MORE ON THE REVALUATION RESERVE
Very often the revaluation reserve can relate to an asset which has not been depreciated eg a freehold property which has increased value due to market forces. In this instance the write up (revaluation) of the freehold property is an unrealized profit because the property has not been sold. As such, this unrealized profit is not available for distribution (which would be in the form of drawings for a sole trader and dividends for the Shareholders of a Limited Company).
Therefore, the unrealized profit is allocated directly to the balance sheet ie bypassing the income statement (profit and loss account).
Regarding the balance sheet presentation, on the assets side of the balance sheet the property is shown at its new written up market value in the fixed assets section. The revaluation (unrealized) profit is shown as a Revaluation Reserve on the Long Term liabilities part of the balance sheet. Double entry is to debit the asset (property) account with the revaluation amount and credit a freehold property revaluation reserve.
Revaluations of freehold property are fairly common especially in a rising property market when property prices are rising. In these circumstances, Business with large property portfolios may be keen to enhance ‘both sides’ of the balance sheet.
Of course in the event of the cessation of the Business, all of its assets (including the revalued property) would be sold at their market value and the creditors paid off, in order of preference, from the sale proceeds. The residue (if any) would be distributed to the Business Owners/Shareholders.