Final answer:
Transferring excess depreciation from revaluation surplus to retained earnings corrects the equity in a company's financial statements by transferring the realized portion of the revaluation surplus, ensuring that the asset's book value is aligned with its depreciated cost basis over time.
Step-by-step explanation:
The purpose of transferring excess depreciation from revaluation surplus to retained earnings is part of an accounting practice under the International Financial Reporting Standards (IFRS). When an asset's carrying amount is increased as a result of a revaluation, it may lead to higher future depreciation charges. The revaluation surplus is an equity account used to record increases in the carrying amount of a fixed asset. However, as the asset is used and depreciates, this increase in value will also result in an increase in the annual depreciation expense.
Therefore, the transfer to retained earnings represents the realization of excess depreciation that has been charged against profit or loss from the increased carrying amount of the asset after revaluation. It is a way of aligning the book value of the asset with its depreciated historical cost basis over time and ensuring that only the realized portion of the revaluation surplus is retained as equity. This transfer is made after the asset is revalued and the corresponding depreciation affects profit or loss. To maintain compliance with accounting principles, the transfer is made, adjusting the surplus from the unrealized to realized equity, without impacting the overall financial position of the company.