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Difficulty: MediumRevaluation of Assets and Liabilities

Match each partnership revaluation transaction or event on the left with its correct accounting entry or treatment on the right.

  • Increase in the book value of Land and BuildingsCredited to the Revaluation Account
  • Decrease in the book value of Stock (Inventory)Debited to the Revaluation Account
  • Distribution of net Revaluation ProfitCredited to Partners' Capital Accounts in the old profit-sharing ratio
  • Distribution of net Revaluation LossDebited to Partners' Capital Accounts in the old profit-sharing ratio

Answer

Increase in the book value of Land and Buildings matches Credited to the Revaluation Account; Decrease in the book value of Stock matches Debited to the Revaluation Account; Distribution of net Revaluation Profit matches Credited to Partners' Capital Accounts in the old profit-sharing ratio; Distribution of net Revaluation Loss matches Debited to Partners' Capital Accounts in the old profit-sharing ratio.
In partnership revaluation accounting, gains from asset appreciation or liability reductions are credited to the Revaluation Account, while losses from asset depreciations or unrecorded liabilities are debited. When the account is closed, net profit is credited to the partners' capital accounts in their old profit-sharing ratio, whereas net loss is debited to the partners' capital accounts in their old profit-sharing ratio.

Step-by-Step Solution

1
Identify the nature of asset value adjustments (gains vs. losses).
Asset appreciation increases firm equity (gain), whereas asset depreciation/reduction reduces firm equity (loss).
Revaluation Account rules require crediting gains (increases in assets/decreases in liabilities) and debiting losses (decreases in assets/increases in liabilities).
2
Determine the accounting entry for closing a net revaluation profit balance.
Net revaluation profit is debited to Revaluation Account and credited to existing partners' capital accounts.
Revaluation profit belongs to the existing partners in their old profit-sharing ratio prior to admission or restructuring.
3
Determine the accounting entry for closing a net revaluation loss balance.
Net revaluation loss is credited to Revaluation Account and debited to existing partners' capital accounts.
Revaluation losses reduce partners' capital balances in their old profit-sharing ratio.

Key Concept

Double-entry rules for the Revaluation Account and allocation of revaluation profit/loss in partnership accounts
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Topics

Revaluation of Assets and Liabilities

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