In accounting for land as a fixed asset used in the conduct of a business, one or more accounts may be carried as seems best. If the land is in several different plots, perhaps widely separated and each plot held with other groups of assets and under varying conditions as to taxes and other obligations, some plots being subject to mortgages and others not so subject, separate accounts with each plot would be desirable. Otherwise, usually the one account will suffice.
The record should be as complete and full as possible. Notation after the title or elsewhere, giving the description and location of the holdings, is an advantage as a means of exact reference. The various items in the account should be supported by full explanatory matter together with documents available for the analysis of the various items and proof as to their legitimacy. It should thus be possible, at any time, to determine the items comprising full cost. The purchase contract price, the attorney’s fees, and broker’s commissions or a fair portion of the purchasing agent’s salary, the costs of search and guarantee of title (if these are borne by the purchaser), notarial and recording fees, the assumption of taxes owing at date of purchase, local improvement taxes and assessments, such as sewer, water, curbing, paving, and the like—all these should be indicated with clearness and definiteness.
Where accounts with a “large number” of plots are kept, it may be advantageous to carry these accounts on a subsidiary record specially ruled to give the detailed information desired and control them all by one general ledger account. Local conditions and the information desired will determine the manner of keeping the records. In all cases, the account should carry a notation as to where the supporting legal papers and documents covering each parcel or plot may be found. This prevents much needless loss of time and worry when quick reference to those papers is desired.
Valuation of Land
The basis for valuing land with unclouded title, as a fixed asset for business purposes has already been clearly indicated. Full cost, usually with neither depreciation nor appreciation, constitutes the valuation formula. By full cost is meant complete cost in condition ready for use or, at least, up to full-title date. In addition to the items enumerated in the preceding section, there may sometimes properly be included such expenses as leveling, grading, filling, and draining. Even the costs of dikes, dams, and embankments, and in the case of railway construction the cost of the care and up-keep of growing trees planted to prevent land or snowslides, tunneling, and the like, may be carried as a part of land costs, although some of these may more accurately be recorded as improvements. In the case of mining land, the cost of stripping the surface to reach the ore body, and the cost of shaft-sinking and of tunneling are proper capital charges and may be recorded under the land account, although preferably under a development account.
Whatever costs are necessarily incurred to make the land serve its intended use are proper capital charges and should be recorded in the land account unless better purposes are served by record in some supplementary account.
Depreciation or Appreciation of Land
The relation of depreciation and appreciation to land valuation is not difficult in theory but is often very perplexing and gives rise to complicated situations in practice. In theory, so long as the land is used for its intended purpose, fluctuations in the market either up or down should not affect the valuation at which it is carried on the books. Just as with the equipment group of assets discussed in Chapter XVI, any increase or decrease in the value of the land cannot be realized so long as the land is employed in operation. Its cost represents the capital tied up in it and the amount on which profits must be earned. This is therefore the value at which it should be carried on the books. Sometimes other considerations than those of accounting influence business policy in connection with the market value of land; but so long as it is used for the business purposes for which it was purchased, full cost price should be its valuation. This may sometimes place a prospective borrower at a disadvantage when using his balance sheet as the basis for credit. A footnote or other notation giving market value will usually suffice, although such value is often difficult of determination without a disinterested appraisal.
Appreciation of Land Values
When land is held over long periods in a growing community, appreciation in value almost always results; occasionally depreciation ensues. The amount of appreciation is oftentimes not as much as it seems because land with buildings on it may not be convertible to some other use at the market price of similarly located vacant land; the cost of scrapping the buildings often being as much or more than the appreciation in land value. Also, appreciation may sometimes be of a temporary character, in the nature rather of a market fluctuation. If so, the distinction must be carefully observed. Perhaps in the majority of cases requiring consideration, appreciation not only is very real but also very considerable.