There is another phase of the interest question to be considered. When land is bought with the idea of holding it for a future rise in value, the owner must necessarily take into consideration interest on the purchase price. It is not an uncommon thing to hear that a man who bought a piece of real estate ten years ago for $1,000 and sells it today for $1,200, has made $200; whereas interest on $1,000 for ten years at 6% amounts to $600. In such cases there is some reason for considering the interest as a part of the cost, but even then it is a better plan to carry the interest, and also the taxes, etc., in separate accounts, the total of which, added to the original price, will show the cost at any given date.

On the other hand, when improved property is bought and rented, the owner, in estimating his profits, does not add to the original cost the interest accruing since the purchase price was paid. This indicates that the method of treating interest in connection with cost depends to some extent on the purpose for which the property is held.

Speaking generally, interest and taxes, being fixed and beyond the control of the owner, should be charged against income in the balance sheet, for they represent that which is past, while profits are among the things hoped for. This periodic charging up, however, does not in any way preclude the keeping of such records of these expenditures as will instantly show the true history of any property. Memoranda accounts for this purpose are fully provided for in the property records which are shown in Forms 20 and 21 (Section 26).

In instances where tracts of land are held by development companies for purposes of subdivision, the best practice is to leave out of the books of account all interest on the investment, except, of course, such interest payable as accrues upon mortgages payable, and this interest should be written off to Profit and Loss whenever the books are closed. This avoids adverse criticism, as well as the possibility of misleading the interested parties.