Question

Abhay and Anirudh were partners sharing profits and losses in the ratio of 2:1. They decided that 1st April, 2015 they will share profits and losses equally. On that date, Revaluation Account was prepa It was noticed that an unrecorded liability towards Leave Encashment of Rs.15,000 existed. Abhay was the opinion that it should be debited to the Revaluation Account. Anirudh was of the opinion that it should not be brought into books but should be accounted when it is paid. Abhay explained to Ani the need for it being accounted now and what effect it will have when it is accounted at the time payment. Anirudh agreed to his view point. Explain what arguments must have been put forward by Abhay to which Anirudh agreed

Answer 1

At the time of change in the profit-sharing ratio, any liability found unrecorded is debited to the Revaluation Account and the net result of the Revaluation Account (revaluation profit or revaluation loss) is debited/credited to the Partners’ Capital Accounts in their old profit-sharing ratio. In this manner, the partners are not put to any undue advantage or disadvantage. Also, according to the prudence concept, all probable losses should be anticipated. Abay must have stated the above accounting practice (rationale to account now) to Anirudh to convince him.