Land improvements are enhancements to a plot of land to make the land more usable. If these improvements have a useful life, they should be depreciated. If there is no way to estimate a useful life, then do not depreciate the cost of the improvements. If land is being prepared for its intended purpose, then include these costs in the cost of the land asset. They are not depreciated. Examples of such costs are demolishing an existing building, and clearing and leveling the land.
Also, note that land is not depreciated, since it does not have a useful life. Instead, it is considered to have a perpetual life. The only situation in which the depreciation of land is allowed is when its value is being depleted through the removal of natural resources.
If functionality is being added to the land and the expenditures have a useful life, record them in a separate Land Improvements account. Examples of land improvements are drainage and irrigation systems, fencing, landscaping, and parking lots and walkways.
| Debit | Credit | |
| Land | 1,000,000 | |
| Cash | 1,000,000 |
ABC then razes a building that was located on the property at a cost of $25,000, fills in the old foundation for $5,000, and levels the land for $50,000. All of these costs are to prepare the land for its intended purpose, so they are all added to the land account with the following entry:
| Debit | Credit | |
| Land | 80,000 | |
| Cash | 80,000 |
ABC Company intends to use the land as a parking lot, so it spends $400,000 to pave the land, and add walkways and fences. It estimates that the parking lot has a useful life of 20 years. It records the cost of the initial investment in the parking lot with this entry:
| Debit | Credit | |
| Land Improvements | 400,000 | |
| Cash | 400,000 |
For each of the next 20 years, ABC charges 20th of the land improvements cost to depreciation. The annual land improvement depreciation entry is:
| Debit | Credit | |
| Depreciation expense | 20,000 | |
| Accumulated depreciation - land improvements | 20,000 |
Note that any land improvement asset with a useful life is subject to impairment analysis, so it is possible that an impairment may be declared, resulting in the immediate recognition of an impairment loss that also reduces the carrying amount of the asset. If the carrying amount is reduced in this manner, it may also be necessary to reduce the remaining periodic depreciation charge.
