Reviewed by Sep 30, 2020| Updated on
Meaning of Revaluation Reserve
Revaluation fund is the accounting term utilised when a business establishes a line item on the balance sheet for the purpose of maintaining a contingency account connected to other assets. A line item will be used when a re-evaluation appraisal shows that the carrying value of the asset has changed.
Let Us Understand Revaluation Reserve in Detail
Organisations have the freedom to construct line items for assets on the balance sheet when they believe it is necessary for correct accounting to be presented. Companies can use reserves for a variety of purposes, including the revaluation of properties. Like most reserve line items, the reserve amount either increases or decreases the total value of the balance sheet assets.
Revaluation reserves are not inherently normal, but they can be used when a business assumes that the value of its assets will fluctuate outside the specified time frames. The normal practice for the calculation of the carrying value of assets on the balance sheet includes marking the assets overtime on a regular basis, usually on the basis of the depreciation schedule.
In general, revaluation reserves raise or decrease the carrying value of the asset, based on assessments of its fair value.
Companies may use reserve lines instead of or in association with write-downs or impairments. Write-downs and impairments are typically a one-time cost fee due to an unforeseen reduction in the value of a long-term asset.
Revaluation Reserve Recording
The revaluation reserve refers to a specific line item adjustment required when the asset is revalued. In most situations, the reserve line either increases the liability or reduces the value of the asset. When entering a savings account, an offsetting contribution must be made to the expense account that will appear on the income statement.
If the asset falls in value, the revaluation fund is credited to the balance sheet to reduce the carrying value of the asset, and the cost is debited to maximise the overall revaluation cost. If the value of the asset increases, the offsetting reserve expense would be reduced by credit, and the balance-sheet revaluation reserve would be increased by debit.
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