Reserves and revaluation

Before a new partner joins, the profits and gains already earned belong to the old partners, so they are settled first.

Accumulated profits and losses: the general reserve and a credit balance of the Profit and Loss Account are credited to the old partners' capital accounts in the old ratio. A debit balance (accumulated loss) is debited to them. The new partner gets none of these.

Revaluation. The firm's assets and liabilities may be worth more or less than their book values. A Revaluation Account records the changes:

• Credit side (gains): an increase in the value of an asset; a decrease in a liability; an unrecorded asset brought into the books.
• Debit side (losses): a decrease in the value of an asset; an increase in a liability; an unrecorded liability brought into the books.

The balance is a profit (if credits are bigger) or a loss. It belongs to the old partners and is shared in the old ratio. The assets and liabilities then appear at their revised values in the new balance sheet.

Example: stock falls by 1,500, furniture by 1,000, a provision of 600 is made, and an electricity bill of 200 is recorded (losses 3,300); plant rises by 3,000, an unrecorded investment of 1,000 is found, and a creditor of 100 is not payable (gains 4,100). Revaluation profit = 800, shared by the old partners in their ratio.