Initially, when accounting for a revaluation surplus, you take it into equity. It does not affect the income statement up until to the point where the asset was valued downwards in the past in which case the reverse of this decrease is accounted on the income statement just in the amount the decrease was recognized in expenses. For an example, if the initial loss was 10,000 and our current surplus is 15,000, from this 10,000 is recognized on the income statement as gain (reversal of the expense) and the rest (5,000 in this case) is going straight to equity under the line “Revaluation surplus”.
That would be the general idea behind the surplus. With debit you increase the value of the asset and with credit you increase the equity. If need be, you add a credit to the income statement to reflect the reversal of an expense.
Now as it happens, the surplus is a separate row within equity on the balance sheet. Consequently there are situations the surplus can be transferred into retained earnings:
- When the asset is derecognized from the balance sheet, i.e. sold or retired from use, – the surplus is transferred fully;
- When the surplus itself is realized, i.e. the difference between depreciation based on the asset’s revalued carrying amount and depreciation based on the asset’s original cost is transferred from revaluation surplus to retained earnings each year.
And that’s that when it comes to treating the surpluses on your statements. One thing to note here is that you should always think before crediting the surplus directly into equity, you should review if there are any decreases that can be reversed beforehand with this gain.