Question

why are assets and liabilities revalued at the time of reconstitution of a partnership firm?

Answer 1

Because, assets and liabilities are shown on historical cost in books of accounts. But in reality, actual value may be different.

So, if you increase your profit ratio, you'll get more share of all increase above historical cost. Which is not correct, because some appreciation may be related to the period before change.

So this adjustment is necessary.

e.g. We are equal partners, having land of 10 lac at historical cost. Land actual price now is 12 lac. So, it means you have earned 1 lac and I 1 lac too. But since, the land is not sold this profit can't be distributed between us.

Later, you ask for more share, and we agree at 3:2. After than we sell land for 13 lac.

You'll get 3/5 of 3 lac profit. However, 2 lac profit was related to before reconstitution period.
Effectively, you should get 1 lac for before change period and 13-12 = 1 lac x 3/5 = 60000.
Total 1,60,000.

Otherwise it would be a loss to me. And I may not agree to that because it's not justice. You cannot ask for more share what we've already earned but not reflected in balance sheet.

Answer 2

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⭐⭐ The balance sheet prepared by old partners before the admission of new partner may not show the assets and liabilities at true value. In other words the value at which the assets and liabilities are shown may be more or less than their actual value. It is quite possible that some assets and liabilities which though exist in the business but some how donot appear in the books. On admission the new partner would like that all the assets and liabilities of the firm are shown in the balance sheet at their genuine value. So there is a need to revaluation the assets and liabilities. This is mutually done by old partners and new partners. The revaluation process goes along way to develop sound understanding among the old and new partners which in turn will result in the smooth conduct of the business under the new arrangements...


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