Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

BUILDINGS, LAND, AND WASTING ASSETS Definition of Real Property The movable fixed assets—paradoxical as the limiting adjectives may seem—having now been considered, the present chapter will treat of the immovable tangible fixed assets. By immovable is meant real property as distinguished from personalty, and by tangible the intention is to exclude from the present consideration such intangible items as good-will, patents, copyrights, trade-marks, franchises, and the like. In accounting for this group of assets there is no place for the caption “real estate.” In its stead the two titles, “land” and “buildings,” are used. This is to avoid confusion and to afford a better basis for calculating depreciation. The term real estate or real property has a very definite legal connotation, but in the popular mind is held to include land and buildings. From the accountant’s point of view there is no objection to the use of the term in the balance sheet, but in the accounts themselves the two assets should be carefully separated. For the private commercial enterprise, land as a fixed asset is subject neither to depreciation nor to appreciation; whereas buildings are constantly depreciating in value. While depreciation can be calculated with fair accuracy on the combined basis, the single basis of building values is the only scientific basis. The separation of the two values is also essential for insurance purposes and the proper adjustment of fire losses. They will therefore be separately treated in this discussion. Cost of Buildings Buildings as fixed assets should be valued by the formula for the fixed asset group, viz., full cost less depreciation. Some points in connection with proper methods of accounting and special cases of valuation require comment. First, as to making the proper record of cost of the buildings. Three cases must here be considered: