Revaluation Account: Assets, Liabilities, Reserves, and Provisions

Revaluation Account is one of the most important parts of Partnership Accounts, but it becomes confusing when students try to memorise every adjustment separately.

The account is not as random as it looks. It has one simple job: record the gain or loss that arises when the firm’s assets and liabilities are checked again at the time of reconstitution.

So when a new partner is admitted, or when an existing partner retires or dies, the firm may need to ask a fair question:

Are the old balance sheet values still correct?

Maybe the building is worth more now. Maybe stock is overvalued. Maybe debtors need a bigger provision. Maybe an old liability was missed. Maybe a reserve sitting in the balance sheet belongs to the old partners and should be settled before the new arrangement begins.

That is where students need clarity.

Once you understand this line, the debit and credit sides become much easier.

What Revaluation Account Really Means

Revaluation means valuing again.

In Partnership Accounts, Revaluation Account is prepared to record:

• increase in the value of assets
• decrease in the value of assets
• increase in liabilities
• decrease in liabilities
• unrecorded assets
• unrecorded liabilities
• provisions created, increased, reduced, or cancelled

The final result of Revaluation Account will be either:

Result	Meaning
Revaluation profit	Gains are more than losses
Revaluation loss	Losses are more than gains

This profit or loss is not shared in the new ratio. It belongs to the partners who were in the firm before the reconstitution, because the value change relates to the old firm.

This is a very common marking point.

The Main Logic: Asset Up Is Gain, Liability Up Is Loss

Before learning the full format, remember this basic idea:

Change	Effect
Asset increases	Gain
Asset decreases	Loss
Liability increases	Loss
Liability decreases	Gain

Why?

If an asset increases, the firm is richer. That is a gain.

If an asset decreases, the firm has lost value. That is a loss.

If a liability increases, the firm owes more. That is a loss.

If a liability decreases, the firm owes less. That is a gain.

Now connect this to Revaluation Account:

Adjustment	Revaluation Account side
Asset increases	Credit
Asset decreases	Debit
Liability increases	Debit
Liability decreases	Credit
Unrecorded asset appears	Credit
Unrecorded liability appears	Debit

This one rule can handle most asset and liability adjustments.

Revaluation Account Format

A basic Revaluation Account looks like this:

Dr.	Amount	Cr.	Amount
To decrease in assets		By increase in assets
To increase in liabilities		By decrease in liabilities
To unrecorded liabilities		By unrecorded assets
To provisions created or increased		By provisions reduced or no longer required
To partners’ capital accounts, if profit		By partners’ capital accounts, if loss

The balancing figure tells you the result.

If the credit side is bigger, there is profit. To close the account, you write the profit on the debit side as transfer to partners’ capital accounts.

If the debit side is bigger, there is loss. To close the account, you write the loss on the credit side as transfer to partners’ capital accounts.

This may feel opposite at first, but remember that the balancing figure appears on the smaller side to make both sides equal.

Journal Entries for Common Revaluation Adjustments

Journal entries help you understand why each item goes to a particular side.

When an Asset Increases

If Building increases by Rs. 40,000:

Particulars	Debit	Credit
Building A/c Dr.	Rs. 40,000
To Revaluation A/c		Rs. 40,000

Revaluation Account is credited because the firm has gained value.

When an Asset Decreases

If Stock decreases by Rs. 10,000:

Particulars	Debit	Credit
Revaluation A/c Dr.	Rs. 10,000
To Stock A/c		Rs. 10,000

Revaluation Account is debited because the firm has lost value.

When a Liability Increases

If Creditors increase by Rs. 6,000:

Particulars	Debit	Credit
Revaluation A/c Dr.	Rs. 6,000
To Creditors A/c		Rs. 6,000

The firm now owes more, so it is a loss.

When a Liability Decreases

If Creditors decrease by Rs. 8,000:

Particulars	Debit	Credit
Creditors A/c Dr.	Rs. 8,000
To Revaluation A/c		Rs. 8,000

The firm now owes less, so it is a gain.

Unrecorded Assets and Unrecorded Liabilities

Sometimes the question says that an asset or liability was not recorded in the books.

An unrecorded asset is a gain because the firm has something valuable that was missing from the books.

An unrecorded liability is a loss because the firm owes something that was missing from the books.

