Financial Accounting · Amalgamation of Partnership Firms

Revaluation Account in Amalgamation of Partnership Firms

Updated 10 October 2026 · Fact-checked

Before two firms amalgamate, each firm revalues its assets and liabilities at the agreed values. Differences go to a Revaluation Account, and the net profit or loss is shared among the old partners in their old profit-sharing ratio. Goodwill, if agreed, is adjusted through partners' capital accounts. The firm's books are then closed.

Understand Revaluation of Assets and Liabilities on Amalgamation

When two or more firms merge, the new firm takes over assets and liabilities at values the partners agree. Those values often differ from book values. The old books must show the difference somewhere, so that the old partners get the gain or bear the loss, not the new firm.

That is the job of the Revaluation Account. It is a nominal account. You debit it for decreases in assets, increases in liabilities and unrecorded liabilities. You credit it for increases in assets, decreases in liabilities and unrecorded assets. The balance is profit or loss on revaluation.

This balance belongs to the old partners of that firm. It is shared in their old profit-sharing ratio, because the gain or loss arose while the old firm was running. Profit is credited to their capital accounts. Loss is debited.

Goodwill is handled the same way. If the agreement values the old firm's goodwill and it is not in the books, the usual approach is to raise it by crediting old partners' capitals in the old ratio, then write it off in the new firm's ratio if the new firm will not carry goodwill. Always follow the agreement and the question's instruction. If the question says goodwill is not to appear in the new books, adjust only through capitals.

After revaluation, accumulated reserves and profits are also credited to old partners in the old ratio. Then the adjusted capital balances are what the firm brings into the new firm. Any needed capital adjustment (for example to make capitals match the new ratio) is done by cash or by current accounts, as the question directs.

Key rules to remember

Revaluation Account treatment: Debit: decrease in assets, increase in liabilities, unrecorded liabilities. Credit: increase in assets, decrease in liabilities, unrecorded assets.; The balancing figure is profit or loss on revaluation.
Sharing of revaluation result: Profit or loss on revaluation is shared in the OLD profit-sharing ratio of that firm.; Never use the new firm's ratio for this.
Goodwill adjustment (not in books): Dr Goodwill A/c, Cr Old partners' Capital A/cs (old ratio); then Dr New partners' Capital A/cs (new ratio), Cr Goodwill A/c, if goodwill is not to appear in new books.; Apply only if the agreement or question says so.
Adjusted capital: Adjusted capital = Old capital + Share of reserves and accumulated profits − Share of accumulated losses ± Share of revaluation profit or loss ± Goodwill adjustment; Consider drawings, interest and fresh capital only if given.
Net assets check: Revised assets − Revised liabilities = Total adjusted capitals; Use it to verify your work.

How to solve Revaluation of Assets and Liabilities on Amalgamation questions

Follow this order for any question on revaluation before amalgamation.

1Read the agreement: note the agreed values of each asset and liability, unrecorded items, and the goodwill value.
2Open the Revaluation Account for each firm separately. Enter each change on the correct side, showing book value versus agreed value.
3Total both sides and find the profit or loss on revaluation.
4Transfer the balance to the old partners' capital accounts in the old profit-sharing ratio.
5Pass goodwill entries if the question asks, and transfer reserves and accumulated profits or losses to capitals in the old ratio.
6Write the partners' capital accounts with opening balances, all transfers, and find adjusted balances.
7Make any capital adjustment (cash or current account) asked for, then check that revised net assets equal adjusted capitals.

Quickest way: Net-change shortcut

When to use it: Use when only the final adjusted capitals are asked and the full Revaluation Account is not required.

List each change as a plus or minus against the book value: asset up is plus, asset down is minus, liability up is minus, liability down is plus.
Add them for the net profit or loss and split it in the old ratio.
Add the shares to each capital, together with reserves and goodwill credits.
Check: revised assets minus revised liabilities must equal the sum of adjusted capitals.

Common mistakes in Revaluation of Assets and Liabilities on Amalgamation

Putting an increase in a liability on the credit side of the Revaluation Account.
Students think increase means credit, as with assets.
Fix: Liabilities behave oppositely. An increase in a liability is a loss, so debit it.
Sharing revaluation profit in the new ratio.
The new firm is in focus and the ratios get mixed up.
Fix: Revaluation, reserves and goodwill credits go in the old ratio of that firm. Only a goodwill write-off in the new books uses the new ratio.
Ignoring unrecorded assets or liabilities.
They do not appear in the balance sheet, so they are missed in the question text.
Fix: Underline every item in the agreement. Unrecorded asset is credit, unrecorded liability is debit.
Treating goodwill wrongly when it is not to be shown in the new books.
Students stop after raising goodwill in the old ratio.
Fix: If goodwill is not to be shown, write it off immediately in the new ratio, so only the net effect remains on capitals.
Forgetting to transfer reserves and accumulated losses before computing adjusted capital.
Attention is on the Revaluation Account alone.
Fix: Before closing, check the balance sheet for reserves, profit and loss balances and deferred expenditure, and move them to capitals in the old ratio.

