Is Land a Tangible Asset? An Accounting Explanation
Uncover the principles of tangible asset classification and the distinct accounting rules for land on financial statements.
Assets are resources businesses use to operate and generate revenue. Proper asset classification is crucial for accurate financial records and representing a company’s financial position. This classification helps in assessing a business’s health and making informed decisions.
Understanding Tangible Assets
A tangible asset is a physical item of value owned by a business. These assets possess physical substance and are used in a company’s operations to produce goods or services. They are recorded on the balance sheet and are expected to provide economic benefits for more than one year. Common examples include buildings, machinery, vehicles, and office furniture.
Tangible assets are categorized as either current or non-current (fixed) assets, depending on their useful life and liquidity. Current tangible assets like inventory are expected to be converted to cash within a year, while fixed assets are held for long-term use. These long-term assets are often used as collateral for loans due to their substantial value.
Land as a Tangible Asset
Land qualifies as a tangible asset in accounting. It possesses physical substance and has a measurable value. In accounting, land refers to the earth’s surface, which can support structures or be used for various purposes like agriculture.
The accounting definition of land includes not only the ground itself but also any permanent, non-removable improvements necessary to prepare it for its intended use. These can include costs for grading, drainage systems, clearing, and excavation. Even if an existing building is purchased with the intent to demolish it and erect a new one, the cost of the purchased building and its demolition are included as part of the land’s cost.
Accounting for Land
Land is reported on the balance sheet as a long-term asset under the Property, Plant, and Equipment (PP&E) section. It is recorded at its historical cost, which includes the purchase price and all costs incurred to make the land ready for its intended use, such as legal fees, survey costs, and accrued unpaid taxes at acquisition. Unlike most other tangible assets, land is not depreciated for financial reporting or tax purposes.
The primary reason land is not depreciated is its indefinite useful life; it does not wear out, become obsolete, or get used up over time. This distinguishes it from assets like buildings or machinery, which have finite useful lives and systematically lose value due to wear and tear. When a property includes both land and a building, the purchase price must be allocated between the two, as only the building portion is subject to depreciation. This allocation is done based on appraised values or property tax assessments.