Adjustment	Entry idea	Revaluation side
Unrecorded asset found	Asset comes into books	Credit
Unrecorded liability found	Liability comes into books	Debit

For example, if an unrecorded investment of Rs. 15,000 is found:

Particulars	Debit	Credit
Investment A/c Dr.	Rs. 15,000
To Revaluation A/c		Rs. 15,000

If an unrecorded repair bill of Rs. 4,000 is discovered:

Particulars	Debit	Credit
Revaluation A/c Dr.	Rs. 4,000
To Outstanding Repairs A/c		Rs. 4,000

That is the whole logic.

How to Treat Provisions in Revaluation Account

Provisions confuse students because they look like liabilities, but they are often linked to assets.

The most common example is Provision for Doubtful Debts.

Suppose debtors are Rs. 1,00,000 and the old balance sheet already has Provision for Doubtful Debts of Rs. 5,000.

Now the adjustment says:

Provision for doubtful debts is to be made at 10 percent on debtors.

Required provision = 10 percent of Rs. 1,00,000 = Rs. 10,000

Old provision = Rs. 5,000

Extra provision needed = Rs. 5,000

Only the extra Rs. 5,000 is a revaluation loss.

Particular	Amount
Required provision	Rs. 10,000
Existing provision	Rs. 5,000
Increase in provision	Rs. 5,000

So Revaluation Account is debited with Rs. 5,000.

Here is the clean treatment:

Provision adjustment	Revaluation side
New provision created	Debit
Existing provision increased	Debit with only the increase
Existing provision reduced	Credit with only the decrease
Provision no longer required	Credit

Why does a provision increase go to the debit side?

Because a higher provision usually means the firm expects a loss or reduction in asset value.

Why does a provision decrease go to the credit side?

Because a lower provision means the expected loss has reduced.

Reserves Are Not Revaluation Items

This is one of the most important distinctions in the chapter.

A reserve is not the same as a provision.

Item	Meaning	Usual treatment
Reserve	Accumulated profit kept aside	Transfer to old partners’ capital accounts
Provision	Amount set aside for a known expected loss or liability	Adjust through Revaluation Account if it changes asset or liability value

General Reserve, Profit and Loss Account credit balance, and similar accumulated profits belong to the old partners. They were created before the change in the firm.

So they are usually transferred directly to the old partners’ capital accounts in the old ratio.

For example, if General Reserve is Rs. 60,000 and old partners A and B share profits in 3:2:

Partner	Share
A	Rs. 36,000
B	Rs. 24,000

Entry:

Particulars	Debit	Credit
General Reserve A/c Dr.	Rs. 60,000
To A’s Capital A/c		Rs. 36,000
To B’s Capital A/c		Rs. 24,000

This is not passed through Revaluation Account.

Accumulated losses are treated similarly, but in the opposite direction. Profit and Loss Account debit balance or advertisement suspense is usually debited to old partners’ capital accounts in the old ratio.

A Simple Sorting Test

When you see an adjustment, ask one question:

Does this item change the value of an asset or liability?

If yes, it usually belongs to Revaluation Account.

If no, it may belong directly to partners’ capital accounts.

Adjustment	Where it goes
Building increased	Revaluation Account
Stock reduced	Revaluation Account
Creditors reduced	Revaluation Account
Unrecorded liability found	Revaluation Account
Provision for doubtful debts increased	Revaluation Account
General Reserve distributed	Partners’ Capital Accounts
Profit and Loss credit balance distributed	Partners’ Capital Accounts
Advertisement Suspense written off	Partners’ Capital Accounts

This test is simple, but it prevents a lot of wrong entries.

Solved Example of Revaluation Account

A and B are partners sharing profits in the ratio of 3:2. C is admitted into the firm. On admission, the following revaluation adjustments are made:

Adjustment	Amount
Building increased by	Rs. 50,000
Stock reduced by	Rs. 8,000
Furniture reduced by	Rs. 10,000
Creditors reduced by	Rs. 6,000
Unrecorded investment found	Rs. 12,000
Unrecorded repair liability found	Rs. 4,000
Provision for doubtful debts to be increased by	Rs. 5,000

Prepare Revaluation Account and transfer the profit or loss.

First classify the adjustments.

Adjustment	Gain or loss	Revaluation side
Building increased	Gain	Credit
Stock reduced	Loss	Debit
Furniture reduced	Loss	Debit
Creditors reduced	Gain	Credit
Unrecorded investment found	Gain	Credit
Unrecorded repair liability found	Loss	Debit
Provision for doubtful debts increased	Loss	Debit

Now prepare the account.

