To begin with, let me explain what is revaluation all about. So basically revaluation is a method of calculating the depreciation of assets where there are multiple identifiable assets of low value such as loose tools, live stocks, etc. Under this method assets like loose tools are revalued at the eRead more
To begin with, let me explain what is revaluation all about. So basically revaluation is a method of calculating the depreciation of assets where there are multiple identifiable assets of low value such as loose tools, live stocks, etc.
Under this method assets like loose tools are revalued at the end of the accounting period and the same is compared with the value at the beginning of the year. the difference amount is considered as depreciation.
The formula goes as :
REVALUATION= OPENING VALUE + PURCHASES – CLOSING VALUE
Let me take an example to show the same. Opening balance of Loose tools amounts to Rs.2,000 during the year, the business purchased loose tools of Rs.500 and at the year-end loose tool amounted to Rs.1,500 then revalued figure which will be shown as depreciation will be
REVALUATION= Rs.(2,000+ 500 – 1,500)
= Rs.1,000
The main discussion is”how to show adjustment of revaluation of the loose tool in financial statements”?
As we all know, loose tools are considered assets for the business, hence shown under the head current assets or fixed assets depending upon the nature of the business and the time for which it is held.
When the trial balance shows the debit value of loose tools, later on in the year-end the loose tools are revalued to a certain amount then the difference amount will be shown as depreciation in the Profit & Loss A/c and the revalued figure will be posted in the balance sheet asset side.
Let me support my explanation with an example,
Given is the extracted trial balance of XYZ & Co.
we see the value of Loose tools in the given trial balance as Rs.50,000. At the year-end, these Loose tools were revalued at Rs.40,000.
Therefore the adjustment in the financial statement would be like Rs (50,000 – 40,000) i.e Rs. 10,000 would be shown as depreciation under Profit & Loss A/c
and the adjusted figure of Rs. 40,000 (i.e Rs.50,000 – Rs.10,000), will be shown on the asset side under the head fixed assets of the Balance Sheet.
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A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time. General reserve is a reseRead more
A cash flow statement presents the changes in the cash and cash equivalents of a business. It classifies the cash flow items into either operating, investing, or financing activities. The cash flow statement provides information about the flow of cash over a period of time.
General reserve is a reserve created by taking a portion of the profits for future requirements.
TREATMENT OF GENERAL RESERVE
As per the indirect method, Since there is no actual flow of cash, any addition to reserves is added back to net profit for calculation of net profit before tax and extraordinary items. This net profit before tax will appear under cash flow from operating activities. If there is a reduction in reserve, then they are subtracted from net profit.
As per the Direct method, an increase or decrease in general reserve will not affect the cash flow statement since non-cash items are not recorded. Only cash receipts and payments that come under operating activities are recorded. So, net profit is not shown in the direct method and hence neither is general reserve.
General reserve does not fall under the head investing activities as investing activities involve the acquisition or disposal of long-term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.
EXAMPLE
If the balance in general reserve for the period of March was Rs 4,000 and in April the balance was Rs 7,000, then its treatment in cash flow would be: