Verification & Valuation of Assets & Liabilities: UGC NET Commerce Notes

Verification and valuation of assets and liabilities are used to verify the recorded and disclosed assets and liabilities in the company's balance sheet. Assets are any property or resources owned by the company and used to generate profit for the organization. At the same time, liabilities in auditing is an organization's monetary or financial obligation to others. Verification of assets and liabilities in auditing involves the Verification of ownership, Possession, and existence of assets, and in case of liability, the time frame, the risk, and interest have to be verified. Verification means checking whether the assets are in the business's name, whether the assets actually exist or not, and whether they have any charge on them. On the other hand, valuation means checking the actual value of assets and liabilities that are shown on the balance sheet. 

Verification and valuation of assets and liabilities are one of the most important topics for the UGC NET Commerce Exam as it covers a significant part of the Commerce subject in the paper-2 Commerce Syllabus.

In this article, we shall study the following:

• Verification and Valuation of Assets and Liabilities- Introduction
• Objectives for Verification and Valuation of Asset and Liabilities
• Principles of Verification of Asset and Liability 
• Method of Valuation of Asset and Liability
• Difference Between Verification and Valuation of Assets and Liabilities

Verification and Valuation of Assets and Liabilities- Introduction

Verification and valuation of assets and liabilities are very important for a business. Verification means checking if the assets and liabilities are real. Valuation means finding the correct value of assets and liabilities. This helps to keep financial records true and fair. It also prevents mistakes and fraud. Businesses must check their assets and liabilities regularly. Valuation of assets in auditing is an important process that ensures the accuracy and fairness of financial statements by establishing the true value of a company's assets.

Objectives for Verification and Valuation of Asset and Liabilities

Validation and evaluation of assets and liabilities guarantee that a firm's financial books are correct. This confirms a firm's assets, like property or money, and liabilities, like loans, are correctly marked.

reservation of Financial Accuracy

Among the goals is to make sure that a company's assets and liabilities data is correct. This is because companies need to understand exactly what they have and what they owe. Accurate records allow the company to make good choices. It also allows the company to be in compliance with the law and regulations.

Determining the Actual Value of Assets and Liabilities

Another goal is to identify the actual worth of what a company has and owes. This is crucial because some assets will depreciate in the future, or liabilities will increase. The information on true value tells companies where they are. This helps them plan.

Safeguarding the Interests of Shareholders and Creditors

Validation and valuation help protect shareholders' and creditors' interests. Shareholders would like to have confidence that their investment is protected, and creditors would like to have confidence that they will be repaid. By validating liabilities and assets, firms can present them with authoritative information. Trust and confidence are established. 

Compliance with Laws and Regulations

The process of verification also ensures that the company is complying with the law. Companies must present their financial data in the format provided by the law. By verifying the value of assets and liabilities, the company can ensure compliance with these rules. This ensures that the company does not have any issues with the law.

Principles of Asset and Liability Verification

Principles of verification provide assurance that the assets and liabilities are accurately accounted for. Having such principles ensures that financial information is always correct and reliable.

Authenticity of Documents

The basic principle is to check the original documents for evidence. They may be receipts, bills, or contracts. If we check them, we are certain that the assets really belong to the company. It also ensures that the records are correct. Without good documents, it is hard to trust the records.

Proper Valuation

The process also involves the verification of assets and liabilities by checking the correctness of the value. The value should reflect the actual worth of the asset or liability. In some cases, the value of assets changes over time. Correct valuation helps in avoiding all errors in financial accounts. This will ensure everything is reported correctly.

Completeness

The records should include every asset and liability that belongs to the company. No important item should be left out. If something is missed, it can make the records inaccurate. Checking for completeness ensures that nothing is forgotten. This helps keep the financial records full and correct.

Consistency

Consistency is the same method every time used for verification. The same rules should be followed each time so that confusion is avoided. This helps in comparing records over different periods. It ensures that the verification process remains the same. Consistency makes the financial records more trustworthy.

Evidence of Ownership

The company ought to have papers that confirm they own the assets. For instance, it may be land deeds or agreements. If it is not feasible to confirm ownership, then the asset might not be valid. Valid verification of ownership helps in making sure that the records are accurate.

Method of Valuation of Asset and Liability

The valuation method assists in determining the right value of assets and liabilities. It makes sure that financial accounts are correct and portray the actual value of the company's assets.

Cost Price Method

Assets are priced at the cost at which they were purchased, in the cost price method. It is applicable to fixed assets such as machinery and buildings. The method is simple to apply, but it might not reflect the value of the assets at the present time.

Market Price Method

In the market price method, assets are valued at their current market value. This means the price they could be sold for today. Market prices can change quickly, so this method helps in understanding the real worth of assets. It is mostly used for things like shares, gold, and stocks. This method gives an up-to-date value of assets.

Replacement Cost Method

The replacement cost method values an asset by finding out how much it would cost to replace it. If an asset is damaged or lost, the company would need to buy a new one. This method helps to plan for future purchases and repairs. It is useful for items like machines or equipment. The value here is based on how much money would be needed to replace the asset.

Realizable Value Method

Under this method, in the realizable value method, assets are calculated based on the amount of money that can be generated from their sale. The method helps understand how much business can earn by selling the assets. It is useful for those items that can be sold; for example, old vehicles or property. In this case, the value will be lower than the original cost. It is helpful in approximating how much the business will get if it sells its assets.

Present Value Method

The current worth method determines the current worth of an amount that will be received in the future. Money today is worth more than the same amount in the future; this method helps calculate its value today. It is often used when making loans or long-term investments. The business uses this method to understand how much future payments are worth now. This method helps in making good financial plans for the future.

Difference Between Verification and Valuation of Assets and Liabilities

Verification and valuation play an important role in the verification process regarding ensuring the value of assets and liabilities. Verification deals with ensuring the assets and liabilities are actual and recorded correctly. Valuation is determining the proper value of the assets and liabilities. The verification and valuation of assets and liabilities in auditing are essential steps to ensure that the financial statements accurately reflect the true financial position of a company.

Conclusion 

Verification and valuation of assets and liabilities are immensely important because it ensures the validity and reliability of the financial statement of the organization in a very effective manner. Verification of assets includes physical Verification of assets which in many cases requires confirmation from third parties like banks, customers, etc. Whereas in the case of liabilities verification, it is helpful in reviewing the contracts and conforming the balances with creditors. By verifying the assets and liabilities, the deviation can be found in the financial statements and mitigate risk as well as ensures the compliance of rules and regulation. It also gives valuable information to the company's stakeholders, which assist them in making a more informed decision. Verification and valuation of sundry creditors entail verification of the correctness of amounts due by the company and ensuring that such liabilities are correctly recorded and valued in the financial statements.

Verification and valuation of assets and liabilities is a critical topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App.