Land is a strategic asset a business holds for various purposes, including revenue generation through outright sales or periodic leasing agreements. The company's leadership adopts proper bookkeeping procedures to make sure personnel record land-related transactions in proper financial accounts. Financial managers report land as a long-term asset in a corporate balance sheet.
A business reports land as a tangible resource on its report on financial condition, or statement of financial position. Accounting regulations, such as the U.S. Securities and Exchange Commission pronouncements, mandate that the business classify land in the "property, plant and equipment" section. Other PPE accounts include commercial establishments -- such as shopping malls and office buildings -- residential dwellings, computer hardware and production machinery. Unlike land, most PPE accounts are subject to depreciation -- a mechanism that allocates asset costs over specific periods, usually over several years.
For most companies, land is a strategic asset because it doesn't go through the wear-and-tear other fixed assets experience. If an organization evolves in a sector where land ownership -- and real estate holdings, in general -- are key, the business must find ways to secure good deals on strategically situated parcels. For example, a fast-food chain may establish a "land scouting" group to survey vast geographical expanses and pinpoint the best locations for new stores. Failure to do so could invite investor anger, and the company might experience a market share reduction down the road. Besides, external financiers may lend a plaintive tone to an already difficult situation by bidding the company's shares down.
Land accounting does not call for depreciation, but it touches on the concept of "write down." This happens when an owner or a developer intentionally reduces a parcel's worth to accommodate a business partner or spur development activity in an economically depressed area. For example, a municipality seeking capital investments to prop up the local economy might write down the values of designated parcels, hoping to attract investors who constantly are on the lookout for cheaper real estate deals. A land owner also might reduce the worth of a parcel if a meteorological event -- like a hurricane or tsunami -- adversely affects the commercial viability of a parcel or an entire swath of land. Land write down is an operating loss. To record land acquisition, a corporate bookkeeper debits the PPE account and credits the notes payable account -- assuming the business borrowed to fund the purchase.
Besides balance sheets, land-related transactions affect other financial statements. These include statements of profit and loss, statements of cash flows and statements of retained earnings.
How to Report a Lease Transaction on a Balance Sheet
An accounting balance sheet provides a snapshot view of a company's overall financial picture at a specific moment of time. But if...