The Impact of Land Sale on the Accounting Equation

Overview

On January 1, Year 1, Prairie Enterprises purchased a parcel of land for $28,000 cash. The company intended to use the land for a warehouse site. However, in Year 3, Prairie Enterprises decided to change its plans and subsequently sold the land for $29,500.

Effect on the Accounting Equation

The sale of the land impacts the accounting equation by increasing both assets and equity by $1,500:

• The initial purchase of the land increased assets by $28,000 and did not create any liabilities since it was a cash transaction.
• When the land was sold for $29,500 in Year 3, assets decreased by the cost price of $28,000 and increased by the sale price of $29,500.
• This transaction resulted in a gain of $1,500 ($29,500 - $28,000) which is added to equity.

Therefore, the accounting equation can be summarized as:
Assets = Liabilities + Equity

By selling the land, Prairie Enterprises experienced a net increase of $1,500 for both assets and equity.

Question

What was the effect of selling the land on Prairie Enterprises' accounting equation?

Answer

The sale of the land increased both assets and equity by $1,500 in Prairie Enterprises' accounting equation. This gain was the difference between the sale price and the cost price of the land.