gnucash/doc/sgml/C/xacc-depreciation.sgml

<ARTICLE ID="XACC-DEPRECIATION">
<ARTHEADER>
<TITLE>Depreciation and Capital Gains</TITLE>
</ARTHEADER>
<!-- <SECT1> -->
<!-- <TITLE>Depreciation and Capital Gains</TITLE> -->
<PARA>
If you hold assets for business purposes, thier decline in value over
time can be treated as a deduction for tax purposes, called
Depreciation.  On the other hand, if you own assets such as real estate,
collectibles (like paintings), and investments (like shares in
companies), you may see them appreciate in value over time.  In this
case, you must recognize -- for tax purposes -- what are called 
<EMPHASIS>Captial Gains</EMPHASIS>
</PARA>

<PARA>This section discusses the handling of
    depreciation and appreciation of assets in GnuCash.
    It also provides a brief introduction to the related tax
    issues.
    </PARA>

<PARA><EMPHASIS>Warning:</EMPHASIS> <EMPHASIS>Be aware that different countries can
    have <EMPHASIS>substantially</EMPHASIS> 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.</EMPHASIS>

    </PARA>
<PARA>Appreciation and depreciation of assets are
    treated somewhat differently:

    <ITEMIZEDLIST>
<LISTITEM>
<PARA><LINK LINKEND="XACC-DEPRECIATION">Depreciation</LINK> 
        is <EMPHASIS>usually</EMPHASIS>
        recognized (the technical term is <EMPHASIS>accrued</EMPHASIS>) as an
        ongoing expense, gradually reducing the value
        of an asset toward zero. 
        Depreciation is usually only calculated on assets 
        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.
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA> <LINK LINKEND="APPR">Capital Gains,</LINK> which could
        be called <EMPHASIS>asset value appreciation,</EMPHASIS> are typically
        <EMPHASIS>not</EMPHASIS> recognized until 
        the asset is sold, and at that <EMPHASIS>instant,</EMPHASIS> the entire
        gain becomes income. 
        Governments tend to be <EMPHASIS>quite
        interested</EMPHASIS> 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
        often require that you recognize interest each year,
        and refuse this to be treated as a capital gain. The
        phrases <EMPHASIS>accrued interest,</EMPHASIS> or <EMPHASIS>imputed
        interest</EMPHASIS> are often used to scare those who are
        sensitive to such things...)
      
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<!-- </SECT1> -->
<SECT1 ID="XACC-CAPITALGAINS">
<TITLE> Capital Gains - Asset Appreciation</TITLE>
<PARA>    <ANCHOR ID="APPR"> 
    </PARA>
<PARA>Appreciation of assets is generally a tricky
    matter because, for some sorts of
    assets, it is difficult to correctly estimate an increase in
    value <EMPHASIS>until you actually sell the asset.</EMPHASIS>

    If you invest in securities
    traded daily on open markets such as stock
    exchanges, prices are often quite exact, and selling the asset at
    market prices may be as simple as calling a broker and issuing
    a <EMPHASIS>Market Order.</EMPHASIS>
    On the other hand, homes in your neighborhood 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.

    </PARA>
<PARA>Values of collectible objects such as
    jewelry, works of art, baseball cards, and "Beanie Babies" 
    are harder to estimate.
    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 <EMPHASIS>worthless</EMPHASIS> outside of that very
    specific context. In such cases, several conflicting
    values might be attached to the asset, <EMPHASIS>none</EMPHASIS> of them
    unambiguously correct.

    </PARA>
<PARA>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):

    <ITEMIZEDLIST>
<LISTITEM>
<PARA>An <EMPHASIS>Asset Cost</EMPHASIS> asset account to track the
      original cost of the painting.

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>An <EMPHASIS>Accrued Unrealized Gains on Asset</EMPHASIS> asset
      account to keep track of increases in value.
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>An <EMPHASIS>Accrued Gain On Asset Income</EMPHASIS> income account
      in which to record the income side of the annual gains in
      your riches.
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>A <EMPHASIS>Realized Gain On Asset Income</EMPHASIS> income account
      in which to record the realized income when you sell the
      asset.
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<PARA>The <EMPHASIS>accrued gains</EMPHASIS> likely won't affect your taxable
    income for <EMPHASIS>income</EMPHASIS> tax purposes, although it could have
    some effect on <EMPHASIS>property</EMPHASIS> taxes.

    </PARA>
<SECT2>
<TITLE>The Handling of Capital Gains in GnuCash</TITLE>
<PARA>    </PARA>
<SECT3>
<TITLE>The Acquisition</TITLE>
<PARA>First, create the <EMPHASIS>asset
    cost account</EMPHASIS>. To record the purchase, transfer the sum 
    you paid for this
    painting from your bank account to this asset account.

