At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.
After revaluation, the assets and liabilities appear in the books of the firm at their revised/current values. The revaluation process ensures that:
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Assets are shown at their current values after accounting for any increase or decrease in value.
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Liabilities are shown at their reassessed correct values after accounting for any increase or decrease.
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Unrecorded assets and liabilities are brought into the books at their proper values.
The Revaluation Account records all changes: increase in value of assets and decrease in liabilities (gains) are credited, while decrease in value of assets and increase in liabilities (losses) are debited. The net gain or loss is transferred to old partners' capital accounts in their old profit sharing ratio.
Imaginary Balance Sheet after Revaluation:
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Creditors | 8,000 | Cash in hand | 2,000 |
| Bills Payable | 4,000 | Cash at bank | 10,000 |
| Capital Accounts: | Sundry Debtors | 8,000 | |
| Azad | 50,000 | Less: Provision | (480) |
| Babli | 32,000 | Stock | 10,000 |
| Furniture | 5,000 | ||
| Machinery | 23,000 | ||
| Buildings | 45,000 | ||
| 94,000 | 1,02,520 |
Note: Buildings increased from Rs. 40,000 to Rs. 45,000; Machinery decreased from Rs. 25,000 to Rs. 23,000; Provision for doubtful debts created at 6% on Rs. 8,000.
Explanation
The question asks about the treatment of assets and liabilities after revaluation. According to the textbook context, at the time of admission, assets and liabilities are revalued to bring them to current values. The Revaluation Account is prepared where gains (increase in assets, decrease in liabilities) are credited and losses (decrease in assets, increase in liabilities) are debited. The balance is transferred to old partners' capital accounts. The imaginary balance sheet demonstrates how assets appear at revised values (Buildings at Rs. 45,000 instead of Rs. 40,000; Machinery at Rs. 23,000 instead of Rs. 25,000) and liabilities reflect provisions like doubtful debts.
Solution Steps
Step 1: Identify that after revaluation, assets and liabilities appear at revised/current values in the books.
Step 2: Explain the role of Revaluation Account in recording increases and decreases.
Step 3: State that net gain/loss is transferred to old partners' capital accounts in old ratio.
Step 4: Prepare an imaginary Balance Sheet showing assets and liabilities at revalued figures.