Revaluation of Assets is an adjustment made in the carrying value of the fixed asset in case the company finds there is a difference between the current price and the market value of the asset. Generally, the value of the asset decreases due to depreciation but in some cases like inflation in the ecRead more
Revaluation of Assets is an adjustment made in the carrying value of the fixed asset in case the company finds there is a difference between the current price and the market value of the asset. Generally, the value of the asset decreases due to depreciation but in some cases like inflation in the economy, it may increase. so, in order to know the correct value of the asset Revaluation is to be done.
Accounting standard allows two models.
- Cost model
- Revaluation model
Under the cost model, the carrying value of fixed assets equals their historical cost less accumulated depreciation and accumulated impairment losses.
For Example, Amazon ltd purchased a Plant for 5,00,000 on January 1, 2010, with a useful life of 10 years, and uses straight-line depreciation.
Here, the journal entry would be passed as
As the useful life of the asset is 20 years, so the yearly depreciation would be
5,00,000/10 i.e. 50,000.
So the accumulated depreciation at the end of December 31, 2012, would be 50,000×2= 1,00,000 and
the carrying amount would be 5,00,000-1,00,000= 4,00,000.
Under the Revaluation method, the assets are revalued at their current market value. If there is an increase in the value of an asset, the difference between the asset’s market value and current book value is recorded as a revaluation surplus.
For Example, Amazon ltd purchased an asset two years ago at a cost of 2,00,000. Depreciation @ 10% under straight-line method.
Therefore, the accumulated depreciation for two years would be 40,000,
i.e. 20,000 for a year.
Carrying cost of the asset = 1,60,000
Assuming, the company revalues its assets and finds that the worth of assets is 1,85,000.
Under this method, the company needs to record 25,000 as a surplus.
Accounting entry for the above will be
Depreciation calculated during the third year would be based on the new carrying value of 1,60,000.
Therefore, Depreciation for the 3rd year= 1,60,000/3
= 53,333.33
Accounting entry:
Alternatively, the incremental depreciation due to the revaluation i.e. 13,333.33 can be charged to the revaluation surplus account.
In case, if there is a revaluation loss, the entries would be interchanged.
In case of admission of a partner, the new partner may not agree with the value of assets as stated in the balance sheet, with time the values may have arisen or may have fallen, so in order to bring them to their correct values revaluation is done so that the new partner doesn’t suffer.
Where the assets and liabilities are to be shown in the books at the revised (new) values after the admission of the new partner.
The accounting entries are
- For Increase in the value of an asset
2. For a decrease in the value of an asset
3. For transfer of profit on revaluation i.e. if the total of credit side exceeds the debit side.
4. For transfer of loss on revaluation i.e. if the total of debit side exceeds the credit side.
Note: If the total of both sides is equal it signifies that there is no profit or loss on the revaluation of assets. Hence no entry is to be passed.
After preparing for the journal entry, a revaluation ledger account is also prepared wherein the accounts carrying a debit balance are transferred to the debit side and the accounts carrying a credit balance are transferred to the credit side.
In the case of retirement of a partner, the same journal entries are to be passed as in the case of Admission of a partner for revaluation of assets.
Generally, the value of an asset decreases with time but it may increase in certain circumstances especially in inflationary economies.
Conclusion
An entity should do the revaluation of its assets because revaluation provides the present value of assets owned by an entity and upward revaluation is beneficial for the entity and hence the company can charge more depreciation on upward revaluation and can get tax benefits.
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Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains” So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any). TRADRead more
Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains”
So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).
TRADING ACCOUNT
Trading A/c is prepared for calculating the Gross Profit or Gross Loss arising from the trading activities of a business.
Trading activities are mostly related to buying and selling of goods. However, in between buying and selling, a lot of activities are involved like transportation, warehousing, etc. So, all the expenses that are directly related to manufacturing or purchase of goods are also recorded in the Trading A/c.
CREDIT SIDE OF TRADING ACCOUNT
It includes,
SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.
Suppose you are in the business of manufacturing and trading shirts. You sold shirts worth $ 20,000 during the year. This $20,000 is your sales.
SALES RETURN – When the goods sold by you are returned by the customer, it is known as sales return. Sales return is deducted from the sales.
Continuing with the above example, the customers returned shirts of $1,000 because they didn’t like them. This return is known as sales return or return inward (as goods are coming back i.e. in)
CLOSING STOCK – Stock is nothing but goods that are either obtained for resale or manufactured for sale and are yet unsold on any particular date.
The value of stock at the beginning of an accounting year is called Opening stock while the value of the stock at the end of an accounting year is called Closing stock.
Closing stock is valued at cost price or market price whichever is less.
It includes,
For example – On 31st March 2023, there was unused raw material worth $1,000 and shirts worth $5,000 remained unsold.
So, we have Closing Stock of Raw material – $1,000
Closing Stock of Finished Goods – $5,000
Normally, the closing stock is given outside the Trial Balance because its valuation is made after accounts have been closed. It is incorporated in the books by transferring it to the Trading A/c. So, it is shown on the credit side of Trading A/c as well as on the assets side of the Balance sheet.
However, if the closing stock is given inside the Trail Balance, it means that the closing stock must have already been deducted from the Purchases account. So, closing stock will only be shown on the assets side of the Balance sheet.
GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > credit side.
DEBIT SIDE OF TRADING ACCOUNT
It includes
OPENING STOCK – The value of the stock at the beginning of an accounting year is called Opening stock.
The closing stock of the last year becomes the opening stock of the current year.
PURCHASES – Goods that have been bought for resale or raw materials purchased for the manufacturing of the product are terms as Purchases. These goods must be related to the business you are doing. It includes cash as well as credit Purchases.
PURCHASES RETURN – When goods bought are returned to the suppliers due to any reason. This is known as Purchase return. Purchase return is deducted from the Purchases.
WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.
CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.
MANUFACTURING EXPENSES – All expenses incurred in the manufacture of goods such as Coal, Gas, Fuel, Water, Power, Factory rent, Factory lighting etc.
DOCK CHARGES – These are charged by port authorities when unloading goods at a dock or wharf. Such charges paid in connection with goods purchased are considered direct expenses and are debited to Trading a/c.
IMPORT DUTY or CUSTOM DUTY – It is a tax collected on imports and specific exports by a country’s customs authorities.
If import duty is paid on the import of goods, then they are shown on the Dr. side of the Trading A/c.
ROYALTY – Royalty refers to the amount paid for the use of assets belonging to another person. It includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchisee agreements. It is also paid for the use of natural resources, such as mining leases.
Royalty is charged to the Trading A/c as it increases the cost of production.
GROSS PROFIT – When sales exceed the amount of purchases and the expenses directly connected with such purchases i.e. when Credit side> Debit side.
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