    </PARA>
<PARA>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 <EMPHASIS>accrued gains on asset</EMPHASIS>
    income account to your asset account.
    Your main window will resemble this:
    <INLINEMEDIAOBJECT>
<IMAGEOBJECT>
<IMAGEDATA FILEREF="image/appr-main1.png">
</IMAGEOBJECT>
<TEXTOBJECT>
<PHRASE>Main window after purchase and appreciation</PHRASE>
</TEXTOBJECT>
</INLINEMEDIAOBJECT> 

    </PARA>
<PARA>and your asset account will resemble this:
    <INLINEMEDIAOBJECT>
<IMAGEOBJECT>
<IMAGEDATA FILEREF="image/appr-asset1.png">
</IMAGEOBJECT>
<TEXTOBJECT>
<PHRASE>Asset account after purchase and appreciation</PHRASE>
</TEXTOBJECT>
</INLINEMEDIAOBJECT> 

    </PARA>
</SECT3>
<SECT3>
<TITLE>While You Hold the Asset</TITLE>
<PARA>Asset appreciation is a sort of income but it is 
      <EMPHASIS>not</EMPHASIS> 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
    <EMPHASIS>theoretically</EMPHASIS> valued at millions of dollars USD.
    They aren't actually millionaires; the
    principal participants have to hold their stock for at least
    six months before selling <EMPHASIS>any</EMPHASIS> of it. The fact that
    they <EMPHASIS>can't</EMPHASIS> sell it means that while it may in theory
    be worth millions of dollars on paper, there is
    no way for them to legally <EMPHASIS>get</EMPHASIS> those
    millions.

    </PARA>
</SECT3>
<SECT3>
<TITLE>Selling the Asset</TITLE>
<PARA>Let's suppose another month later prices for Degas
    paintings have gone up some more, in your case about $2500, you
    estimate. You duly record the $2500 as an income like above,
    then decide to sell the painting.

    </PARA>
<PARA>Three possibilities arise:

    <ITEMIZEDLIST>
<LISTITEM>
<PARA>Your optimistic estimate of the painting's value was correct. 
       The income account is left alone (or perhaps gets
       transferred from an <EMPHASIS>Accrued Gain</EMPHASIS> income 
       to a <EMPHASIS>Realized Gain</EMPHASIS> income account), and 
       the recording would appear as follows:
        <TABLE>
<TITLE>Turning an Accrued Gain into a Realized Gain</TITLE>
<TGROUP COLS="2">
<THEAD>
<ROW>
<ENTRY>Account</ENTRY>
<ENTRY>Amount</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>Cash</ENTRY>
<ENTRY>$16055</ENTRY>
</ROW>
<ROW>
<ENTRY>Painting</ENTRY>
<ENTRY>-$11000</ENTRY>
</ROW>
<ROW>
<ENTRY>Realized Gain Income</ENTRY>
<ENTRY>-$5055</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

        </PARA>
<PARA>If any amounts had been accrued as <EMPHASIS>Accrued
        Gains,</EMPHASIS> the asset amount should be closed out, offset
        by a <EMPHASIS>negative</EMPHASIS> value for <EMPHASIS>Accrued Gain</EMPHASIS>
        income. If the total that had been accrued was $5000, then
        the transaction might look like the following:

        <TABLE>
<TITLE>Accrued Gain becomes Realized Loss</TITLE>
<TGROUP COLS="2">
<THEAD>
<ROW>
<ENTRY>Account</ENTRY>
<ENTRY>Amount</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>Cash</ENTRY>
<ENTRY>$16055</ENTRY>
</ROW>
<ROW>
<ENTRY>Painting</ENTRY>
<ENTRY>-$11000</ENTRY>
</ROW>
<ROW>
<ENTRY>Accrued Gain Asset</ENTRY>
<ENTRY>-$5000</ENTRY>
</ROW>
<ROW>
<ENTRY>Realized Gain Income</ENTRY>
<ENTRY>-$5055</ENTRY>
</ROW>
<ROW>
<ENTRY>Accrued Gain Income</ENTRY>
<ENTRY>$5000</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

        </PARA>
<PARA>Note that the two income accounts offset one another so
        that the <EMPHASIS>current</EMPHASIS> income resulting from the
        transaction is only $55. The remaining $5000 had previously
        been recognized as <EMPHASIS>Accrued Gain Income.</EMPHASIS>
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>You were over-optimistic about the value of the painting. 
      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.

