Accounting maintains proper records of a company’s assets, which are items owned that brings value to the business. Land is one such asset that a company can own and use. Financial accounts in a general ledger contain the financial information relating to physical assets. Each account has a natural debit or credit balance. This rule comes from the double-entry accounting system used by companies.
Land is an asset; therefore, it has a natural debit balance. The value recorded into the financial account is the historical cost paid for the property. Cost for clearing or improving the land may also go in this account. Costs for adding items to the land will typically go into a separate financial account.
Journal Entry Examples
A company purchases land for $15,000 cash. An accountant records the transaction as a debit to the land account and a credit to cash. The company then purchases a second piece of property for $55,000 using a loan. The accountant will record the purchase as a debit to land and a credit to loans payable, a long-term liability.
Asset accounts go on a company’s balance sheet. Assets are the first section of this financial statement. Land is a long-term tangible asset. This places it under the second asset group in the balance sheet’s asset section. Each piece of land a company owns will typically have a separate line reporting the balance in the land account.
Depreciation does not affect land. Since land does not depreciate, companies do not have to lower the asset’s value. Land should either stay the same or appreciate in value. Making improvements to the land will also help it increase in value. Most companies do not recognize these gains until they sell the property, resulting in a capital gain included with the company’s net income.