Question

Which of the following would affect the Revaluation Account at the time of admission of a partner?
(A) Increase in assets
(B) Drawings against capital
(C) Recording of unrecorded assets
(D) Decrease in liabilities

• A. (A), (B), and (C) only
• B. (A), (B), and (D) only
• C. (A), (C), and (D) only
• D. (B), (C), and (D) only

Answer 1

The Correct Option is C

Revaluation Account and Admission of a Partner 

The Revaluation Account plays a crucial role during the admission of a new partner to a firm. It is used to adjust the values of existing assets and liabilities to their current market values before the new partner joins. This ensures that the new partner shares in the future profits and losses based on a fair valuation of the firm's net worth.

Impact on the Revaluation Account

The Revaluation Account is specifically affected by the following:

• Changes in the Values of Assets: Increases or decreases in the value of existing assets (e.g., land, buildings, equipment) are recorded in the Revaluation Account.
• Changes in the Values of Liabilities: Increases or decreases in the value of existing liabilities (e.g., creditors, outstanding expenses) are also recorded in the Revaluation Account.
• Recording of Unrecorded Assets: Assets that were not previously recognized on the firm's books but have value are recorded, increasing the Revaluation Account balance.
• Decrease in Liabilities: A decrease in liabilities, such as settling a debt for less than its book value, also increases the Revaluation Account balance.

Accounting Treatment

In general:

• Increases in Assets and Decreases in Liabilities result in a credit to the Revaluation Account.
• Decreases in Assets and Increases in Liabilities result in a debit to the Revaluation Account.

Distribution of Revaluation Profit/Loss

The net profit or loss resulting from the revaluation process is then distributed among the old partners in their old profit-sharing ratio. This ensures that the new partner does not share in the gains or losses arising from the revaluation of assets and liabilities.