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: