When your business buys land, the accounting entry used to record the transaction depends on the payment method. The simplest way to buy land is with cash. If you want to get a mortgage loan, the lender will require a down payment. Some land sellers may accept your company’s stock as payment or agree to exchange one capital asset for the land. Whichever option you select, the land’s total cost includes the legal fees, title search expenses, survey costs, title insurance fees and realtor commissions.
Buying land with cash affects different parts of the asset section of your balance sheet. Land is a long-term asset and cash is a current asset. The land account is debited for the full purchase price and the cash account decreased by the same amount. For example, the journal entry for the purchase of land and buildings for $50,000 is a debit to Land for $50,000 and a credit to Cash for $50,000.
Credit Purchase
Purchasing land with a loan affects the assets and liabilities sections of the balance sheet. The land is recorded at its full cost as a long-term asset. The cash down payment decreases the cash account. The loan amount is recorded in the current liabilities section if it will be paid off in one year or less. Otherwise, the loan is considered a long-term liability, reports Accounting Coach. For example, the accounting entry to record land costing $60,000 with a $10,000 down payment and a $50,000 loan is a debit to Land for $60,000, a credit to Cash for $10,000 and a credit to Land-Mortgage Payable for $50,000.
Stock-for-Land Purchase
You can exchange stock equal to the purchase price of the land. Assuming your company’s stock is not traded on an exchange, the land’s fair market value determines the price. Two licensed property appraisers should value the land and the lesser amount used as the property’s value. For example, you agree to exchange 10,000 shares of common stock valued at $10 a share with a par value of $1 for land valued at $50,000. The accounting entry is a debit to Land for $50,000, a credit to Common Stock for $10,000 (10,000 shares multiplied by $1) and a credit to Paid-In Capital in Excess of Par for $40,000.
Exchange of Assets
You can acquire land by exchanging one of your company’s assets for it, suggests Accounting Scholar. For example, you buy land worth $70,000 by exchanging new machinery with a book value of $75,000, a trade-in value of $50,000 and accumulated depreciation of $10,000. Net book value is $75,000 minus $10,000 accumulated depreciation, or $65,000. The Loss on Exchange is the net book value of $65,000 minus the trade-in value of $50,000, or $15,000. The accounting entry to record the exchange is a debit Land for $70,000, a debit to Accumulated Depreciation for $10,000 and a debit to Loss on Exchange for $15,000. You credit Machinery for $75,000 and credit cash for $20,000.
The land is recorded at its full cost as a long-term asset. The cash down payment decreases the cash account
cash account
In business practice, cash account refers to a business-to-business or business-to-consumer account which is conducted on an immediate payment basis i.e. no credit is offered. It may also refer to an account held with a brokerage firm, in which a client deposits cash to buy stocks, bonds and other securities.
. The loan amount is recorded in the current liabilities section if it will be paid off in one year or less. Otherwise, the loan is considered a long-term liability, reports Accounting Coach.
Sometimes a company buys land and other assets for a lump sum. When land and buildings purchased together are to be used, the firm divides the total cost and establishes separate ledger accounts for land and for buildings. This division of cost establishes the proper balances in the appropriate accounts.
This is because land is not depreciated, on the theory that land is not consumed (as is the case with other fixed assets). When you sell land, debit the Cash account for the amount of payment received from the buyer, and credit the Land account to remove the amount of land from the general ledger.
The accountant debits the entire costs to the Land account, including the cost of removing the building less any cash received from the sale of salvaged items while the land is being readied for use. Land is considered to have an unlimited life and is therefore not depreciable.
The definition of a land transaction is simply the process taken once you have decided to purchase real property. There are several types of land transactions which happen in the world of real estate. Land transaction definitions include residential, bare land, commercial, and farm and ranch.
When acquiring land, certain costs are ordinary and necessary and should be assigned to Land. These costs include the cost of the land, title fees, legal fees, survey costs, and zoning fees. Also included are site preparation costs like grading and draining, or the cost to raze an old structure.
All costs incurred in the acquisition of property should be capitalized. These include, but are not limited to: Price of land and appraisal. Demolition of existing buildings and improvements.
Land is always reported at historical cost on the balance sheet and would remain at historical cost since land is not depreciated. In addition, there is no fair value adjustment unless the land is sold or is part of a transaction.
Land is not depreciated because it is considered to have an indefinite useful life. Unlike other assets like buildings, machinery, or vehicles, land does not wear out, become obsolete, or lose its utility over time.
Land can never be depreciated. Since land cannot be depreciated, you need to allocate the original purchase price between land and building. You can use the property tax assessor's values to compute a ratio of the value of the land to the building.
As mentioned earlier, land is a negative income business. Income does not offset expenses. That doesn't mean those expenses can't be declared on the investor's tax return. Land expenses are itemized and go on Schedule E.
Property that is part of a property inventory or RPI could include land and anything that is permanently affixed to that land, such as buildings, installed systems within those building, any systems within the land itself—such as irrigation or canals—and building equipment.
Land is classified as a long-term asset on a business's balance sheet, because it typically isn't expected to be converted to cash within the span of a year. Land is considered to be the asset with the longest life span.
Investors considering a raw land purchase need to realize that they are engaging in a purely speculative investment. This is because undeveloped land does not generate any income, and therefore any return on investment will have to come from the potential capital gain that may be received once the land is sold.
A purchase of land for cash will have a net effect of zero on all three elements of the accounting equation which are assets, liabilities and equity. Land and cash are both assets, a debit on assets increases it while a credit decreases it.
Investing in land is like investing in rental properties. Any costs incurred to initially acquire land, including closing and up-front financing costs, are capitalized as basis of the investment and are not deductible at the time of purchase.
The land is a tangible asset that appears on the balance sheet. It is reported as an asset under the non-current assets. It is a fixed asset and does not appear on the income statement. Even the purchase of land is not reported on the income statement.
For example, a company may buy land (a capital asset), then deploy money and labor to build a building, warehouse, or manufacturing plant. Each of these structures is a capital asset that would likely provide long-term benefit to the company.
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