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Why does our company's balance sheet report its land at cost when it is so much more valuable?

Author:
Harold Averkamp, CPA, MBA

Accountants are guided by the cost principle. This requires accountants to report assets at their cost when acquired—not their replacement cost or market value. The historical cost is an objective amount that can easily be audited. In contrast, the market value is subjective: one person thinks the land is worth $1 million while another thinks it’s worth $1.5 million.

Further support for the cost principle is the accountants’ going concern assumption. A company is assumed to be continuing in business and will not be liquidating. If your company bought the land for possible expansion, its cost is more relevant than the amount the company could get if it were liquidating. After all your company is not liquidating. The revenue recognition principle would be another reason why market values are not reported.

(P.S. I should add that some businesses are required to report assets at market value. I believe those businesses are in industries with significant markets and verifiable quoted market prices.)

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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