On the admission of a new partner, an increase in the value of assets is debited to:
On the admission of a new partner, an increase in the value of assets is debited to:
Solution
When a new partner is admitted, assets and liabilities are revalued to reflect their current market values. This ensures the new partner doesn't share in gains that belong to the old partners.
When an asset's value increases, the Assets Account is debited to record the increased value in the books. The corresponding credit entry goes to the Revaluation Account (Profit and Loss Adjustment Account).
Journal Entry:
Assets Account Dr.
To Revaluation Account
The Revaluation Account credit balance (profit) is then transferred to the old partners' capital accounts in their old profit-sharing ratio.
A common confusion arises about whether to debit the Revaluation Account or the Assets Account. Remember: we're actually increasing the book value of the asset itself, so the asset account must be debited as per the rule that "an increase in asset is debited."
The Revaluation Account merely records the effect of this revaluation, receiving the credit entry since it represents a gain for the old partners.
Correct Option: 2
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