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Cost of Land

Moneyzine Editor
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Moneyzine Editor
2 mins
January 12th, 2024
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Cost of Land

Definition

The financial accounting term cost of land refers to the asset valuation method that applies to land appearing on a company's balance sheet. The cost of land would include all expenses associated with the acquisition of the property, as well as those needed to ready it for use by the company.

Explanation

Companies can acquire land for several reasons. It can be purchased for speculative purposes, in which case it should be classified as an investment. Alternatively, if a real estate company purchases land, it might be considered part of its inventory.

Most of the time, land will become part of the company's property, plant, and equipment. When purchased, the cost of land should include:

  • Purchase Price: includes the price paid to the seller for the land acquired by the company.

  • Encumbrances: such as liens or mortgages on the property, in addition to costs such as unpaid property taxes.

  • Closing Costs: includes professional fees paid to attorneys, agencies conducting title searches, title insurance, survey costs, as well as fees paid to government entities to register the sale

  • Preparation: costs associated with getting the land ready for its intended purposes. This includes clearing of trees, grading, draining systems, and removing existing structures. Excavation of land to receive a building should be recorded as cost of buildings.

  • Improvements: if an improvement will have an "indefinite" life, then it can be capitalized. This includes landscaping, lighting, drainage systems, and utility lines (water, sewer, electric, natural gas).

Land is never depreciated. Improvements that are thought to have "limited" lives, such as a driveway or fencing, should be recorded in a Land Improvements asset account so they can be depreciated over their useful lives.

If the company receives payment of any type while preparing the land for its intended purpose, those proceeds should be subtracted from the cost of the land. This can occur when a building is demolished and scrap metal or brickwork is recycled.

Special assessments levied by local government such as roadwork, sewer lines, paving and street lights can also be included in land if the local government is responsible for replacement too.balance sheet

Related Terms

  • Balance Sheet
    Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
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  • The financial accounting term property, plant, and equipment is used to describe assets of a long lasting nature, which are used in the normal operation of the company. The most common types of property, plant, and equipment are land, buildings, and machinery.
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    The financial accounting term cost of buildings refers to the asset valuation method that applies to buildings appearing on a company's balance sheet. The cost of buildings would include all expenses associated with the acquisition or construction of the building to ready it for use by the company.
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  • The financial accounting term self-constructed assets refer to those built by the company and appearing on its balance sheet. The cost of self-constructed assets would include direct costs such as materials and labor associated with its construction. Companies can optionally allocate a portion of indirect costs to the asset too.
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  • Accumulated Depreciation
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