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Financial Accounting · Retirement of Partner

Revaluation Account and Reserves on Retirement of a Partner

Updated 10 October 2026 · Fact-checked

On retirement, assets and liabilities are revalued through a Revaluation Account. Profit or loss on revaluation is shared by all partners in the old ratio. Reserves, accumulated profits and losses are also distributed to all partners, including the retiring partner, in the old ratio. Then the retiring partner's dues are settled.

Understand Revaluation of Assets and Liabilities and Reserves

When a partner retires, the firm's old balance sheet may not show true values. Assets may be worth more or less than book value. Some liabilities may be missing. If you ignore this, the retiring partner gets paid on wrong figures.

The Revaluation Account fixes this. It is a temporary account that records only the changes in values. An increase in an asset or a decrease in a liability is a gain (credit). A decrease in an asset or an increase in a liability, or an unrecorded liability, is a loss (debit). The balance is profit or loss on revaluation.

This profit or loss belongs to the period before retirement. So it is shared by all partners, including the retiring one, in the old profit sharing ratio. It is credited or debited to their capital accounts.

The same logic applies to the General Reserve, Reserve Fund, Profit and Loss A/c credit balance and other accumulated profits. They were earned by all old partners, so they are transferred to the capital accounts of all partners in the old ratio. Accumulated losses (debit balance of P&L, deferred revenue expenditure) are written off the same way.

A Workmen Compensation Reserve or Investment Fluctuation Reserve needs care. Any liability actually payable is provided for first. Only the excess, if any, goes to partners. Revaluation is done before goodwill and before the new ratio is applied.

Key rules to remember

Revaluation profit or loss
Profit = Total credits (assets ↑, liabilities ↓) − Total debits (assets ↓, liabilities ↑)
Positive balance is profit; negative is loss. Share in the old ratio.
Sharing rule
Revaluation result, reserves, accumulated profits and losses → all partners in OLD ratio
The retiring partner shares fully. The new ratio is not used here.
Entry: asset increased
Asset A/c Dr; to Revaluation A/c
Reverse for a decrease.
Entry: liability increased or unrecorded
Revaluation A/c Dr; to Liability A/c
Reverse for a decrease in liability.
Entry: profit on revaluation
Revaluation A/c Dr; to Partners' Capital A/cs (old ratio)
For a loss, reverse the entry.
Entry: reserves and profits
General Reserve / P&L A/c Dr; to Partners' Capital A/cs (old ratio)
For accumulated loss, credit P&L A/c and debit capitals.
Entry: reserve for a known liability
Reserve Dr; to Liability A/c, then only the excess to capitals
Example: Workmen Compensation Reserve against a claim.

How to solve Revaluation of Assets and Liabilities and Reserves questions

Use this order for any question on revaluation and reserves at retirement.

  1. 1Write down the old ratio and identify the retiring partner.
  2. 2List every change in values: assets up or down, liabilities up or down, unrecorded assets or liabilities.
  3. 3Prepare the Revaluation Account: losses on the debit side, gains on the credit side. Find the balancing figure.
  4. 4Transfer the balance to partners' capital accounts in the old ratio.
  5. 5Transfer General Reserve, P&L credit balance and other reserves to capital accounts in the old ratio. Write off accumulated losses the same way. Provide for any known liability first.
  6. 6Post all entries in the Partners' Capital Accounts, leaving space for goodwill and adjustments later.
  7. 7Continue with goodwill, capital adjustment and settlement as the question requires.

Quickest way: Net-effect capital method

When to use it: Use when the question asks only for capital balances or the retiring partner's amount, and no Revaluation Account is demanded.

  1. Compute net revaluation profit or loss in one line, netting all changes.
  2. Add reserves and accumulated profits, subtract accumulated losses and revaluation loss.
  3. Get the total net gain or loss to be shared.
  4. Multiply by each partner's old ratio share and add to or subtract from the capital.
  5. Check that the total of the shares equals the net figure.

Common mistakes in Revaluation of Assets and Liabilities and Reserves

  • Sharing revaluation profit or loss in the new ratio

    Students focus on the new firm after retirement.

    Fix: It relates to the past, so use the old ratio for all partners, including the retiring partner.

  • Excluding the retiring partner from reserve distribution

    Students think only continuing partners benefit.

    Fix: Reserves belong to all old partners. Credit the retiring partner's capital too.

