How to Account for Property Purchases through Your Limited Company: A Guide for Investors
Are you an investor with properties held through a limited company? Understanding how to correctly account for your property transactions is crucial for maintaining clear and accurate financial records. Whether you're renting out properties or buying to improve and sell, it's important to know where and how to report these assets in your accounts.
When a limited company purchases properties, the accounting treatment depends on the nature of the properties and the company's business model. Based on the description provided (the company buys and rents properties, as well as buys properties to improve and sell off), the properties will be categorized and reported differently depending on the type of property and the company's intention with that property.
1. Properties held for rental (Investment Properties)
For properties that are purchased with the intention of generating rental income (i.e., buy-to-let properties), these are classified as Investment Properties under UK accounting standards, typically following FRS 102 or IFRS for statutory accounts.
Investment Properties are recorded under Non-Current Assets.
Initial Recognition: The properties should be recognized at cost at the time of acquisition (which includes the purchase price and any directly attributable costs like legal fees, stamp duty, etc.).
Subsequent Measurement: Investment properties can either be valued using the cost model (where the asset is carried at cost less accumulated depreciation) or the fair value model (where the asset is revalued to fair market value at each reporting date). If the fair value model is used, changes in fair value are recognized in profit and loss.
Journal Entry for Purchase of Investment Property:
If the company buys a property to rent out, the accounting entries would be as follows:
Debit: Investment Property (Non-current Asset)
Credit: Bank/Cash (or Loans if financed by borrowing)
2. Properties held for resale (Inventories)
For properties that are purchased with the intention to develop, improve, and sell off (i.e., trading properties), these are classified as Inventories under FRS 102 or IFRS.
Inventories are recorded under Current Assets.
Initial Recognition: Similar to investment properties, trading properties are initially recognized at cost, which includes the purchase price and any directly attributable costs (e.g., improvements, legal fees).
Subsequent Measurement: These properties should be carried at the lower of cost or net realizable value (NRV), with any write-down to NRV being recognized as an expense in the profit and loss account.
Journal Entry for Purchase of Property for Resale:
If the company buys a property to improve and sell, the accounting entries would be as follows:
Debit: Inventory – Property held for resale (Current Asset)
Credit: Bank/Cash (or Loans if financed by borrowing)
If the company incurs additional costs for improving the property, the improvements would be capitalized in the same way under inventory (e.g., costs of renovation).
Sale of Property (Investment Property or Inventory)
The accounting treatment of the sale will depend on the classification of the property.
Sale of Investment Property (Property held for rental):
The gain or loss on sale of an investment property is recognized in the profit and loss account.
The asset is removed from the balance sheet, and the proceeds from the sale are recognized.
Journal Entry for Sale of Investment Property:
Debit: Bank (or Receivables)
Credit: Investment Property (at book value)
Credit/Debit: Profit or Loss on Sale (Recognize gain or loss depending on the difference between sale price and book value)
3. Property Held in Progress (Work in Progress)
If the company has properties that are under development and not yet ready for sale or rental, these would be classified as Work in Progress (WIP) under Inventory until they are completed.
Properties under construction or development (before they are ready for sale or rental) are typically recorded under Work in Progress.
Once the property is ready for rental or sale, it would then be reclassified as either Investment Property or Inventory, as applicable.
Journal Entry for Work in Progress:
When the company starts improving a property and incurs development costs, these costs would be recorded in WIP:
Debit: Work in Progress (Current Asset)
Credit: Bank or Creditor (for payments made)
Sale of Property (Investment Property or Inventory)
The accounting treatment of the sale will depend on the classification of the property.
Sale of Investment Property (Property held for rental):
The gain or loss on sale of an investment property is recognized in the profit and loss account.
The asset is removed from the balance sheet, and the proceeds from the sale are recognized.
Journal Entry for Sale of Investment Property:
Debit: Bank (or Receivables)
Credit: Investment Property (at book value)
Credit/Debit: Profit or Loss on Sale (Recognize gain or loss depending on the difference between sale price and book value)
2.Sale of Inventory Property (Property held for resale):
When a property held for resale is sold, the revenue from the sale is recognized, and the cost of the property sold is recognized as an expense in the cost of sales.
Journal Entry for Sale of Inventory Property:
Debit: Bank (or Receivables)
Credit: Sales Revenue
Debit: Cost of Sales (remove the property cost from inventory)
Credit: Inventory (remove property from inventory)
Reporting in Statutory Accounts:
For statutory year-end accounts, the following would apply:
Investment Properties are shown as non-current assets in the balance sheet.
Properties held for resale are included as inventory under current assets.
The Profit and Loss account will reflect:
Rental income from investment properties (if applicable).
Gains or losses on sale of properties (both investment properties and inventory properties).
Costs related to properties (e.g., depreciation on investment properties, cost of sales for inventory properties).
The Companies Act requires that these transactions comply with accounting standards such as FRS 102 (for UK companies), ensuring the financial statements reflect true and fair views of the company's financial position and performance.
If you want expert guidance on how to handle your property transactions, schedule an appointment today and ensure your accounts are in perfect order. Let's discuss how we can help your business stay compliant and financially sound.
