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.

Related Terms

balance sheet, plant, property and equipment, cost of equipment, cost of buildings, self-constructed assets, accumulated depreciation, deferred payment contract