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How to account for a land purchase

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Sage And Saddle signHere’s the reader question of the day:

“In accounting, how do you post a land purchase?”

Of course, I promptly turned this over to Maesz, our resident accounting expert. Here’s her reply:

This is for a pure land purchase — no buildings, fences, wells, etc (technically these must be assigned value at purchase and then depreciated).

The check for the purchase of the land decreases (credit to) cash/checking and creates (debit to) an asset of land (non-depreciable). That way it shows up on the balance sheet as an asset at cost.

The cash “received” from any mortgage increases (debit to) cash/checking; the mortgage beginning amount enters as (credit to) a liability.

The interest on the mortgage is a deductible expense (debit) and the principal payments decrease (debit) the balance of the mortgage/liability due. The “credit” side of this entry is the payment from cash/checking.

Land is a non-depreciable asset. I always just put in an asset account; “brand” it non-depreciable.

Bottom Line:
Land is an asset, not an expense.
Improvements on land have to be accounted for separate from the land.

If you need help with a specific case, check with a local accountant for details.

And if you have a small business question, we’ll be glad to try to answer it. Just ask in the comments.

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About Becky McCray

Becky started Small Biz Survival in 2006 to share rural business and community building stories and ideas with other small town business people. She and her husband have a small cattle ranch and are lifelong entrepreneurs. Becky is an international speaker on small business and rural topics.

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