        <TABLE>
<TITLE>Accrued Gain becomes Realized Gain</TITLE>
<TGROUP COLS="2">
<THEAD>
<ROW>
<ENTRY>Account</ENTRY>
<ENTRY>Amount</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>Cash</ENTRY>
<ENTRY>$15000</ENTRY>
</ROW>
<ROW>
<ENTRY>Painting</ENTRY>
<ENTRY>-$11000</ENTRY>
</ROW>
<ROW>
<ENTRY>Accrued Gain Asset</ENTRY>
<ENTRY>-$5000</ENTRY>
</ROW>
<ROW>
<ENTRY>Realized Gain Income</ENTRY>
<ENTRY>-$4000</ENTRY>
</ROW>
<ROW>
<ENTRY>Accrued Gain Income</ENTRY>
<ENTRY>$5000</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

        </PARA>
<PARA>Note that the two income accounts offset one another so
        that the <EMPHASIS>current</EMPHASIS> income resulting from the
        transaction turns out to be a <EMPHASIS>loss</EMPHASIS> of $1000.
        That's fine, as you had previously recognized $5000 in
        income.
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>You manage to sell your painting for more than you thought
      in your wildest dreams. 
      The extra value is, again, recorded as a gain, 
      <EMPHASIS>i.e.</EMPHASIS> an income.

        <TABLE>
<TITLE>Accrued Gain Becomes Handsome Realized Gain</TITLE>
<TGROUP COLS="2">
<THEAD>
<ROW>
<ENTRY>Account</ENTRY>
<ENTRY>Amount</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>Cash</ENTRY>
<ENTRY>$50000</ENTRY>
</ROW>
<ROW>
<ENTRY>Painting</ENTRY>
<ENTRY>-$11000</ENTRY>
</ROW>
<ROW>
<ENTRY>Accrued Gain Asset</ENTRY>
<ENTRY>-$5000</ENTRY>
</ROW>
<ROW>
<ENTRY>Realized Gain Income</ENTRY>
<ENTRY>-$39000</ENTRY>
</ROW>
<ROW>
<ENTRY>Accrued Gain Income</ENTRY>
<ENTRY>$5000</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>
      
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<PARA>In practice, it is very important to keep the <EMPHASIS>Accrued
    Gain Income</EMPHASIS> separate from the <EMPHASIS>Realized Gain
    Income,</EMPHASIS> as the former is likely to be ignored by your tax
    authorities, who will only care to charge you on the 
    <EMPHASIS>Realized Gain.</EMPHASIS>

    </PARA>
<PARA>Below, we show the second case discussed.
    <INLINEMEDIAOBJECT>
<IMAGEOBJECT>
<IMAGEDATA FILEREF="image/appr-main2.png">
</IMAGEOBJECT>
<TEXTOBJECT>
<PHRASE>Main window after sale</PHRASE>
</TEXTOBJECT>
</INLINEMEDIAOBJECT>
     <INLINEMEDIAOBJECT>
<IMAGEOBJECT>
<IMAGEDATA FILEREF="image/appr-asset2.png">
</IMAGEOBJECT>
<TEXTOBJECT>
<PHRASE>Asset account after sale</PHRASE>
</TEXTOBJECT>
</INLINEMEDIAOBJECT> 

    </PARA>
</SECT3>
</SECT2>
<SECT2>
<TITLE>Caution about Valuation</TITLE>
<PARA>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."
    </PARA>

<PARA>When dealing with appreciation of assets,

    <ITEMIZEDLIST>
<LISTITEM>
<PARA>Be careful with your estimation of values. 
      Do not indulge in wishful thinking.
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>Never, ever, count on money you do not have in your bank or
      as cash. 
      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 <EMPHASIS>cash,</EMPHASIS> precisely because "valuable
      assets" were not the same thing as cash.
      
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
</SECT2>
<SECT2>
<TITLE>Taxation of Capital Gains</TITLE>
<PARA>    </PARA>
<PARA>Taxation policies vary considerably between countries, so it
    is virtually impossible to say anything that will be
    universally useful.
    However, it is <EMPHASIS>common</EMPHASIS> 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 <EMPHASIS>usually</EMPHASIS> 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.

    </PARA>

<PARA><ULINK URL="mailto:cbbrowne@hex.net">I have</ULINK> one story
from my professional tax preparation days where a family sold a farm,
and expected a <EMPHASIS>considerable</EMPHASIS> 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 <EMPHASIS>dairy</EMPHASIS> farm, with some <EMPHASIS>really
peculiar</EMPHASIS> resulting deductions.  
The point of this story is that while the presentation here is
fairly simple, taxation often gets terribly complicated...  </PARA>

</SECT2>
</SECT1>
<SECT1 ID="XACC-DEPR">
<TITLE>Depreciation of Assets</TITLE>
<PARA>Compared to the often uncertain estimates one has to do
    where appreciation of assets is concerned, we are on somewhat
    firmer ground here.

