A lump-sum purchase occurs when you purchase several assets at once for a single price. With this type of transaction, the individual price you pay for each asset is not detailed in the sales report or on the receipt. Instead, these documents just note the lump sum. There can be unique advantages to these types of transactions, but you need to account for them carefully.
Examples of Lump-Sum Purchases
The classic example of a lump-sum purchases is when you buy land and a building. To explain, imagine you buy a piece of property with three buildings on it. As a buyer, you pay a single lump sum to the seller, but you acquire four distinct assets: the land and each of the three buildings. You may also buy smaller assets as part of a lump-sum purchase. Real estate isn’t the only type of lump-sum purchase. Some companies offer package deals on office furniture. For example, you could get a filing cabinet, a desk, and a bookshelf for a single price.
Accounting for Lump-Sum Purchases
For the purposes of business accounting, you have to account for lump-sum purchases as individual purchases. To continue with the above example, imagine you spent $500,000 purchasing land and three buildings. Based on the price of undeveloped land in the area, you estimate that the land is worth $200,000. Then, you allocate $175,000 to the largest building on the plot and $75,000 and $50,000 to each of the smaller buildings on the land. In case of an audit, you may want to keep copies of the documents you use when determining these values. For example, if you use public records to estimate the price of land, you should print out and keep those records. If you hire assessors, keep their reports as well. When you file your annual tax return, you use these numbers when calculating your capital cost allowance for the year. These values become your undepreciated capital cost.
Advantages of Lump-Sum Purchases
In some cases, the only option may be a lump-sum purchase. For example, if someone is selling land and a building, those items typically come together, and it isn’t possible to split them up. In other cases, lump-sum sales are offered as an inexpensive alternative to buying several assets separately. This saves time on shopping, because you can buy numerous items at once. It can also make shipping more convenient, and it can help to establish strong relationships between you and your vendor.
Disadvantages to Lump-Sum Purchases
Although lump-sum purchases tend to be cheaper than buying assets individually, these purchases can require a lot of money up front. If you don’t have that much working capital on hand, you may want to buy items one by one over a longer period of time. In some cases, you may also have to find storage for the extra items, and if you have limited space, that can also be challenging. Lump-sum purchases can offer savings and convenience, but you need to ensure you account for them correctly. Most importantly, remember that you can’t account for these purchases as if they’re a single asset. Instead, you need to break up the sales price and account for each item separately.