Change in Profit-Sharing Ratio — Part 2: Revaluation, Reserves and Accumulated Profits: visual lesson, CBSE Class 12 Accountancy

Lesson

Revaluation, reserves and accumulated profits

Part 2 — settling the past in the old ratio before the new ratio begins.

In this lesson you will

Prepare a revaluation account and share its gain or loss in the old ratio
Distribute general reserve, profit and loss balances, workmen compensation reserve and investment fluctuation reserve
Pass a single adjustment entry when partners keep book values and reserves unchanged

Part 2 at a glance

Concept

Assets may be worth more or less than their book values; some liabilities may be unrecorded.
If not settled now, the gain or loss would later be shared in the new ratio, which is unfair.

Fairness between the partners

Concept

A nominal account: gains on the credit side, losses on the debit side; the balance goes to the partners' capital accounts in the old ratio.

Table of revaluation rules: increases in assets, decreases in liabilities and unrecorded assets are credited; decreases in assets, increases in liabilities or provisions and unrecorded liabilities are debited; the balance is shared in the old ratio
Change	Revaluation account
Increase in an asset	Credit (gain)
Decrease in an asset	Debit (loss)
Increase in a liability (or new provision)	Debit (loss)
Decrease in a liability	Credit (gain)
Unrecorded asset brought in	Credit (gain)
Unrecorded liability brought in	Debit (loss)
Balance	Shared in the old ratio