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How Do You Account for the Sale of Land?

How Do You Account for the Sale of Land

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How Do You Account for the Sale of Land

When a company sells land, it needs to account for the transaction properly to ensure that its financial statements reflect the changes accurately. The land is typically recorded on the company’s balance sheet as a non-current asset at its cost when it was purchased. When it’s sold, the company must update its accounting records to reflect the sale and any potential gain or loss on the sale.

Here are the steps to account for the sale of land:

  • Determine the Selling Price and Costs: The company needs to determine the selling price of the land and any costs associated with the sale, such as commissions or fees.
  • Calculate the Gain or Loss: The gain or loss on the sale of the land is determined by subtracting the land’s book value (its cost when it was purchased) and any selling costs from the selling price.
  • Record the Transaction: The company records the sale of the land in its accounting records (journal entry) by debiting (increasing) the cash account by the amount it received. It also debits any costs associated with the sale. It credits (decreases) the Land account for the land’s book value. If there’s a gain, it credits a Gain on Sale of Land account. If there’s a loss, it debits a Loss on Sale of Land account.

For example, let’s say a company sells a piece of land for $300,000. The land was originally purchased for $200,000, and there were no costs associated with the sale.

The journal entries for this transaction would be:

  • Debit Cash $300,000 (increase in assets due to cash received)
  • Credit Land $200,000 (removal of the land from assets)
  • Credit Gain on Sale of Land $100,000 (recording the gain on the sale)

The gain on sale of land is usually reported as a separate item in the income statement under other income or gains. It’s considered an unusual or infrequent item because selling land isn’t part of the company’s usual day-to-day business operations.

Remember, specific accounting practices can vary based on different accounting standards like IFRS or US GAAP. Be sure to consult with an accounting professional or refer to the specific accounting policy that your organization uses.

Example of How to Account for the Sale of Land

Let’s say a company purchased a piece of land five years ago for $1,000,000. The company recently sold the same land for $1,300,000. The company had to pay a broker’s fee (a cost associated with the sale) of $50,000. Here is how you would account for the sale of this land:

  • Determine the Selling Price and Costs: The selling price is $1,300,000, and the broker’s fee is $50,000.
  • Calculate the Gain or Loss: Subtract the land’s book value (original purchase price) and the selling costs from the selling price. The gain from the sale is $1,300,000 – $1,000,000 (book value) – $50,000 (broker’s fee) = $250,000.
  • Record the Transaction: The journal entries would be:
  • Debit Cash for $1,300,000 (increase cash because you received money from the sale)
  • Debit Broker’s Fee Expense (or Loss on Sale of Land) for $50,000 (recognize the cost of the sale)
  • Credit Land for $1,000,000 (decrease the value of land in the assets)
  • Credit Gain on Sale of Land for $250,000 (recognize the gain from the sale)

So, the journal entry would look like this:

AccountDebit ($)Credit ($)
Cash1,300,000
Broker’s Fee Expense50,000
Land1,000,000
Gain on Sale of Land250,000

The Gain on Sale of Land would be reported in the income statement under non-operating income because it’s not part of the regular business operations. This gain indicates that the company made a profit from the sale of the land after considering the original purchase price and all costs associated with the sale.

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