Buy Land - is this an expense?

[777888]

Hi everyone,

I'm new to accounting and have a pretty elementary question.

After buying equipment, it would need to be depreciated/amortized, so the cost of the equipment will be shown as expenses. It's just that the expenses will be spread out over many years (i.e. its useful life).

But say I've spent 1 billion to purchase land. Land is never depreciated in accounting. If it's not depreciated, I don't see how it can become an expense. Would this 1 billion ever be shown as an 'expense' at all? Would it have any direct effect on the income statement?

Thanks a lot!

 

[gazmentsaci]

In general, the journal entries that will be posted with a debit to cash and accumulated depreciation (for the buldings, as land does not depreciate) and credits to the land and building accounts would be correct if cash were the only consideration:

Dr. Cash
Dr. Accumulated Depreciation - Buildings
Cr. Land
Cr. Buildings

 

[Counterofbeans]

You are correct. Land is never depreciated, nor expensed/impaired, etc

 

[bklynboy]

You are correct. Land is never depreciated, nor expensed/impaired, etc

Although you are probably referring to while its held as an asset, Land can be impaired. Once you have fulfilled held for sale rules and the property at FMV is less than BV, a loss must be taken.

 

[777888]

You are correct. Land is never depreciated, nor expensed/impaired, etc

But what if I've spent a lot of money on buying land? Say I've spent 1 billion to buy land, it would still never be shown as an 'expense'? This doesn't make much sense to me.

How come it would have no direct impact on my profit (or net income) at all when I've spent so much money buying land?

 

[bklynboy]

The reason we depreciate certain assets is that they have a useful life and are obsolete after a point in time. Land does not depreciate meaning its not used up - it continues to exist indefinetly. This is the same reason that when you insure your home they generally do not give any replacement value for the land because it cant be destroyed or needs to be replaced.

 

[777888]

But when you've spent a lot of money buying land (a huge expenditure), how can that not decrease your profit?

 

[ColinCPA]

It may, when you dispose of the land. If you sell the property for less than it's basis, you will incur a loss. If you sell for greater than it's basis, you will recognize a gain.

Land theoretically appreciates in value, rather than depreciate, unlike buildings. Thus, no depreciation expense.

 

[ttreacy]

Buy land is an investment not an expense

Usually speaking, when you purchase land it is considered and investment and not an expense.

 

[Counterofbeans]

Although you are probably referring to while its held as an asset, Land can be impaired. Once you have fulfilled held for sale rules and the property at FMV is less than BV, a loss must be taken.

Yes, clearly, I was evaluating it while it's being held as an asset, which is what the OP was asking. I guess I should have said, "while land is recorded as Property, Plant, and Equipment" or something similar.

But when you've spent a lot of money buying land (a huge expenditure), how can that not decrease your profit?

It won't show up as a gain/loss until the land is disposed of and/or is recorded in the G/L in preparation of being disposed of. Cash paid doesn't equal immediate loss/expense treatment in the G/L

 

[Samir]

But what if I've spent a lot of money on buying land? Say I've spent 1 billion to buy land, it would still never be shown as an 'expense'? This doesn't make much sense to me.

How come it would have no direct impact on my profit (or net income) at all when I've spent so much money buying land?

Think of it this way. If you didn't buy the land, the cash would have remained as an asset on the balance sheet and the P&L would have been the same.

Now, if you buy the land, cash is reduced, but you now have a new asset on the balance sheet--land--in the amount of the land cost. So your balance sheet still remains the same. The P&L isn't affected either way.

But when you've spent a lot of money buying land (a huge expenditure), how can that not decrease your profit?

Because profit has nothing to do with cash on hand. You can make a huge profit and have nothing leftover in cash if you buy a bunch of assets (or pay down a bunch of liabilities).

 

[777888]

Think of it this way. If you didn't buy the land, the cash would have remained as an asset on the balance sheet and the P&L would have been the same.

Now, if you buy the land, cash is reduced, but you now have a new asset on the balance sheet--land--in the amount of the land cost. So your balance sheet still remains the same. The P&L isn't affected either way.
Because profit has nothing to do with cash on hand. You can make a huge profit and have nothing leftover in cash if you buy a bunch of assets (or pay down a bunch of liabilities).

I think I get it now! Thanks a lot.

 

[saad25]

Dear 777888,

Please never confuse P&L and Cashflow.....If you have spent for e.g 2000 on electricity that is an expense for the business and not recoverable...... if you have spent 2000 on buying land it is not an expense as it is recoverable and hence an ASSET of the business..... if you were to liquidate you would never be able to recover the 2000 on utilities but you would be able to recover the 2000 on the land....assuming it stays the same value.....

in other words once you are taking the depreciation on a yearly basis what you are saying is that the net value left in the BS ( Cost minus deprecation) is in theory what you will be able to recover if you were to sell it off... hence your asset....

hope this makes sense

 

[Samir]

I think I get it now! Thanks a lot.

You're welcome!