Definition and Explanation:
Under revaluation method of
depreciation, the assets are revalued each
year. The method is normally adapted to charge
depreciation on numerous inexpensive fixed assets
like small tools, live stock, patents, copy rights
and other assets of such nature which are constantly
changing and their period of life is most uncertain.
Accordingly periodic inventory is taken of usable
items and valued at cost irrespective of ruling
prices. Excess of the opening over the closing
inventory thus gives the periodic depreciation
expenses.
To understand the depreciation
charge under revaluation method consider the
following example.
Example:
For example, if the value of tools
at the beginning of the year was $8,000, during the
year tools worth $6,000 were purchased more and when
at the end revaluation was undertaken it amounted to
$ 11,000. The amount of depreciation for the year
shall be as under:
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($8,000 + $6,000) -
$11,000
=$14,000 - $11,000
= $3,000 |
Merits of Revaluation Method:
This method is very simple and the amount of loss
can be ascertained very easily.
Demerits:
- As every year revaluation is desired it
presents various problems.
- Amount of depreciation is always unequal.
- The valuation of asset is very time
consuming.
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