Why do firm reevaluate assets and reassers their liabilities on retirement or on the event of death of a partner.
At the time of retirement or death of a partner, the firm reevaluates assets and reassesses liabilities because there may be some assets which may not have been shown at their current values. Similarly, there may be certain liabilities which have been shown at a value different from the obligation to be met by the firm.
Additionally, there may be some unrecorded assets and liabilities which need to be brought into the firm's books. A Revaluation Account is prepared to ascertain the net gain or loss on revaluation of assets and/or liabilities.
The gain or loss on revaluation is transferred to the capital accounts of all partners, including the retiring or deceased partners, in their old profit sharing ratio. This ensures fair settlement of the sum due to the retiring partner or the legal representatives of the deceased partner.
Explanation
The textbook context clearly states that at the time of retirement/death, assets may not be shown at current values and liabilities may be shown at values different from actual obligations. The revaluation ensures that the retiring/deceased partner receives their fair share based on the true financial position. The Revaluation Account captures all adjustments including unrecorded items, and the resulting gain/loss is distributed among all partners in their old profit sharing ratio.