Worked examples

Example 1

Anil and Bimal share profits 3:2. Their balance sheet shows: Assets: Land ₹4,00,000, Stock ₹2,00,000, Debtors ₹1,50,000, Cash ₹1,00,000 (total ₹8,50,000). Liabilities: Creditors ₹1,00,000, Bank loan ₹2,00,000, General Reserve ₹50,000, Capitals Anil ₹3,00,000 and Bimal ₹2,00,000 (total ₹8,50,000). For amalgamation: land is valued at ₹5,00,000, stock at ₹1,80,000, a provision of ₹10,000 is made on debtors, and an unrecorded liability of ₹15,000 is recognised. Prepare the Revaluation Account and find the adjusted capitals.

Show the solution

Check the balance sheet: assets 4,00,000 + 2,00,000 + 1,50,000 + 1,00,000 = ₹8,50,000. Liabilities 1,00,000 + 2,00,000 + 50,000 + 3,00,000 + 2,00,000 = ₹8,50,000. It balances.
Revaluation Account. Dr side: Stock decrease ₹20,000, Provision for debtors ₹10,000, Unrecorded liability ₹15,000, total ₹45,000. Cr side: Land increase ₹1,00,000. Balancing figure: profit on revaluation ₹55,000 (1,00,000 − 45,000).
Share the profit in 3:2: Anil ₹33,000, Bimal ₹22,000.
General reserve ₹50,000 in 3:2: Anil ₹30,000, Bimal ₹20,000.
Anil's adjusted capital = 3,00,000 + 33,000 + 30,000 = ₹3,63,000.
Bimal's adjusted capital = 2,00,000 + 22,000 + 20,000 = ₹2,42,000.
Total adjusted capitals = 3,63,000 + 2,42,000 = ₹6,05,000.

Answer: Profit on revaluation is ₹55,000. Adjusted capitals: Anil ₹3,63,000 and Bimal ₹2,42,000 (total ₹6,05,000). Check: revised assets ₹9,20,000 (land 5,00,000 + stock 1,80,000 + debtors 1,40,000 + cash 1,00,000) − revised liabilities ₹3,15,000 (creditors 1,00,000, bank loan 2,00,000, unrecorded liability 15,000) = ₹6,05,000 = total adjusted capitals.

Example 2

Rohit and Sohan share profits 2:1. Their capitals are ₹6,00,000 and ₹3,00,000. On amalgamation, the machinery book value ₹2,00,000 is revalued at ₹1,70,000, and the furniture book value ₹50,000 is revalued at ₹65,000. Goodwill is valued at ₹90,000, not in books, and is not to appear in the new firm's books. The new firm's profit ratio is 1:1. Find adjusted capitals.

Show the solution

Revaluation: machinery decrease ₹30,000 (debit), furniture increase ₹15,000 (credit). Net loss = ₹15,000.
Loss shared 2:1: Rohit ₹10,000, Sohan ₹5,000.
Goodwill ₹90,000 credited in old ratio 2:1: Rohit ₹60,000, Sohan ₹30,000.
Goodwill written off in new ratio 1:1: each partner debited ₹45,000.
Rohit's net goodwill effect = +60,000 − 45,000 = +₹15,000. Sohan's = +30,000 − 45,000 = −₹15,000.
Rohit's adjusted capital = 6,00,000 − 10,000 + 15,000 = ₹6,05,000.
Sohan's adjusted capital = 3,00,000 − 5,000 − 15,000 = ₹2,80,000.

Answer: Loss on revaluation is ₹15,000. Adjusted capitals: Rohit ₹6,05,000 and Sohan ₹2,80,000.

Exam tips

Draw a two-column check at the end: revised assets minus revised liabilities against the sum of adjusted capitals. It catches most errors in a minute.
Write each firm's Revaluation Account separately. Combined working loses step marks when the ratios differ.
Show the profit-sharing ratio used beside every transfer so the examiner can award method marks even if a figure slips.
In MCQs, check the direction of each item first (liability up means loss). Many wrong options are built on that reversal.
Use the exact wording of the question for goodwill. If it says not to be shown in books, pass the write-off entry.

Practice questions from Amalgamation of Partnership Firms

Revaluation of Assets and Liabilities on Amalgamation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Revaluation of Assets and Liabilities on Amalgamation: frequently asked questions

Why is revaluation done before amalgamation?

The new firm takes assets and liabilities at agreed values. The difference from book values arose in the old firm, so it must be settled among the old partners first. This keeps the new firm's books clean.

In which ratio is revaluation profit shared in amalgamation?

It is shared in the old profit-sharing ratio of the firm whose assets were revalued. The new ratio is used only for items that the question specifically assigns to it, such as writing off goodwill.

How is goodwill adjusted when two firms amalgamate?

If agreed goodwill is not in the books, it is credited to old partners' capitals in the old ratio. If the new firm will not show goodwill, it is then written off against capitals in the new ratio.

How are capital accounts adjusted after revaluation?

Add shares of reserves, accumulated profits and revaluation profit, and deduct losses and revaluation loss. If capitals must match a stated figure or ratio, the difference is settled in cash or through current accounts, as the question says.