Why there is need for the revaluation of assets and liabilities on the admission of a partner?
At the time of admission of a new partner, it is necessary to ascertain whether the assets of the firm are shown in the books at their current values. Often, assets may be overstated or understated, which requires revaluation. Similarly, a reassessment of liabilities is done to bring them into the books at their correct values.
Furthermore, there may be certain unrecorded assets and liabilities of the firm that need to be brought into the books. For this purpose, the firm prepares a Revaluation Account.
Any gain or loss arising from this revaluation is transferred to the capital accounts of the old partners in their old profit sharing ratio. This ensures that the new partner is not affected by the past fluctuations in the value of assets and liabilities.
Explanation
The textbook context in Section 2.7 explains that assets might not be recorded at current values (being overstated or understated) and liabilities might need correction. It also highlights the need to record unrecorded items. The purpose is to ensure the financial position reflects reality, and any gain or loss belongs to the old partners before the new partner enters.