On the retirement of an existing partner, an increase in the value of a liability will be credited to :-
On the retirement of an existing partner, an increase in the value of a liability will be credited to :-
Solution
When a partner retires, assets and liabilities are revalued to reflect their true market values. This revaluation affects both continuing and retiring partners in their old profit-sharing ratio.
When a liability's value increases, it represents a loss for the firm (as the firm now owes more than recorded).
The accounting treatment is:
Journal Entry:
Revaluation Account Dr.
To Liability Account
The Liability Account is credited to record the increased amount of liability. The corresponding debit goes to Revaluation Account (or Profit and Loss Adjustment Account), which captures this loss.
Why other options are incorrect:
- Option 1 (Retiring Partner Capital Account): The capital account is affected indirectly when the revaluation profit/loss is distributed, not directly credited for liability increase.
- Option 2 (Profit and Loss Adjustment Account): This account is debited (not credited) for increase in liability, as it represents a loss.
- Option 4 (Realization Account): This account is used only when the firm is dissolved, not when a partner retires.
The increased liability must be reflected in the Liability Account itself by crediting it, which is why Option 3 is correct.
Related questions:
2022: 8 Aug Shift 2