This section provides a treatment of the handling of depreciation and appreciation of assets in GnuCash.
It also provides a brief introduction to the related tax issues.
Warning: Be aware that different countries can have substantially different tax policies for handling these things; all that this document can really provide is some of the underlying ideas to help you apply your "favorite" tax/depreciation policies.
Note that appreciation and depreciation of assets tend to be treated somewhat differently:
Depreciation tends to only get calculated on assets that are used for professional or business purposes, because governments don't generally allow you to claim depreciation deductions on personal assets, and it's pointless to bother with the procedure if it's not deductible.
Unlike depreciation, governments tend to be quite interested in taxing capital gains in one manner or another.
(As always, there are exceptions. If you hold a bond that pays all of its interest at maturity, tax authorities will often require that you recognize interest each year, and refuse this to be treated as a capital gain. The phrases accrued interest, or imputed interest are often there to scare those that are sensitive to such things...)
Appreciaton of assets is, in general, a fairly tricky matter to deal with. This is so because, for some sorts of assets, it is difficult to correctly estimate an increase in value until you actually sell the asset.
If you invest in securities that are traded on a daily basis on open markets such as stock exchanges, prices may be quite exact, and selling the asset at market prices may be as simple as calling a broker and issuing a Market Order.
On the other hand, homes in your neighbourhood are sold somewhat less often, such sales tend to involve expending considerable effort, and involve negotiations, which means that estimates are likely to be less precise. Similarly, selling a used automobile involves a negotiation process that makes pricing a bit less predictable.
Harder to estimate are values of collectible objects such as jewelry, works of art, baseball cards, and "Beanie Babies." The markets for such objects are somewhat less open than the securities markets.
Worse still are one-of-a-kind assets. Factories often contain presses and dies customized to build a very specific product that cost tens or hundreds of thousands of dollars; this equipment may be worthless outside of that very specific context. In such cases, there several conflicting values might be attached to the asset, none of them unambiguously correct.
Let's suppose you buy an asset expected to increase in value, say a Degas painting, and want to track this. (The insurance company will care about this, even if nobody else does.)
Properly tracking the continually-increasing value of the Degas will require at least three, quite possibly the following four accounts (plus a bank or cash account where the money for the purchase comes from):
The accrued gains likely won't affect your taxable income for income tax purposes, although it could have some effect on property taxes.
The first thing you have to do is to create the asset cost account, then transfer the sum you paid for this painting from your bank account to this asset account to record the purchase.
A month later, you have reason to suspect that the value of your painting has increased by $1200. In order to record this you transfer $1200 from your accrued gains on asset income account to your asset account.
Your main window will resemble this:
and your asset account will resemble this:
Asset appreciation is a sort of income but it is not cash in hand.
The people that got "rich" in 1999 from IPOs of Linux-related companies like Red Hat Software and VA Linux Systems could verify this. They hold options or stock that are theoretically valued at millions of dollars USD.
That doesn't mean that they are actually millionaires; the principal participants have to hold their stock for at least six months before selling any of it. The fact that they can't sell it means that while it may in theory be worth millions of dollars on paper, there is, as of late 1999, no way for them to legally get those millions.
Let´s say another month later prices for Degas paintings have gone up some more, in your case about $2500, you estimate. You duly record these $2500 as an income like above, then decide to sell the painting.
Now there arise three possibilities:
The income account is left alone (or perhaps gets transferred from an Accrued Gain income to a Realized Gain income account), and the recording is rather like:
Account | Amount |
---|---|
Cash | $16055 |
Painting | -$11000 |
Realized Gain Income | -$5055 |
And if any amounts had been accrued as Accrued Gains, the asset amount should be closed out, offset by a negative value for Accrued Gain income. If the total that had been accrued was $5000, then the transaction might look like the following:
Account | Amount |
---|---|
Cash | $16055 |
Painting | -$11000 |
Accrued Gain Asset | -$5000 |
Realized Gain Income | -$5055 |
Accrued Gain Income | $5000 |
Note that the two income accounts offset one another so that the current income resulting from the transaction is only $55. The remaining $5000 had previously been recognized as Accrued Gain Income.
Instead of the $16055 you thought the painting was worth are only offered $15000. But you still decide to sell, because you value $15000 more than you value the painting.
The numbers change a little bit, but not too dramatically.
Account | Amount |
---|---|
Cash | $15000 |
Painting | -$11000 |
Accrued Gain Asset | -$5000 |
Realized Gain Income | -$4000 |
Accrued Gain Income | $5000 |
Note that the two income accounts offset one another so that the current income resulting from the transaction turns out to be a loss of $1000. That's fine, as you had previously recognized $5000 in income.
The extra value is, again, recorded as a gain, i.e. an income.
