Charging Depreciation on Land
If you’re an accounting student or executive you might have been often asked: “Why is depreciation not charged on land?”. The reason why depreciation is not charged on land is that the useful life of land can’t be found. A necessity for an asset to be depreciated is that it needs to have an estimated useful life, which, in case of land, can’t be determined.
We can’t decide what the estimated life of land (in years) we live or work on is.
To explain it more clearly, let us say a company, which is still operational today, acquired a piece of land in 1910.
The company built its HQ on the land in 1910, the building has been rebuilt and renovated many times since 1910, but the piece of land is still there and no one can say for how many more years it is going to exist (possibly, infinite).
So, just because there is no useful life of land there was no depreciation charged on that. In fact, with time the value of land must have appreciated.
Also, Let us look at the formula for calculating annual depreciation (SLM)
= (Cost of Fixed Asset – Scrap Value)/Useful Life of Fixed Asset
With no useful life or “infinite” useful life the above formula can’t be fulfilled, this is the reason why depreciation is not charged on land.