admission of partner where will profit and loss of assets will go ?
Answers
Answer:
At the time of admission of a new partner, we need to revalue the existing assets and liabilities and thus, prepare the revaluation account. The value of assets may be different from its book value because, with time, the value of some assets increases while that of some decreases. Also, the value of liabilities may be different from their book values. Also, there must be some assets or liabilities that are not recorded in the books need to be recorded.
Explanation:
We need to bring the value of assets and liabilities to their current values otherwise the incoming partner may have an advantage because of the change in values.
Credit the increase in the value of assets or decrease in the number of liabilities to revaluation account, being profit.
Debit the decrease in value of assets or increase in the number of liabilities to revaluation account, being a loss.
The difference between the two sides of the revaluation account is either profit or loss.
If the credit side is more than debit side there is profit and if the debit side is more than the credit side there is a loss.
Transfer the Profit or loss of revaluation account to the partners capital accounts (old partners account) in their old profit sharing ratio.
