Final answer:
In revaluation accounting, an initial revaluation increase is recorded in equity, while a subsequent revaluation decrease can reduce this surplus or be recognized as a loss. The asset's value adjustment on the balance sheet reflects current market conditions, adhering to the prudence principle.
Step-by-step explanation:
In revaluation accounting, assets may be adjusted to reflect their current fair market values. When there is an initial revaluation upwards, it means the asset's value has increased and this increase is recognized in equity under a revaluation surplus. If there is a subsequent revaluation downwards, it indicates that the asset's value has decreased. The treatment of this decrease depends on whether there is a balance in the revaluation surplus related to the asset. If a surplus exists, the decrease is debited against any previous revaluation surplus credited from the up valuation. If there is no surplus, or the decrease exceeds the existing surplus, the excess is recognized as a loss in the income statement.
The key points in this process involve, first, the initial revaluation increase, which boosts the asset’s book value on the balance sheet and creates a revaluation surplus. Secondly, the subsequent revaluation decrease reverses some of the increase, impacting either the revaluation surplus or the income statement, depending on the circumstances. This process reflects the principle of prudence in accounting, where gains are recognized only when realized, whereas losses are recognized when they are probable.