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Why isn't land depreciated?

Author:
Harold Averkamp, CPA, MBA

Definition of Land

The land that is used in a business (as opposed to land that is an investment, or land that will be sold by a real estate developer) is a tangible asset that is assumed to have an unlimited life. Therefore, the cost of the land is not depreciated.

The land used in a business will be reported on the company’s balance sheet under the asset heading of property, plant and equipment.

Example of Land

Assume that a company purchases a warehouse for its business operations. The warehouse was built on a 10-acre parcel of land that is included in the property’s cost of $1,600,000. A real estate appraisal indicates that the land has a current value of $400,000 and the warehouse building has a current value of $1,200,000.

The transaction will be recorded with a debit of $400,000 to the asset Land, and a debit of $1,200,000 to the asset Warehouse Building. The $400,000 allocated cost of the land is not depreciated, while the warehouse building’s allocated costs of $1,200,000 will be depreciated over the warehouse building’s years of useful life.

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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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