Accounting Principles – Property
Among the accounts prominent in all lines of business are the so-called “property accounts.” This has become a common term, although it is probably to be criticized in that it is not sufficiently specific.
It includes, as a rule, land, buildings and equipment. It is too frequently confused by being called real estate, real property, property and plant, etc. These terrris while not so bad perhaps when used as general descriptive titles in financial statements have no place in the books as account titles. An abundance of accounts is preferable to a scarcity. Not much time is gained by economizing in the number of accounts and much time and useful information is many times subsequently lost by this procedure. It is easier to combine than to separate. Combination is the rule in financial statements because of their general nature. Division should be the rule as to the means of securing the information.
Thus it is proposed in the discussion of property accounts to look at the items which may unquestionably come under property and take up one by one the accounts representing these items.
An analysis of the possibilities which the word embraces would include in general terms land, buildings, machinery, tools, equipment, horses, wagons, harness and automobiles, and furniture and fixtures.
Land is sometimes referred to as real property. Real property is a technical legal word. “Property is the right to possess and use.” “Real property is the right to possess and use land” for an indefinite period of time. Land is also sometimes referred to as real estate, but this term like so many others applied to land and buildings is confusing, for the reason, that the term real estate is also used to designate a business, the object of which is to deal in real property and those chattel interests which attach to real property such as leases and leasing, mortgages and liens. All confusion may be avoided by not using any of these terms and merely referring to land as such.
Since accounting follows bookkeeping and bookkeeping follows the business transactions, it will no doubt be of interest in discussing the account for land and the manner in which the account is manipulated, to examine the subject of the account with regard to—how it may be acquired, either permanently and temporarily, what may happen to it, and how it may be disposed of.
Land may be acquired by inheritance, purchase or gift. In some cases it may be improved by reclaiming or draining, and in others by filling in or making new land. It will probably be seen immediately that all of these possibilities might exist and that all have a distinct bearing upon the accounting. In any case the permanent acquisition of land is accompanied by a deed which vests title in the holder thereof. Land acquired by gift or inheritance has a very different effect upon the accounts from that which is purchased, made or reclaimed. Land which is purchased will be acquired either for cash or through credit. The credit may take the form of an open account or may be represented by a mortgage. The purchaser may take the land subject to the mortgage or he may assume the mortgage. Where land is made or reclaimed there are certain expenses incident to its improvement which may add to the first cost or perhaps the entire cost. In just these few simple statements the acquisition of land has brought sharply to the attention the fact that it is closely related to bookkeeping, accounting, law and finance.
The holder of land is brought into direct contact with the government through its ownership. The government affords police protection to its citizens and in return exacts a tax for such service and the general maintenance of the government. Taxes will be treated at length in another chapter. In addition to the right to taxation which the state claims, there is what is known as the right of eminent domain. This is the right to confiscate any property which may be needed for the common good. Included under such necessities, are thoroughfares, projected railroad lines, and street car systems. While such proceedings are possible under the right granted him by the constitution of the United States, the holder must be given an opportunity to be heard and he must be paid a fair compensation for his land.
In the absence of ownership, land may be hired or it may be leased. The distinction between hiring and leasing seems to be, that hiring implies as a rule a verbal contract from month to month, or from one short period of time to another; whereas leasing carries with it a written contract with certain express and implied conditions and usually covers a longer period of time; for example, a year, five years or ten years.
At first thought, it would not seem that much of consequence could happen to land. Upon further investigation it will be quite plain that economic conditions may have a very great effect upon land. A given locality, perfectly adapted to certain lines of business to-day, may within ten years be entirely unsuited to the needs of the same line of business. Land which is of no particular value to-day may within the same period of time become exceedingly high in price owing to the demand. Thus, land may either appreciate or depreciate in value. If the owner of the land does not pay his taxes or his other obligations, the state may impose a lien, or the courts may take similar action in favor of some judgment creditor. The holder of a mortgage may foreclose and take title.
Land may be a direct factor in the production of income or it may be an indirect factor. As the part of the property of a business organization it is an indirect factor in the production of income in the form of profits. Remembering that land includes not only the surface, but the natural resources above and below the surface, it may be a direct factor in the production of income in the case of mining, hunting, fishing, forestry, and water power. The income may be obtained through any one of these extractive industries or by temporarily assigning these rights to others in consideration of rent.
Land may be disposed of by sale, for cash or on credit; on account, through an unsecured claim or through a mortgage; by sale through foreclosure either in the case of a mortgage, tax, or other lien.
The application of the above principles may be seen in the following test:
Applied Theory Test Number One
James Morrison, being in business for himself, inherits from his father certain land (Parcel A) which can be used to advantage in the business. It was valued in the inventory of the estate at $10,000. He purchases one additional parcel of land (Parcel B) for $15,000 paying $8,000 in cash, giving a purchase money mortgage for the balance and taking it subject to a mortgage of $4,000. On another parcel (Parcel C) he purchases the land for $20,000 paying $1,000 in cash, giving a purchase money mortgage for the balance and assuming a mortgage of $5,000. He receives gratis from a neighboring town a parcel (Parcel D) for a manufacturing plant. This plot is low and swampy and requires draining and filling in which cost $2,500 but was held by a former owner at $4,000. It subsequently appreciated in value $7,500, while Parcel B depreciated $2,000. One-half of Parcel A was taken by the state under the right of eminent domain, at an appraised value equal to cost. Parcel D was sold by the state under a tax lien realizing for Morrison $11,000 and the mortgagee foreclosed on Parcel C selling it for $13,000.
Frame the journal entries necessary to express the preceding transactions.
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