- Chathura brings Rs. 1,000,000 in cash as capital.
Worked example: the revaluation account
Prepare the revaluation account and share the result between Amal and Nuwan.
- Gain (credit): land and buildings 2,600,000 − 2,000,000 = 600,000.
- Losses (debit): equipment 600,000 − 520,000 = 80,000; inventory 40,000; allowance 15,000; unrecorded liability 25,000.
- Total losses: 80,000 + 40,000 + 15,000 + 25,000 = 160,000.
- Revaluation profit: 600,000 − 160,000 = 440,000.
- Shared 3:2: Amal 440,000 × 3/5 = 264,000; Nuwan 440,000 × 2/5 = 176,000.
- Entry: Dr Revaluation 440,000; Cr Amal capital 264,000; Cr Nuwan capital 176,000.
Revaluation profit Rs. 440,000: Amal Rs. 264,000, Nuwan Rs. 176,000.
Statement of financial position after admission, 1 April 2026 (Rs.)
| Item | Rs. |
|---|---|
| Land and buildings | 2,600,000 |
| Equipment | 520,000 |
| Inventory (400,000 − 40,000) | 360,000 |
| Trade receivables (300,000 − 15,000) | 285,000 |
| Bank (200,000 + 1,000,000) | 1,200,000 |
| Total assets | 4,965,000 |
| Trade payables | 250,000 |
| Accrued electricity | 25,000 |
| Capital: Amal (1,850,000 + 264,000) | 2,114,000 |
| Capital: Nuwan (1,400,000 + 176,000) | 1,576,000 |
| Capital: Chathura | 1,000,000 |
| Total capital and liabilities | 4,965,000 |
Worked example: prove the new statement balances
Check both totals of the statement after admission.
- Assets: 2,600,000 + 520,000 + 360,000 + 285,000 + 1,200,000 = 4,965,000.
- Liabilities: 250,000 + 25,000 = 275,000.
- Capitals: 2,114,000 + 1,576,000 + 1,000,000 = 4,690,000.
- Capitals + liabilities: 4,690,000 + 275,000 = 4,965,000.
Both sides total Rs. 4,965,000.
Retirement in brief
When a partner retires, the same steps apply: revalue assets and liabilities, adjust goodwill, and transfer the current account to capital. The amount due to the retiring partner is capital + current account + share of revaluation profit + share of goodwill. It is paid in cash, or transferred to a loan account and paid in instalments.
Land prices in and around Colombo have risen a great deal over the years. A partnership that bought its premises long ago would be unfair to its old partners if it admitted a new one at historical cost, so the property is revalued first.
Short answer: “What is a revaluation account?” A temporary account recording increases and decreases in asset and liability values on a change in a partnership; its balance is shared by the old partners in the old ratio.
Essay: “Prepare the revaluation account, the partners' capital accounts and the statement of financial position after admission.” Revaluation account (losses debit, gains credit), share the balance in the old ratio, update capitals and add the new partner's capital, then the new statement with equal totals.
Revaluation: gains credit, losses debit. The result goes to the old partners in the old ratio; the new partner gets no share of it.