[priyankagoyal05]

Hi, I am student of CA Finals , My query is why Revaluation Reserve is transferred to General Reserve and why not to Profit & Loss Account?

[Fidget1]

In a nutshell, the revaluation surplus is a movement on owners' equity. As such, it doesn't go through the profit and loss.

This is difficult to try and explain, but here goes...

The thing to remember is that just because an asset is being revalued rather than treated under historical cost, it doesn't mean that historical cost can be forgotten about in respect of that asset. Historic cost is the anchor when it comes to revaluations because assets always need to be originally recorded at cost and what happens after that, revolves around that.

So, if an asset is revalued upwards, the original recorded cost still exists but the excess of revalued amount over cost (or depreciated historical cost) is basically a windfall to the owners' equity i.e. there's nothing to go through the P+L on account of it, so it is shown in the balance sheet as a debit to increase the asset to its revalued amount, and a credit to the revaluation reserve (accounting for the windfall really, as this is a windfall purely to them rather than anything occurring in the normal scheme of the business that requires going through the P+L).

Even if the asset in question is now being depreciated at its revalued amount - i.e. the depreciation charge to the P+L increases, the excess of the new depreciation charge over the original depreciation charge (on historic cost) will be debited from the revaluation reserve and credited to retained earnings in the balance sheet as that period's realisation of the revalued amount back to the owners. And if the asset wasn't sold, then the revaluation reserve would be zero at the end of the useful life.

If the asset is sold before being fully depreciated at its new depreciation amount, then any surplus remaining on the revaluation reserve goes to retained earnings in the balance sheet without going near the P+L because it can't be systematically transferred over via excess depreciation because the asset has been sold.

Any gain or loss on disposal rightfully goes through the profit and loss because in essence, a gain/loss on disposal is a depreciation adjustment and so it belongs in the profit and loss.

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