15 julio, 2024

Buildings or building account: what it consists of, example

A building or account of buildings In accounting it is a depreciable account of fixed assets, which is part of the «Plant Property and Equipment» account. Buildings are considered real property and are generally depreciated using the straight-line method. Although a building as such is depreciable, the land on which it stands is not.

The “Buildings” account contains the book value of buildings owned by an entity. This value is the original purchase price, plus subsequent capitalized additions, less accumulated depreciation and any impairment of the assets.

«Accumulated depreciation buildings» is a contra-account of fixed assets that is credited with the depreciation associated with buildings. Since this is a balance sheet account, your accumulated balance will increase each year. However, this accumulated balance may not exceed the cost of the buildings.

When the credit balance in «Accumulated depreciation buildings» is offset by the cost in the «Buildings» account, the result will be the book value of the buildings.

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What are buildings in accounting?

Buildings are assets that are used for business purposes. They include office buildings, warehouses or commercial premises, such as convenience stores, large stores, shopping centers, etc.

buildings and costs

The cost of a building on the books is given by the price at which it was originally purchased. It should also contain any other type of start-up costs that have been spent to put it into operation.

In the same way as land, buildings are fixed assets that are acquired for continuous and long-term use, in order to make a profit for the business.

On the other hand, buildings are subject to depreciation, which is the periodic reduction of their value. This is recorded on the income statement, thus reducing revenue. Land is not depreciated.

Buildings may also have significant maintenance expenses, which will be debited to the income statement, further reducing revenue for the accounting period.

The cost of a building may include construction costs and other costs incurred to bring it to use. Therefore, construction delays can affect the total cost of a building.

buildings on the balance sheet

Buildings are listed at historical cost on the balance sheet as long-term or fixed assets, since this type of asset is held for business use and is not readily convertible to cash.

Because buildings are subject to depreciation, their cost will be adjusted on the balance sheet for accumulated depreciation to arrive at their net book value.

For example, Company ABC’s balance sheet reports that its office building cost $140,000, with accumulated depreciation of $45,000. Thus, the net book value or net book value of the building on the balance sheet is $95,000.

sale of buildings

If a building needs to be sold at a certain time for business reasons, any gain or loss on the sale will be based on the difference between the net book value of the building and the market sale price.

When a gain is generated from the sale made, the amount received in excess of the building’s net book value will be reflected in the income statement as an increase in revenue for the accounting period in question.

If the sale results in a loss because the business receives less than the book value, the loss will also be reflected on the income statement as a decrease in revenue.

building example

On May 2, 2011, construction began on a new Mar Company department store. The following costs were incurred for this construction:

The store was completed on February 1, 2012 and put into operation after its grand opening on May 2, 2012. The useful life of the building is estimated to be 30 years.

Mar Company issued a $25 million loan on May 2, 2011 to help build its new store, which meets the definition of a qualifying asset. The loan had an annual interest rate of 8% and its full repayment was set for May 2, 2012.

It is required to calculate the amount that must be included in the accounting account «Properties and equipment» with respect to the new store and indicate what impact all the information indicated above would have on the income statement for the fiscal year ending on December 30. April 2012.

Properties and equipment

As can be seen, this is an example of a self-built asset. For this reason, all costs that make it possible to bring the store to its current location and condition for its intended operation must be capitalized.

With the exception of general expenses, all expenses listed in the table above qualify to be capitalized. On the other hand, the interest on the loan must also be capitalized.

As activities are being carried out to prepare this asset for its intended use, it can be seen that the criteria for recognizing its capitalization are met, since expenses are incurred for the asset, in addition to costs incurred for a loan.

The capitalization of interest on the loan should end when the asset is ready for use, which was February 1, 2012. At this point, any remaining interest for the period should be charged to the income statement as a finance expense. The capitalization table would be:

Therefore, the total amount to be capitalized in the “Property and equipment” balance sheet account will be $29,670,000.

Impact on the income statement

With respect to the impact it will have on the income statement, the following should be included in it:

– General expenses for $940,000.

– Interest for the remaining three months February-April, which will now be an expense of $500,000 (25,000,000 x 8% x 3/12).

building depreciation

Even when the asset has not been put into operation, it is established that the depreciation of an asset begins when it is available for use, which is from February 1, 2012.

The annual depreciation of the building will be its total cost ($29,670,000) over 30 years, resulting in an annual amount of $989,000.

References

Roger CPA Review (2020). buildings. Taken from: rogercpareview.com. Lumen Learning (2020). Components of Asset Cost. Taken from: courses.lumenlearning.com. Acca (2020). Accounting for property, plant and equipment. Taken from: accaglobal.com. Harold Averkamp (2020). Accumulated depreciation – Buildings definition. Accounting Coach. Taken from: accountingcoach.com. Steven Bragg (2018). buildings. Accounting Tools. Taken from: accountingtools.com.

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