A lump-sum purchase occurs when you purchase assets in a group at once for a single price. With this type of transaction, the sales report or receipt doesn’t detail the price you pay for each individual item. Instead, these documents just note the lump sum cost. These types of transactions can provide unique advantages, but it’s a good idea to carefully account for them.
Lump-Sum Purchase Examples
Buying land and a building together offers a classic example of a lump-sum purchase. Imagine you buy a piece of property with three buildings on it and pay a single lump sum to the seller. Though this only counts as a single purchase, you acquire four distinct assets in the transaction as you now own the land plus the three buildings that sit upon it.
You can make other lump-sum purchases besides real estate. You can also buy smaller assets, including equipment or machinery, in lump-sum purchases. Some companies offer package deals on office furniture. For example, you might work out a transaction that gets you a filing cabinet, desk, and bookshelf for a single price.
Lump-Sum Purchase Accounting
For business accounting purposes, companies typically count lump-sum purchases as individual purchases. Let’s take another look at the land and three buildings you just purchased. Imagine you spend $500,000 on your lump-sum purchase of the four assets. To properly note them in your accounting records, you need to determine the value of each individual asset. You do this by researching the undeveloped land in the area and the typical cost of each building’s square footage. In your research, you assign the following values:
- $200,000 for the land itself
- $175,000 for the largest building
- $75,000 for the medium building
- $50,000 for the smallest building
It’s a good idea to keep copies of the documents you use to determine these values in case you undergo a Canada Revenue Agency (CRA) audit. For example, if you use public records to estimate the land price, you might print out and keep those records. Likewise, if you hire appraisers, keep their reports along with receipts for your payments. When filing your annual tax return, these numbers help you calculate your capital cost allowance for the year and become your undepreciated capital cost.
Advantages of Lump-Sum Purchases
In some cases, your only option may be a lump-sum purchase. If someone wishes to sell land with a building on it, those items typically come together as you really have no way to split them. In other situations, sellers offer lump-sum sales as an inexpensive alternative to buying several assets separately. This saves shopping time when you need to buy numerous items at once. It makes shipping more convenient and economical, and it can help establish strong relationships between you and your supplier.
Disadvantages of Lump-Sum Purchases
Although lump-sum purchases tend to prove cheaper than buying assets individually, these purchases can mean you need 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. You might also want to give some thought to storage if you have limited space. Even when you have the money to buy business-related equipment for future projects, you need a convenient place to store it until that project begins.
While lump-sum purchases can offer savings and convenience, proper accounting ensures you can easily claim them on your tax return. Keep in mind that you can’t account for these purchases as if they’re a single asset. Breaking up your sales price and accounting for each item separately helps you and your small business stay on the good side of the CRA. Keep your books accurate and up to date automatically. Change the way you manage your finances now.