Leaving Certificate Accounting Theory Practice Test

When an asset is carried under the revaluation model, any upward movement in its carrying amount is handled by equity first and then by earnings, with depreciation adjusted to the new amount. The key idea is that past decreases that were charged to equity or to profit are covered by the upward revaluation before any excess affects retained earnings. In other words, increases are allocated to offset prior decreases up to that amount, and any remainder goes to retained earnings. The asset’s depreciation in future periods is then based on this new carrying amount, not the old cost.

For example, if the asset had a previous decrease of 20 recognized in the books and its value rises by 40, 20 would be recognized in revaluation surplus (reducing the impact of the prior decrease), and the remaining 20 would go to retained earnings. Going forward, depreciation would be charged on the new carrying amount (the higher value). This approach keeps the asset’s value aligned with its current worth while ensuring depreciation reflects the updated figure.