Movie Case Study
The scene that you just saw shows Deepa (played by Rakhee) requesting Mr. Vikram Singh (played by Dharmendra) to release the land. She has a school that is located in the same area. Mr. Singh wants to construct Sugar Mill on that land. He believes that a sugar mill would generate employment in the area and in turn revenue would be earned. While Deepa believes that the population would be illiterate when there are no schools. Who do you think is right?
In this blog, Learning Perspectives will explore how an investment in the land makes a difference.
What is an investment in land?
Land investment is accompanied by large cash expenditure. This is true for individuals and businesses. Generally, individuals purchase land to build residential house properties. While land can be used for many investments, individuals relate it to real estate.
We continuously relate buying land as an investment. Why is that? That is because buying land would make your money grow in the future, hence buying land is mostly related to investment. At the same time, this is a huge cash outflow that is illiquid in nature. An illiquid investment would mean an investment that cannot be cashed easily. Land, when acquired by businesses, can be associated with land encroachment and risk acquisition.
Land investments can be of various types:
Commercial development land Agricultural land Residential development land Vineyards Orchards Mixed farming land Land in Accounting: Land in accounting is classified as a long-term asset on the balance sheet. It is considered fixed in nature. Unlike other assets, the land is not depreciated in the books of accounts. This is because one cannot determine the land’s useful life. It is considered to be eternal, hence land is not depreciated. Long-term or fixed assets include:
- Long term securities
Accounting for selling the land also differs from other assets, mainly because it doesn’t account for depreciation. Generally, when a company sells land, it would experience a profit or loss on that piece of land. This is accounted for in the books of accounts as below:
Example of Land Investment by Company
Let’s assume Company XYZ purchased land for Rs, 50,00,000. After two years, they sold that land for Rs. 55,00,000. How would this entry be recorded?
We can clearly see there is a gain of Rs. 5,00,000 (55,00,000-50,00,000)
Cash A/c Dr. 55,00,000
To Gain on sale of land 5,00,000
To Fixed Asset (land) 50,00,000
Cash is debited here with Rs. 55,00,000 as that is the amount of payment received. The land is credited as this amount will be removed from the ledger. Remember, when it was purchased it was debited.
If Co. XYZ sold it for a loss of Rs. 45,00,000. Now there is a loss of Rs. 5,00,000. Entry would be as follows:
Cash A/c Dr. 45,00,000
Loss on sale Dr. 5,00,000
To Land 50,00,000