Buildings (Asset Account)

Buildings is a general ledger asset account that records the cost of structures a business owns and uses in its operations, such as offices, factories, warehouses, stores and garages. It is a noncurrent asset reported within property, plant and equipment on the balance sheet, and it is paired with the contra account Accumulated Depreciation – Buildings, which reduces it to book value.

The account holds structures used in the business, not property held for sale or as an investment. A real estate developer's unsold houses are inventory, and a building owned to earn rent may be presented separately as investment or rental property. The land under a building is recorded in a separate Land account because land is not depreciated, while the building is.

When a business buys or builds a home for itself, it does not treat the price as a cost of that year alone, because the building will serve it for decades. Instead, it records the building as something it owns, an asset, at what it cost.

Each year after that, a slice of the cost is charged against profit to reflect the building growing older. The Buildings account keeps the original cost; a separate account keeps track of how much has been charged so far.

Following the historical cost principle, a building is recorded at all costs needed to acquire it and get it ready for use. For a purchased building, that includes the purchase price allocated to the building, closing costs, legal fees, and costs of renovation or repair needed before it can be used. For a constructed building, it includes materials, labor, architects' and engineers' fees, permits and inspection fees, and interest on construction borrowing, which is capitalized during the construction period under US GAAP. Costs are accumulated in construction work in progress until the building is placed in service.

When land and a building are bought together, the total price is split between them in proportion to their fair values, often based on an appraisal report or property tax assessment. If a company pays $2,000,000 for a property appraised at $500,000 for the land and $1,500,000 for the building, the entry debits Land $500,000 and Buildings $1,500,000.

• Purchase. Debit Buildings, and Land if applicable; credit Cash or Mortgage Loan Payable.
• Annual depreciation. Debit Depreciation Expense; credit Accumulated Depreciation – Buildings. A $1,500,000 building with a 40-year life and no salvage value is depreciated at $37,500 a year using the straight-line method.
• Improvements. Additions and improvements that extend the building's life or capacity are capitalized to Buildings; routine upkeep is charged to repairs and maintenance expense.
• Disposal. When sold, the building's cost and accumulated depreciation are removed, and a gain or loss is recognized for the difference between the proceeds and book value.

For financial reporting, management estimates each building's useful life, often 25 to 50 years, and salvage value, and chooses a method, usually straight-line. Some companies separate major components, such as roofs, elevators and heating systems, and depreciate them over their own shorter lives; this componentization is required under IFRS and permitted under US GAAP. For federal income tax, buildings are depreciated under MACRS, generally over 39 years for nonresidential real property and 27.5 years for residential rental property, using the straight-line method. Parking lots, fences and similar items around a building are recorded separately as land improvements.

A building is reviewed for impairment when events, such as a plant closure or a sharp fall in property values, suggest its carrying amount may not be recoverable. If an impairment is recognized, the write-down cannot later be reversed under US GAAP. The notes to the financial statements disclose the cost of buildings, accumulated depreciation, depreciation methods and useful lives, and any buildings pledged as security for loans.

Because buildings stay on the books at cost less depreciation, their book value can be far from market value, particularly after long periods of rising property prices. Analysts valuing a company with significant real estate often look beyond the balance sheet to appraisals or comparable sales, while lenders focus on the building's collateral value in deciding how much they will lend against it.

• IRS Publication 946, How to Depreciate Property