Is land debit or credit? One of the assets that companies consider very valuable is land, this is because it is an asset that generally appreciates in value over the years instead of depreciating. The land is therefore considered an asset with the longest lifespan since it can be used for as long as the business is in existence. It is classified as a long-term asset on the balance sheet of companies. The balance sheet lists the assets, liabilities, and equity of a company during the reporting period covered. It is simply a summary of all the company owns and all they owe to creditors and debtors.
Assets are resources owned by companies that bring value to the company. Accurately recording transactions involving land is important, as accurate reporting aids companies, investors, analysts, and auditors to have a clearer view of the company’s financial standing. Thus, it is important to understand whether the land is a debit or a credit. In order to reach this understanding, we will discuss what land, debit, and credit each mean.
Understanding land, debit, and credit
The land is a resource that companies own. Debits and credits are how accounting entries are made to record various transactions that go on in a company. Let us discuss each of these terms further and how they relate to each other so that we can ascertain whether the land is a debit or credit.
What is the land?
Land is a tangible asset that can be owned and used by companies to further their business operations and bring economic benefits to the organization. It is classified as a long-term asset since it is generally not expected to be converted to cash within a year. It normally appears on the company’s balance sheet in the assets section under property, land, and equipment (PP&E).
Due to the fact that the useful life span of land cannot be clearly determined and because it does not depreciate with use, the land is generally considered an eternal asset. Although it is one of the least liquid assets that a company can own, it is also one of the most valuable as it generally appreciates in price over the years. When making journal entries to record the land a company owns, each piece of land it owns is recorded on a separate line under the land account.
Since land does not depreciate, companies do not need to lower its value as years pass. Instead, the land’s value either remains the same or increases. When improvements are made on the land, it generally increases the value of the land. Most companies however do not account for any increase in the land’s value in their records until they sell the land. When the land is sold, it often results in a capital gain which is included in the company’s net income that will be reported on its income statement.
What is a debit?
In accounting, a debit indicates a decrease or an increase in an account. Whether a debit will be a decrease or an increase in an account depends on the type of account. For the land account, a debit indicates an increase in the balance of the land account. This increase is generally recorded when a new piece of land is purchased.
What is credit?
In accounting, a credit indicates an increase or a decrease in an account. Whether a credit will be an increase or a decrease in an account depends on the type of account. For the land account, a credit indicates a decrease in its balance. This decrease is generally recorded when a piece of land is sold.
How debit and credit affect the land account
When companies record financial transactions that have occurred, they do so using the double-entry accounting system. The land account is not exempt from this double-entry accounting system. This implies that for every transaction to the land account that is a debit, there must be an equal but opposite entry in another account as a credit. Conversely, whenever there is a credit to the land account, there must also be an equal but opposite entry in another account.
The double-entry accounting system uses debits and credits to ensure that the company’s books are accurate and in sync with each other. This is based on the fact that monies coming in or leaving a company must have an origin, thus when money goes out of one account, it must show up in another account. We will further discuss the various journal entries to the land account as either debit or credit hereafter.
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Is land a debit or credit?
Generally, assets have a natural debit balance and since land is an asset, it means that land is a debit and not a credit. The amount recorded for land is usually the amount that the company paid when the land was originally purchased.
In some instances, the additional amount spent on improving the land and clearing it might also be added to the land’s original purchase price. Costs for adding items to the land are generally recorded in a separate account. Although the natural balance of the land account is a debit, it can also be a credit in a situation whereby the owners of the land sell it off. It becomes a credit because there will be a reduction in the land account balance since the asset is sold off.
Journal entries for land as debit or credit
Accounting for the purchase or sale of land differs significantly from that of other assets such as equipment. This is because unlike other assets that have a useful life span and as such depreciate over the years thereby leading to accumulated depreciation being removed from the accounting record for these assets over the years; the land does not depreciate over the years. Therefore, there is no removal of accumulated depreciation for land.
Debit and credit journal entries for land purchase
When companies buy land and pay for it in cash, the journal entry to record the transaction will involve two accounts; the land account and the cash account. The land account will be debited while the cash account will be credited it involves a debit to the land account and a credit to cash.
For instance, if BBC purchases land worth $300 million and paid for the land by making a bank transfer of the amount from their bank account to the account of the land owner, the journal entry to record the purchase will be recorded as follows:
Debit and credit journal entry for land purchase in cash
Although the land was paid for via bank transfer, it is recorded as a credit to the cash account since it indicates a reduction in the company’s cash
Debit and credit journal entry for land purchase using cash and loan
When a company purchases land using a combination of loan and cash, the journal entry to record such a transaction will involve three accounts; land, cash, and loans payable.
For instance, if a company wants to acquire a land worth $90 million but it has only $50 million in its bank account. In order for the company to be able to cover the cost of the land, they can take a loan of $40 million from the bank. When this happens, the journal entry to record the land purchase will include a debit to the land account and a credit to the cash and loans payable account. The transaction will be recorded as shown below:
In the journal entry above, the loan is taken from the bank is recorded in the loans payable account to indicate that the company owes the bank that amount. The loans payable account records the loan as a long-term liability since its repayment will usually take more than a year to complete. Note that the interest payment to the bank is not accounted for in the above journal entry.
Debit and credit journal entries for land sale
When companies sell land, it usually results in a simultaneous increase and decrease in their assets. There will be a decrease in the land account and an increase in the cash account. Additionally, there will also be a gain or loss arising from the sale unless the land was sold for the same amount that it was bought.
If the sale of the land was made at a price higher than that at which the land was bought, it results in a capital gain to the seller and three accounts will be used to record the transaction which is the land, gain on land sale, and cash accounts. The cash account will be debited while the land and gain on land sale accounts will be credited.
For instance, when a company buys land for $30 million and uses it for 10 years before selling it off for $45 million. It means that there was a capital gain on the land sale. The journal entry for the sale will be as shown in the table below.
Debit and credit journal entry for a gain on land sale
|Gain on land sale||$15,000,000|
Debit and credit journal entry for a loss on land sale
Continuing the example above, If the company sold the land for $29 million, it means they lost $1 million in the land sale. This will be recorded as seen in the following table:
|Loss on land sale||$1,000,000|
Is land debit or credit? The land is a debit balance because it is an asset account. The value recorded for land is its historical cost of purchase aside from the cost for any property constructed on it. Land is a fixed asset that appreciates in value instead of depreciating in value over time. It, therefore, does not have a specific useful life span. The land is recorded in a company’s balance sheet in the property, plant, and equipment section of assets.
Making accurate debit or credit journal entries to the land account to record a purchase or sale of land is very important. This is in order to ensure that the company’s financial books are balanced and that at the time of sale or purchase, the right amount is recorded so as to give investors, auditors, and the company owners the true position of the assets they have.