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Upon revaluation of a property when we realize the gain ,we also charge extra depreciation on that gain to the revaluation reserve but why we transfer that depreciation to the retained earnings as a positive figure?
For example the building gained 16m on revaluation and had a remaining life of 16 years.That,s 1m for current year depreciation.We first subtracted (1m) from the revaluation surplus then transferred 1m to retained earnings as a positive figure.Er, no! You have the sequence wrong
Following revaluation (using your figures) the annual depreciation will increase by $1 million and that adversely impacts the retained earnings (because the charge to statement of profit or loss has increased and profits therefore decreased)
So why should retained earnings have to suffer as a result of an arbitrary revaluation?
They shouldn’t!
So, to the extent of that $1 million surplus depreciation, we get revaluation reserve to compensate retained earnings by debiting revaluation reserve and crediting retained earnings
Does that make it any better?
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