This section illustrates long-term assets (those whose useful lives exceed a year) and discusses these types: land, buildings, leasehold improvements, intangibles, vehicles and other equipment.
Land is not a wasting asset. That is, it does not get used up over time and rarely suffers damage such that it loses value. For that reason, it usually is recorded at cost at the time of purchase. Appreciation in its value over decades is not recorded and is not recognized in any way on the books of the owner. It is only after land has been sold that sale price and purchase cost are compared to calculate gain or loss on sale.
Land is frequently sold/purchased in combination with structures upon it. That means that the cost has to become separated from the cost of structures on it. Land valuation is usually part of the transfer of ownership process and its value is shown on the purchase documents separately from that of any structures it supports.
Land values shown on purchase documents frequently arise from the process of value determination managed by assessors whose job it is to assign values to land for tax purposes. Local and regional areas of a state or province use the values determined by assessors in their tax formulas, which provide revenues for local and regional governing authorities to finance their required community services.
Should land be acquired in a situation not subject to a history of land valuation by a formal valuation system, then the purchaser can appeal to real estate agents and an examination of recent sale transactions for information that would allow calculating a reasonable amount to express the value of the land.
Buildings are the man-made «caves» in which much of life’s human interaction occurs. These structures are wasting assets, because in their use they or their components gradually wear. Over time they begin to lose some of their function and they can suffer damage due to planetary elements or human action.
Accepted accounting practice is to record the cost of the building determined at time of ownership transfer (purchase) or at conclusion of all costs of construction. Because buildings are frequently used for decades, and due to the need to be able to calculate gain or loss on sale, accounting practice preserves the original cost by not recording declines in value in the account containing the original purchase or construction cost.
Instead, the depreciation technique is used to show (in the balance sheet) the structure’s net book value (original cost reduced by accumulated depreciation). Depreciation is a separate topic treated elsewhere in this Guide.
When a business does not own the building where it operates, and instead has a long-term lease, it is not uncommon for the business tenant to make improvements to the premises so that the structure obtains both function and appearance that enhances conducting its business activities.
In these cases, the expenditures that the business incurs are recorded in a Leasehold Improvements account: increase (debit) Leasehold Improvements, decrease (credit) Bank or increase (credit) a suitable liability account (which could be a liability to a contractor or a bank or a credit card, etc.).
Vehicles or Equipment of all kinds usually last for several years, but their useful lives are much shorter than that of assets that have little movement in their functioning. Because they do wear out over time, common accounting practice in business is to record depreciation using life spans and depreciation methods appropriate to the nature and use of the asset. Frequently, the life and depreciation methods chosen are influenced by what is permitted per national tax regulations for the kind of asset being depreciated.
Usually, businesses depreciate their assets. Individuals can do so as well to the degree that taxing authorities permit. Very wealthy persons employ accountants and attorneys to track and manage their investments and assets holdings to take advantage of all tax benefits permitted by law.
The mechanics of accounting (debiting and crediting appropriate accounts) for these assets are relatively simple, much the same as for any of the above assets. Where the difficulty lies is in their valuation, which is an advanced topic and not something that individual persons and small businesses would likely encounter. For that reason further discussion of items such as patents, copyrights, goodwill, etc. are left out of this Guide.