Land is a special type of asset that is treated differently from other types of fixed assets, such as buildings or equipment, in accounting. This is because land is considered a non-depreciable asset, which means that it does not lose value over time due to use or wear and tear. As a result, land does not accumulate depreciation and does not need to be depreciated like other fixed assets.
When a company purchases land, it is recorded as an asset on the company’s balance sheet at its cost. The cost of the land includes any fees or expenses associated with the purchase, such as closing costs and legal fees. The land is then held as an asset until it is sold or otherwise disposed of.
If the land is subsequently sold, the company recognizes a gain or loss on the sale based on the difference between the sale price and the cost of the land. The gain or loss is recognized as income or expense on the company’s income statement. Because land does not accumulate depreciation, the company does not need to make any adjustments to the recorded cost of the land when it is sold.
The Cash account is debited for the amount of payment received from the purchaser, which represents an inflow of cash for the company. The Land account is credited to remove the cost of the land from the balance sheet, which represents an outflow of assets. The difference between the sale price and the original cost of the land is then calculated and recognized as either a gain or loss on the sale. A gain is recognized if the sale price is greater than the original cost of the land, and a loss is recognized if the sale price is less than the original cost.
Journal entry for a gain on the sale of land
Stark Inc. purchased a piece of land in 2020 for $500,000. In 2022, Stark Inc. sold the land to a third party for $650,000. This resulted in an accounting gain of $150,000, which would be accounted for as such:
| Account | ||
|---|---|---|
| Cash | $650,000 | |
| Gain on sale of land | $150,000 | |
| Fixed asset – land | $500,000 |
Journal entry for a loss on the sale of land
Stark Inc. purchased a piece of land in 2020 for $500,000. In 2022, Stark Inc. sold the land to a third party for $450,000. This resulted in an accounting loss of $50,000, which would be accounted for as such:
| Account | ||
|---|---|---|
| Cash | $450,000 | |
| Loss on sale of land | $50,000 | |
| Fixed asset – land | $500,000 |