Dr. Revaluation Account	Amount	Cr. Revaluation Account	Amount
To Stock A/c	Rs. 8,000	By Building A/c	Rs. 50,000
To Furniture A/c	Rs. 10,000	By Creditors A/c	Rs. 6,000
To Outstanding Repairs A/c	Rs. 4,000	By Investment A/c	Rs. 12,000
To Provision for Doubtful Debts A/c	Rs. 5,000
To A’s Capital A/c	Rs. 24,600
To B’s Capital A/c	Rs. 16,400
Total	Rs. 68,000	Total	Rs. 68,000

The credit side before transfer is Rs. 68,000.

The debit side before transfer is:

Rs. 8,000 + Rs. 10,000 + Rs. 4,000 + Rs. 5,000 = Rs. 27,000

So revaluation profit is:

Rs. 68,000 - Rs. 27,000 = Rs. 41,000

This profit is transferred to A and B in their old ratio of 3:2.

Partner	Calculation	Share of profit
A	Rs. 41,000 x 3 / 5	Rs. 24,600
B	Rs. 41,000 x 2 / 5	Rs. 16,400

Effect on the New Balance Sheet

Revaluation Account does not end with the account format. The revised values must also appear in the new balance sheet.

Item	Balance sheet effect
Building	Shown after adding Rs. 50,000
Stock	Shown after reducing Rs. 8,000
Furniture	Shown after reducing Rs. 10,000
Creditors	Shown after reducing Rs. 6,000
Investment	Shown as a new asset of Rs. 12,000
Outstanding repairs	Shown as a new liability of Rs. 4,000
Provision for doubtful debts	Shown at the revised amount

This is where many students lose marks. They prepare Revaluation Account correctly, then copy the old balance sheet values into the new balance sheet.

Do not do that.

The profit or loss on revaluation will not appear as a separate “Revaluation Profit” item in the new balance sheet in normal questions. It affects partners’ capital accounts, and the final capital balances are shown in the balance sheet.

Common Mistakes to Avoid

The mistakes in this topic are usually small, but they change the final answer.

Mistake	Better way
Giving revaluation profit to the new partner	Transfer it to old partners in old ratio
Putting General Reserve in Revaluation Account	Transfer it to old partners’ capital accounts
Charging full provision again when a provision already exists	Charge only the increase
Forgetting unrecorded liability	Debit Revaluation Account and show liability
Forgetting new balance sheet effect	Show revised assets and liabilities
Using new ratio for revaluation profit or loss	Use the old ratio unless the question says otherwise

When you practise, do not only check whether your Revaluation Account totals match. Also check whether the balance sheet values have changed correctly.

How to Study Revaluation Account Without Memorising Too Much

Start with the basic gain-loss logic.

Write this on your rough page:

Gain	Loss
Asset increase	Asset decrease
Liability decrease	Liability increase
Unrecorded asset	Unrecorded liability
Provision reduced	Provision created or increased

Then remember:

• gains go to the credit side
• losses go to the debit side
• final profit or loss goes to old partners in the old ratio
• reserves and accumulated profits do not normally go through Revaluation Account

This is enough to solve most school-level questions with confidence.

Frequently Asked Questions

What is Revaluation Account?

Revaluation Account is an account prepared during partnership reconstitution to record changes in the values of assets and liabilities. It shows the final revaluation profit or loss.

Why is Revaluation Account prepared?

It is prepared so that assets and liabilities are shown at fair or agreed values before the new partnership arrangement begins. This prevents old gains or losses from being unfairly shared with partners who were not entitled to them.

Is revaluation profit shared in the old ratio or new ratio?

Revaluation profit or loss is usually shared by the old partners in their old profit-sharing ratio, because it relates to the period before the change in the firm.

Does General Reserve go to Revaluation Account?

No. General Reserve is an accumulated profit. It is usually transferred directly to old partners’ capital accounts in the old profit-sharing ratio.

Does Provision for Doubtful Debts go to Revaluation Account?

Yes, if the provision is being created, increased, reduced, or cancelled as part of revaluation. If an old provision already exists, only the change in provision is adjusted through Revaluation Account.

What happens when an unrecorded asset is found?

An unrecorded asset is brought into the books by debiting the asset account and crediting Revaluation Account. It is treated as a gain.

What happens when an unrecorded liability is found?

An unrecorded liability is brought into the books by debiting Revaluation Account and crediting the liability account. It is treated as a loss.

Does Revaluation Account appear in the new balance sheet?

Normally, no. Revaluation Account is closed by transferring its profit or loss to partners’ capital accounts. The new balance sheet shows revised assets, revised liabilities, and final capital balances.