What is a Revaluation Account?

A Revaluation Account is a nominal account prepared at the time of reconstitution to record changes in the values of assets and liabilities. Increases in asset values are credited; decreases are debited. The balance (profit or loss on revaluation) is transferred to the old partners' capital accounts in the old profit-sharing ratio.

What are the adjustments needed at the time of admission?

The key adjustments are: (1) Calculate new profit-sharing ratio and sacrificing ratio, (2) Treatment of goodwill — raise or write off, (3) Revaluation of assets and liabilities, (4) Transfer of accumulated profits/losses to old partners, (5) Bring in new partner's capital, (6) Prepare a revised balance sheet.

Tamil Nadu Class 12 Accountancy Admission of a Partner Notes — Samacheer Kalvi

Quick Summary

When a new partner is admitted, the partnership is reconstituted. This requires recalculation of profit-sharing ratios, treatment of goodwill, revaluation of assets and liabilities, and adjustment of accumulated reserves.

New Profit-Sharing Ratio

New Ratio must be calculated when a partner is admitted.

Method: New partner's share is given; old partners divide the remaining share in their old ratio.

Example: A:B share profits 3:2. C is admitted for 1/5 share.

Remaining share for A and B = 1 − 1/5 = 4/5
A's new share = 3/5 × 4/5 = 12/25
B's new share = 2/5 × 4/5 = 8/25
C's share = 1/5 = 5/25
New ratio: A:B:C = 12:8:5

Sacrificing Ratio

FormulaSacrificing Ratio = Old Share − New Share

Old partners sacrifice profit in favour of the new partner. Premium for goodwill is distributed to sacrificing partners in the sacrificing ratio.

Treatment of Goodwill

When Premium is Brought in Cash

Cash/Bank A/c       Dr
  To Premium for Goodwill A/c
Premium for Goodwill A/c  Dr
  To Sacrificing Partners' Capital A/cs (sacrificing ratio)

When Goodwill Exists in Books

Write off existing goodwill by debiting old partners in old ratio
Then record new goodwill treatment

When No Premium is Brought (Hidden Goodwill)

Goodwill is raised and then written off using capital accounts.

Revaluation Account

Prepared to record changes in asset/liability values:

Revaluation Account
Dr side:                     Cr side:
Decrease in asset value      Increase in asset value
Increase in liability        Decrease in liability
Profit on revaluation        Loss on revaluation
(transferred to old          (transferred to old
partners in old ratio)       partners in old ratio)

Accumulated Profits and Losses

Before admission, accumulated reserves and profits must be transferred to old partners:

Debit: General Reserve, Profit & Loss A/c, etc.
Credit: Old partners' capital accounts in old ratio

New Partner's Capital

Two approaches: 1. New partner brings the required capital as agreed 2. Adjustment for proportionate capital: Calculate total capital based on new partner's contribution, then adjust old partners' capitals accordingly

Revised Balance Sheet

After all adjustments, prepare the new balance sheet with:

Updated capital balances (all three partners)
Revalued asset and liability figures
New partner's capital contribution recorded

Important Questions

One Mark

1. What is sacrificing ratio? 2. Define revaluation account. 3. What is the purpose of the Revaluation Account at admission?

Short Answer (3 Marks)

1. Explain how to calculate the new profit-sharing ratio when a partner is admitted. 2. What are the adjustments required at the time of admission? 3. Explain the treatment of goodwill when premium is paid in cash.

Long Answer (5 Marks)

1. A and B are partners sharing profits in 3:2. C is admitted for 1/4 share. A:B sacrifice in equal ratio. Calculate new PSR and sacrificing ratio. 2. At the time of admission of C, the following revaluations are made: Stock overvalued by ₹5,000; Building increased by ₹20,000; Creditors decreased by ₹3,000. Prepare the Revaluation Account. 3. Explain all the adjustments required at the time of admission of a new partner.

Board Exam Tips

New PSR calculation is guaranteed in every exam — practice at least 5 different formats
Revaluation account format must be drawn as a T-account — not as narration
Don't forget to transfer reserves/general reserve to old partners before the balance sheet

Revision Checklist

[ ] New PSR formula and worked example
[ ] Sacrificing ratio = old − new
[ ] Goodwill treatment — 3 cases (cash, no cash, existing goodwill)
[ ] Revaluation Account format
[ ] Steps: what to adjust at admission (6 steps)
[ ] Revised Balance Sheet preparation

Frequently Asked Questions

Sacrificing ratio is the ratio in which existing partners give up (sacrifice) a portion of their profit share to the incoming partner. Sacrificing Ratio = Old Share − New Share. Example: If A's old share is 3/5 and new share is 2/5, A's sacrifice = 3/5 − 2/5 = 1/5. Premium for goodwill is distributed to sacrificing partners in this ratio.