Account | Amount |
---|---|
Cash | $50000 |
Painting | -$11000 |
Accrued Gain Asset | -$5000 |
Realized Gain Income | -$39000 |
Accrued Gain Income | $5000 |
In practice, it truly is important to keep the Accrued Gain Income separate from the Realized Gain Income, as the former is likely to be ignored by your tax authorities, who will only care to charge you on the Realized Gain.
Below, we show the second case discussed.
As we see in this example, for non-financial assets, it may be difficult to correctly estimate the ``true'' value of an asset.
It is quite easy to count yourself rich based on questionable estimates that do not reflect "money in the bank."
Thus, when dealing with appreciation of assets,
Do not indulge in wishful thinking.
Until you have actually sold your asset and got the money, any numbers on paper (or magnetic patterns on your hard disk) are merely that.
If you could realistically convince a banker to lend you money, using the assets as collateral, that is a pretty reasonable evidence that the assets have value, as lenders are professionally suspicious of dubious overestimations of value.
Be aware: all too many companies that appear "profitable" on paper go out of business as a result of running out of cash, precisely because "valuable assets" were not the same thing as cash.
Taxation policies vary considerably between countries, so it is virtually impossible to say anything that will be universally useful.
However, it is common for income generated by capital gains to not be subject to taxation until the date that the asset is actually sold, and sometimes not even then.
North American home owners usually find that when they sell personal residences, capital gains that occur are exempt from taxation. It appears that other countries treat sale of homes differently, taxing people on such gains. German authorities, for example, tax those gains only if you owned the property for less than ten years.
I have one story from my professional tax preparation days where a family sold a farm, and expected a considerable tax bill that turned out to be virtually nil due to having owned the property before 1971 (wherein lies a critical "Valuation Day" date in Canada) and due to it being a dairy farm, with some really peculiar resulting deductions.
In short, this presentation is fairly simple, but taxation often gets terribly complicated...
Compared to the often uncertain estimates one has to do where appreciation of assets is concerned, we are on somewhat firmer ground here.
Since depreciation of assets is very often driven by tax policies, the discussion of depreciation will focus in that direction, on some of the more common depreciation calculation schemes.
While there has been some discussion about how to accomplish automated calculation and creation of transactions to handle things like depreciation, there is not yet any working code, so for now, you will have to do calculations by hand.
Linear depreciation diminishes the value of an asset by a fixed amount each period until the net value is zero. This is the simplest calculation, as you estimate a useful lifetime, and simply divide the cost equally across that lifetime.
Example: You have bought a computer for $1500 and
wish to depreciate it over a period of 5 years. Each year the
amount of depreciation is $300, leading to the following
calculations:
Year | Depreciation | Remaining Value |
---|---|---|
1 | 300 | 1200 |
2 | 300 | 900 |
3 | 300 | 600 |
4 | 300 | 300 |
5 | 300 | 0 |
Each period the asset is depreciated by a fixed percentage of its value in the previous period. In this scheme the rest value of an asset decreases exponentially leaving a value at the end that is larger than zero ( i.e. - a resale value).
Beware: Tax authorities may require (or allow) a larger percentage in the first period. On the other hand, in Canada, this is reversed, as they permit only a half share of "Capital Cost Allowance" in the first year.
The result of this approach is that asset value decreases more rapidly at the beginning than at the end which is probably more realistic for most assets than a linear scheme. This is certainly true for automobiles.
Example: We take the same example as above, with an annual depreciation of 30%.
Year | Depreciation | Remaining Value |
---|---|---|
1 | 450 | 1050 |
2 | 315 | 735 |
3 | 220.50 | 514.50 |
4 | 154.35 | 360.15 |
5 | 108.05 | 252.10 |
A third method most often employed in Anglo/Saxon countries is the "sum of digits" method. Here is an illustration:
Example: First you divide the asset value by the sum of the years of use, e.g. for our example from above with an asset worth $1500 that is used over a period of five years you get 1500/(1+2+3+4+5)=100. Depreciation and asset value are then calculated as follows:
Year | Depreciation | Remaining Value |
---|---|---|
1 | 100*5=500 | 1000 |
2 | 100*4=400 | 600 |
3 | 100*3=300 | 300 |
4 | 100*2=200 | 100 |
5 | 100*1=100 | 0 |
In order to keep track of the depreciation of an asset, you need :
The first step, again, is to record the purchase of your asset by transferring the money from bank bank account to the asset cost account. Afterwards, in each accounting period you record the depreciation as an expense in the appropriate account.
The two windows below show your asset account and the main window after the third year of depreciation using a "sum of digits" scheme for the example above.
Since depreciation and tax issues are closely related, you may not always be free in chosing your preferred method. Fixing wrong calculations will cost a whole lot more time and trouble than getting the calculations right the first time, so if you plan to depreciate assets, it is wise to make sure of the schemes you will be permitted or required to use.
Return to Main Documentation Page.