How Land Is Defined in Accounting Terms - dummies

How Land Is Defined in Accounting Terms

By Maire Loughran

Land, also called real property, is the earth on which the company’s office buildings or manufacturing facilities sit. The cost of the land plus any improvements the company has to make to the land to use it for business operations reflects on the balance sheet at historic cost.

Four types of costs relate to the purchase of land:

  1. Contract price: The purchase price for the land.

  2. Closing costs: Expenses to change the title of the land from buyer to seller. These costs include real estate broker commissions, legal fees, and title insurance.

  3. Survey costs: Basically, the fee for a land surveyor to give you a professional opinion on where the boundaries of the property are.

  4. Land improvements: Expenses the company incurs to get the land ready for use, which include clearing the land, if necessary, to build the manufacturing plant or adding sidewalks and fences to an existing property.

Because it’s not considered to be “used up” like other PP&E, land is never depreciated.

If a company buys land as an investment, you record it in the investment section of the balance sheet instead of using PP&E. Wondering whether it goes in the current or long-term section? Well, that classification depends on how long the company plans to own the land. If the company anticipates selling it within 12 months of the balance sheet date, it’s a current asset. Otherwise, record it as a long-term asset.