Meaning of Undervalued and Overvalued (in case of an asset) and its treatment. Also are liabilities undervalued, overvalued too?
Undervaluation implies that an asset or a liability is shown at a lower value in the books than its actual value. On the other hand, overvaluation means that an asset or a liability is shown at a higher value than its actual value. The given below is the treatment of undervaluation and overvaluation of assets or liabilities in the Revaluation Account.
Case | Meaning and Impact | Treatment |
Undervaluation of Asset | This implies that the asset is shown in the books at a lesser value than its actual value. Therefore, the said asset should be increased with the understated amount (i.e. Actual Value – Given Value) | This is a gain for the business therefore, it is shown on the Credit Side of the Revaluation Account |
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Overvaluation of Asset | This implies that the asset is shown in the books at a higher value than its actual value. Therefore, the said asset should be reduced with the overstated amount (i.e. Given Value – Actual Value) | This is a loss for the business, therefore, it is shown on the Debit Side of the Revaluation Account |
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Undervaluation of Liability | This implies that the liability is shown in the books at a lesser value than its actual value. Therefore, the said liability should be increased with the understated amount (i.e. Actual Value – Given Value) | This is a loss for the business, therefore, it is shown on the Debit Side of the Revaluation Account |
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Overvaluation of Liability | This implies that the liability is shown in the books at a higher value than its actual value. Therefore, the said liability should be reduced with the overstated amount (i.e. Given Value – Actual Value) | This is a gain for the business therefore, it is shown on the Credit Side of the Revaluation Account |