Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?
Yes, I advise that assets and liabilities must be revalued at the time of admission of a partner.
It is always desirable to ascertain whether the assets of the firm are shown in books at their current values. In case the assets are overstated or understated, these need to be revalued. Similarly, a reassessment of liabilities is done so that these are brought in the books at their correct values. At times, there may also be some unrecorded assets and liabilities which also have to be brought into the books of the firm.
For this purpose, the firm prepares a Revaluation Account. The gain or loss on revaluation of each asset and liability is transferred to this account. The account is credited with increase in the value of assets and decrease in liabilities as it is a gain. It is debited with decrease in the value of assets and increase in liabilities as it is a loss. Similarly, unrecorded assets are credited and unrecorded liabilities are debited to the Revaluation Account.
If the Revaluation Account shows a credit balance, it indicates net gain, and if there is a debit balance, it indicates net loss. This balance is transferred to the capital accounts of the old partners in their old profit sharing ratio.
The journal entries include: For increase in value of asset (Asset A/c Dr. to Revaluation A/c), for reduction in value of asset (Revaluation A/c Dr. to Asset A/c), and for increase in liability (Revaluation A/c Dr. to Liability A/c).
Explanation
The textbook context clearly explains the necessity of revaluation at the time of admission. The key reasons include bringing assets and liabilities to their current/correct values and recording any unrecorded items. The treatment involves preparing a Revaluation Account where gains (increase in assets, decrease in liabilities) are credited and losses (decrease in assets, increase in liabilities) are debited. The net result is transferred to old partners' capital accounts in their old profit sharing ratio, ensuring that the new partner neither gains nor suffers from past variations in asset/liability values.