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 theasset. 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.
Let us begin with a short explanation of what opening balance is: The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period. In a firm’s account, the first entry done is of the opening balance. It can either hRead more
Let us begin with a short explanation of what opening balance is:
The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period.
In a firm’s account, the first entry done is of the opening balance. It can either have a debit balance or a credit balance depending upon whether the firm has a negative or positive balance.
Opening balance of a ledger
Opening balance is the first entry of the ledger account at the beginning of an accounting period.
In the case of a newly started business, there will be no closing balances and as such there will be no balances to be carried forward. In such a case, the investment and capital of the business will be entered as an opening balance for the current accounting period.
So the first and foremost part is to identify on which side of the ledger i.e. the debit side or the credit side the opening balance is to be entered.
For Example, A trial balance is given which represents the debit and credit balances, accordingly, I will prepare different ledger accounts to make it simpler.
The trial balance shows the opening balance of various accounts. Now posting them in ledger accounts.
As the Furniture is an Asset account, the opening balance will be on the debit side of the ledger account.
As Sundry creditor is a credit account, we put the opening balance on the credit side.
As the Capital is a credit account, we put the opening balance on the credit side.
As Wages is a debit account, we put the opening balance on the debit side.
As the Discount received is a credit account, we put the opening balance on the credit side.
Exception
Drawing Account.
Drawing account is an exception to this topic. It is considered a contra account to the owner’s capital account because it reduces the value of the owner’s equity. Drawings, therefore, have no opening balance.
Contra Entry.
Contra entry involves transactions of cash and bank. Any entry which involves both the cash and bank is contra entry.
For example, we deposit cash 5000 into the bank.
Accounting entry for this transaction would be
In this case, the ledger entry would be
As the bank account has a debit balance, the opening balance would come on the debit side.
As the cash account has a credit balance, the opening balance would come on the credit side.
Alternatively, If we withdraw cash 5000 from the bank.
Accounting entry would be
In this case, the ledger entry would be
As the Cash account has a debit balance, the opening balance would come on the debit side.
As the Bank account has a credit balance, the opening balance would come on the credit side.
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short. CWIP is the work which is not yet completed but the amount for which has already been paid. Suppose, at the time of preparing a balance sheet, ifRead more
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short.
CWIP is the work which is not yet completed but the amount for which has already been paid.
Suppose, at the time of preparing a balance sheet, if an asset is not completed, all the costs incurred on that asset up to the balance sheet date are to be transferred to an account called capital work in progress.
Example 1: A machinery under installation.
There are several expenses incurred while installing machinery, expenses such as labor charges, Initial delivery and handling costs, Assembly and installation cost, etc are included in CWIP and when the asset is completed and is ready to use, all the costs are transferred to the relevant accounts.
To make it simpler, let me show journal entries relating to this example.
When an expense is incurred/paid:
When an asset is complete and put to use:
Example 2:Â A Contractor is constructing a building. The following expenditures are being incurred to date:
i) Raw materials – 5,00,000
ii) Payment to Architect – 3,50,000
iii) Advance for Equipments – 1,50,000
Following accounting entries will be passed to record the expenditure on CWIP assets:
The following accounting entry will be passed once assets are ready to use:
Disclosure in the Balance sheet
CWIP account is shown separately in the balance sheet below the fixed asset.
we cannot depreciate capital work in progress. It can only be depreciated when the asset is put to use.
What is Revaluation of Assets?
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.
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
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.
See lessHow to know if opening balance of an account is Debit or Credit?
Let us begin with a short explanation of what opening balance is: The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period. In a firm’s account, the first entry done is of the opening balance. It can either hRead more
Let us begin with a short explanation of what opening balance is:
The opening balance is the amount of funds that are bought forward from the end of one accounting period to the beginning of a new accounting period.
In a firm’s account, the first entry done is of the opening balance. It can either have a debit balance or a credit balance depending upon whether the firm has a negative or positive balance.
Opening balance of a ledger
Opening balance is the first entry of the ledger account at the beginning of an accounting period.
In the case of a newly started business, there will be no closing balances and as such there will be no balances to be carried forward. In such a case, the investment and capital of the business will be entered as an opening balance for the current accounting period.
So the first and foremost part is to identify on which side of the ledger i.e. the debit side or the credit side the opening balance is to be entered.
For Example, A trial balance is given which represents the debit and credit balances, accordingly, I will prepare different ledger accounts to make it simpler.
As the Furniture is an Asset account, the opening balance will be on the debit side of the ledger account.
As Sundry creditor is a credit account, we put the opening balance on the credit side.
As the Capital is a credit account, we put the opening balance on the credit side.
As Wages is a debit account, we put the opening balance on the debit side.
As the Discount received is a credit account, we put the opening balance on the credit side.
Exception
Drawing Account.
Drawing account is an exception to this topic. It is considered a contra account to the owner’s capital account because it reduces the value of the owner’s equity. Drawings, therefore, have no opening balance.
Contra Entry.
Contra entry involves transactions of cash and bank. Any entry which involves both the cash and bank is contra entry.
For example, we deposit cash 5000 into the bank.
Accounting entry for this transaction would be
In this case, the ledger entry would be
As the bank account has a debit balance, the opening balance would come on the debit side.
As the cash account has a credit balance, the opening balance would come on the credit side.
Alternatively, If we withdraw cash 5000 from the bank.
Accounting entry would be
In this case, the ledger entry would be
As the Cash account has a debit balance, the opening balance would come on the debit side.
As the Bank account has a credit balance, the opening balance would come on the credit side.
See lessWhat is capital work-in-progress?
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short. CWIP is the work which is not yet completed but the amount for which has already been paid. Suppose, at the time of preparing a balance sheet, ifRead more
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short.
CWIP is the work which is not yet completed but the amount for which has already been paid.
Suppose, at the time of preparing a balance sheet, if an asset is not completed, all the costs incurred on that asset up to the balance sheet date are to be transferred to an account called capital work in progress.
Example 1: A machinery under installation.
There are several expenses incurred while installing machinery, expenses such as labor charges, Initial delivery and handling costs, Assembly and installation cost, etc are included in CWIP and when the asset is completed and is ready to use, all the costs are transferred to the relevant accounts.
To make it simpler, let me show journal entries relating to this example.
When an expense is incurred/paid:
When an asset is complete and put to use:
Example 2:Â A Contractor is constructing a building. The following expenditures are being incurred to date:
i) Raw materials – 5,00,000
ii) Payment to Architect – 3,50,000
iii) Advance for Equipments – 1,50,000
Following accounting entries will be passed to record the expenditure on CWIP assets:
The following accounting entry will be passed once assets are ready to use:
Disclosure in the Balance sheet
CWIP account is shown separately in the balance sheet below the fixed asset.
we cannot depreciate capital work in progress. It can only be depreciated when the asset is put to use.
See less