In Accounting for Land Investors, one of the formulas we use when creating journal entries for terms sales is Capital Recovery. The number represents the percentage of the transaction whereby we recover our cost of land.
Calculation
Capital Recovery = Sales Basis / Sales Price
Example
The Sales Basis is what we paid for each piece of land on a sale record. If we sold two properties in the same transaction, paying $3,000 for one property and $3,500 for a second property, our sales basis would be $6,500.
Sales Basis = 6,500.00
If we sold those two properties in one transaction for $20,000, this is the Purchase Amount in LGPass.
Sales Price = 20,000.00
Now, let’s solve for our Capital Recovery.
Capital Recovery = Sales Basis / Sales Price
Capital Recovery = 6,500 / 20,000
Capital Recovery = 32.5%
This means that for every dollar of principal we receive from the buyer, $..325 covers the cost of our land. This is reflected as the Cost of Goods Sold on the Profit and Loss Statement.
