Does Purchasing Land for Cash Affect the Owner's Equity in Accounting?

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Most transactions in a business have representation on a company’s general ledger. Accounting for cash and land fall under assets reported in this accounting book. Owner’s equity also has representation here as the net worth of a business, such as total assets less total liabilities. Purchasing land for cash is an asset exchange transaction, which does not affect owner’s equity.

Definitions

Cash is typically the most liquid asset a company owns. The business uses it as a medium of exchange for other goods and services as needed to continue business operations. Accountants classify cash as a current asset. Land also is an asset, although it is a long-term asset. These provide use for more than 12 months in the course of normal business operations.

Asset Exchange Transaction

Accounting defines an asset exchange transaction as the swap of one asset for another. In this case, a company gives a business cash in exchange for land. There is no net effect on the company’s general ledger as the value for both items have equal value. Since both cash and land are assets, the company’s total assets do not change either. Total assets are typically the first section of a company’s balance sheet.

Accounting for Land

As an asset, land never depreciates in value. The historical value paid for the property will often remain on the books for the entire time a company owns it. In some cases, a company may need to revalue the land if its value drops significantly. In other cases, depletion may be necessary if the land has value for items removed from it, such as a coal mine or timber. Generally accepted accounting principles provide specific rules for either of these situations.

Considerations

Using a loan to purchase land does not affect owner’s equity either. The initial affects to the general ledger are an increase in assets and liabilities, which both offset in the general ledger. As the company pays off the loan, cash decreases along with the loan that relates to the land purchase. The net effect is the same, with decreases in both sides of the general ledger that offset each other.

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References

  • "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011
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