Revaluation of Assets and Liabilities

Revaluation of assets and liabilities refers to the process of reassessing the value of a firm's assets and liabilities in order to reflect their current market value. This is typically done when there are significant changes in market conditions or when the financial statements are being prepared.

Profit on Revaluation

When there is a profit on revaluation of assets and liabilities, it means that the value of the assets has increased since the last valuation. This could be due to various factors such as appreciation in the market value of the assets, improvements made to the assets, or any other reason that increases their worth. The profit on revaluation is calculated by subtracting the previous value of the assets from their current value.

Sharing of Profit

The profit on revaluation is shared among the partners of a firm in their profit-sharing ratio. The profit-sharing ratio is determined by the partnership agreement and represents the proportion in which the partners are entitled to share the profits and losses of the firm. It is usually based on the capital contributions made by the partners or any other mutually agreed-upon basis.

Explanation

When there is a profit on revaluation, it is considered as an increase in the value of the firm's assets. As a result, the partners' capital accounts will increase in accordance with their profit-sharing ratio. This means that the partners who have a higher profit-sharing ratio will receive a larger share of the profit on revaluation, while those with a lower ratio will receive a smaller share.

For example, let's say there are three partners in a firm with a profit-sharing ratio of 3:2:1. If the profit on revaluation is $10,000, the distribution of this profit would be as follows:

- Partner A (with a profit-sharing ratio of 3) would receive $6,000 (3/6 * $10,000).
- Partner B (with a profit-sharing ratio of 2) would receive $4,000 (2/6 * $10,000).
- Partner C (with a profit-sharing ratio of 1) would receive $2,000 (1/6 * $10,000).

This distribution ensures that each partner receives a share of the profit on revaluation in proportion to their profit-sharing ratio. It reflects their respective contributions to the firm and helps maintain fairness in the distribution of profits.

In conclusion, when there is a profit on revaluation of assets and liabilities, it is shared among the partners in their profit-sharing ratio. This ensures that each partner receives a fair share of the profit based on their respective contributions to the firm.