Question

Which of the following would affect the Revaluation Account at the time of reconstitution of a partnership firm?

• A. Increase in assets
• B. Drawings against capital
• C. Interest on capital
• D. Partner’s salary

Answer 1

The Correct Option is A

Revaluation Account and Asset Value Changes 

The Revaluation Account is an account prepared during the reconstitution of a partnership firm (e.g., admission of a partner, retirement of a partner, or change in profit-sharing ratio) to adjust the values of assets and liabilities to their current market values.

Impact of Asset Increases

An increase in the value of an asset has a direct impact on the Revaluation Account. Specifically, it will be recorded here as per accounting standars.

Recording Increase

In terms of journal entries

• Assets Debit
• Revaluation Credit

Conclusion

Therefore, increase in assets would be recorded in the Revaluation Account during the reconstitution of a partnership firm. Hence, the correct answer is Option 1.

Answer 2

Revaluation Account and Asset Value Changes 

The Revaluation Account is used in accounting to record changes in the value of assets and liabilities. It is particularly relevant when a partnership is reconstituted (e.g., admission of a new partner, retirement of a partner, or change in profit-sharing ratio).

Impact of Asset Increases

An increase in the value of an asset has a direct and positive effect on the Revaluation Account. Specifically:

• The asset account is debited to increase its book value.
• The Revaluation Account is credited to reflect the increase in net worth.

Journal Entry

The typical journal entry to record an increase in asset value is:

        

Asset A/c       Dr.   (Increase in Value)
To Revaluation A/c    Cr.   (Increase in Value)
        

   

Example

If a building is revalued upwards by ₹ 50,000, the journal entry would be:

        

Building A/c    Dr.   ₹ 50,000
To Revaluation A/c   Cr.   ₹ 50,000
        

   

Significance

The Revaluation Account ensures that the balance sheet accurately reflects the current value of assets and liabilities. Any gains or losses arising from revaluation are ultimately distributed among the partners in their old profit-sharing ratio (prior to the reconstitution).