How do I account for land improvements?

Land improvements are enhancements to a plot of land to make it more usable. If these improvements have a useful life, then you should depreciate them. If there is no way to estimate a useful life, then do not depreciate the cost of the improvements.

If you are preparing land for its intended purpose, then you should include these costs in the cost of the land asset. They are not depreciated. Examples of such costs are:

• Demolishing an existing building
• Clearing and leveling the land

If you are adding functionality to the land and the expenditures have a useful life, then you should record them in a separate Land Improvements account. Examples of land improvements are:

• Drainage and irrigation systems
• Fencing
• Landscaping
• Parking lots and walkways

A special item is the ongoing cost of landscaping. This is a period cost, not a fixed asset, and so should be charged to expense as incurred.

For example, ABC Company buys a parcel of land for $1,000,000. Its initial accounting entry is:

	Debit	Credit
Land	1,000,000
Cash		1,000,000

ABC then razes a building that was located on the property at a cost of $25,000, fills in the old foundation for $5,000, and levels the land for $50,000. All of these costs are to prepare the land for its intended purpose, so they are all added to the land account with the following entry:

	Debit	Credit
Land	80,000
Cash		80,000

ABC Company intends to use the land as a parking lot, so it spends $400,000 to pave the land, and add walkways and fences. It estimates that the parking lot has a useful life of 20 years. It records the cost of the initial investment in the parking lot with this entry:

	Debit	Credit
Land Improvements	400,000
Cash		400,000

For each of the next 20 years, ABC charges 20th of the land improvements cost to depreciation. The annual entry is:

	Debit	Credit
Depreciation expense	20,000
Accumulated depreciation - land improvements		20,000

Related Topics

Overview of depreciation
How do I account for leasehold improvements?
What does capitalize mean?
What is the accounting entry for depreciation?
What is the correct capitalization limit?
What is the mid-month convention?