  • Reversing sides for liabilities

    Confusion between asset and liability effects.

    Fix: Remember: asset decrease or liability increase is a loss (debit); the opposite is a gain (credit).

  • Distributing the full Workmen Compensation Reserve when a claim exists

    Students treat every reserve like General Reserve.

    Fix: Transfer the claim amount to a liability. Only the excess goes to partners.

  • Forgetting to write off accumulated losses

    The debit balance of P&L A/c is ignored as it is an asset-side item.

    Fix: Charge the debit balance to all partners in the old ratio before preparing the new balance sheet.

  • Showing reserves again in the new balance sheet

    Students copy the old balance sheet.

    Fix: Once distributed to capitals, the reserve disappears from the new balance sheet.

Worked examples

Example 1

Asha, Bipin and Chetan share profits in the ratio 5:3:2. Chetan retires. Before this, General Reserve was ₹50,000 and P&L A/c (credit) ₹30,000. Stock of ₹80,000 is revalued at ₹70,000. Building of ₹2,00,000 is revalued at ₹2,40,000. A creditor claim of ₹5,000 is unrecorded. Prepare the Revaluation Account and show the effect on capitals.

Show the solution
  1. Losses (debit): Stock decrease ₹10,000 and unrecorded liability ₹5,000 = ₹15,000.
  2. Gains (credit): Building increase ₹40,000.
  3. Revaluation profit = ₹40,000 − ₹15,000 = ₹25,000.
  4. Share in 5:3:2: Asha ₹12,500, Bipin ₹7,500, Chetan ₹5,000.
  5. Reserves total = ₹50,000 + ₹30,000 = ₹80,000.
  6. Share in 5:3:2: Asha ₹40,000, Bipin ₹24,000, Chetan ₹16,000.
  7. Total credit to capitals: Asha ₹52,500, Bipin ₹31,500, Chetan ₹21,000. Total ₹1,05,000 (= ₹25,000 + ₹80,000).

Answer: Revaluation profit ₹25,000. Capitals are credited: Asha ₹52,500, Bipin ₹31,500, Chetan ₹21,000.

Example 2

Ravi, Seema and Tarun share profits 4:3:3. Tarun retires. Balance sheet shows Workmen Compensation Reserve ₹60,000, a claim of ₹40,000 is expected, and P&L A/c debit balance ₹20,000. Machinery of ₹1,00,000 is to be reduced by 10%. Find each partner's net capital effect.

Show the solution
  1. Reserve available after claim: ₹60,000 − ₹40,000 = ₹20,000 excess to partners. Claim of ₹40,000 is shown as a liability.
  2. Machinery decrease = 10% of ₹1,00,000 = ₹10,000, a revaluation loss.
  3. Net to share = excess reserve ₹20,000 − P&L loss ₹20,000 − revaluation loss ₹10,000 = −₹10,000, a net loss.
  4. Share of net loss in 4:3:3: Ravi ₹4,000, Seema ₹3,000, Tarun ₹3,000.
  5. Each capital account is debited by these amounts.

Answer: Net loss ₹10,000: Ravi ₹4,000, Seema ₹3,000 and Tarun ₹3,000 are debited to capitals.

Exam tips

  • Always show the Revaluation Account format in full; step marks are given for each item and the balance transfer.
  • Check the question for reserves earmarked for a specific liability before distributing.
  • Write the old ratio at the top of your working and use it for all items in this topic.
  • Put capital account working in a clear table so the total of each side can be checked.
  • For MCQs, remember the rule: revaluation result and reserves go to all partners in the old ratio.

Practice questions from Retirement of Partner

Revaluation of Assets and Liabilities and Reserves 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 and Reserves: frequently asked questions

In which ratio is revaluation profit shared on retirement?

It is shared by all partners, including the retiring partner, in the old profit sharing ratio. The profit relates to the period before retirement.

How is General Reserve treated on retirement of a partner?

It is transferred to the capital accounts of all partners in the old ratio. After this, it no longer appears in the new balance sheet.

Do reserves always go to partners?

No. If a reserve is meant for a specific liability, such as a workmen's claim, provide for that liability first. Only the excess is distributed to partners.

Is the Revaluation Account a real, personal or nominal account?

It is a nominal account in nature. It is prepared temporarily to record changes in values and its balance is transferred to capital accounts.