    <ITEMIZEDLIST>
<LISTITEM>
<PARA>Governments tend to set up precise rules as to how you
      are required to calculate depreciation for tax purposes.
      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>It is easy to look up in references such as "Blue Books"
      estimates of what an automobile should be worth after 3 years
      of use.
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<PARA>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.

    </PARA>
<PARA>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.

    </PARA>
<SECT2>
<TITLE>Depreciation schemes</TITLE>
<SECT3>
<TITLE>Linear Sepreciation</TITLE>
<PARA>Linear depreciation diminishes the value of an asset by a
    fixed amount each period until the net value is zero. This is
    the <EMPHASIS>simplest</EMPHASIS> calculation, as you estimate a useful
    lifetime, and simply divide the cost equally across that
    lifetime.

    </PARA>
<PARA><EMPHASIS>Example:</EMPHASIS> 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:
    

    <TABLE>
<TITLE>Example 1</TITLE>
<TGROUP COLS="3">
<THEAD>
<ROW>
<ENTRY>Year</ENTRY>
<ENTRY>Depreciation</ENTRY>
<ENTRY>Remaining Value</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>1</ENTRY>
<ENTRY>300</ENTRY>
<ENTRY>1200</ENTRY>
</ROW>
<ROW>
<ENTRY>2</ENTRY>
<ENTRY>300</ENTRY>
<ENTRY>900</ENTRY>
</ROW>
<ROW>
<ENTRY>3</ENTRY>
<ENTRY>300</ENTRY>
<ENTRY>600</ENTRY>
</ROW>
<ROW>
<ENTRY>4</ENTRY>
<ENTRY>300</ENTRY>
<ENTRY>300</ENTRY>
</ROW>
<ROW>
<ENTRY>5</ENTRY>
<ENTRY>300</ENTRY>
<ENTRY>0</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

    </PARA>
</SECT3>
<SECT3>
<TITLE>Geometric Depreciation</TITLE>
<PARA>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 ( <EMPHASIS>i.e.</EMPHASIS> - a resale
    value).

    </PARA>
<PARA><EMPHASIS>Beware: Tax authorities may require (or allow) a larger
    percentage in the first period.</EMPHASIS> On the other hand, in
    Canada, this is reversed, as they permit only a <EMPHASIS>half</EMPHASIS>
    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 <EMPHASIS>    probably</EMPHASIS> more realistic for most assets than a linear
    scheme. This is certainly true for automobiles.

    </PARA>
<PARA><EMPHASIS>Example:</EMPHASIS> We take the same example as above,
    with an annual depreciation of 30%.

    <TABLE>
<TITLE>Example 2</TITLE>
<TGROUP COLS="3">
<THEAD>
<ROW>
<ENTRY>Year</ENTRY>
<ENTRY>Depreciation</ENTRY>
<ENTRY>Remaining Value</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>1</ENTRY>
<ENTRY>450</ENTRY>
<ENTRY>1050</ENTRY>
</ROW>
<ROW>
<ENTRY>2</ENTRY>
<ENTRY>315</ENTRY>
<ENTRY>735</ENTRY>
</ROW>
<ROW>
<ENTRY>3</ENTRY>
<ENTRY>220.50</ENTRY>
<ENTRY>514.50</ENTRY>
</ROW>
<ROW>
<ENTRY>4</ENTRY>
<ENTRY>154.35</ENTRY>
<ENTRY>360.15</ENTRY>
</ROW>
<ROW>
<ENTRY>5</ENTRY>
<ENTRY>108.05</ENTRY>
<ENTRY>252.10</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

    </PARA>
</SECT3>
<SECT3>
<TITLE>Sum of digits</TITLE>
<PARA>A third method most often employed in Anglo/Saxon countries
    is the "sum of digits" method. Here is an illustration:

    </PARA>
<PARA><EMPHASIS>Example:</EMPHASIS> First you divide the asset value
    by the sum of the years of use, <EMPHASIS>e.g.</EMPHASIS> 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:

    <TABLE>
<TITLE>Example 3</TITLE>
<TGROUP COLS="3">
<THEAD>
<ROW>
<ENTRY>Year</ENTRY>
<ENTRY>Depreciation</ENTRY>
<ENTRY>Remaining Value</ENTRY>
</ROW>
</THEAD>
<TBODY>
<ROW>
<ENTRY>1</ENTRY>
<ENTRY>100*5=500</ENTRY>
<ENTRY>1000</ENTRY>
</ROW>
<ROW>
<ENTRY>2</ENTRY>
<ENTRY>100*4=400</ENTRY>
<ENTRY>600</ENTRY>
</ROW>
<ROW>
<ENTRY>3</ENTRY>
<ENTRY>100*3=300</ENTRY>
<ENTRY>300</ENTRY>
</ROW>
<ROW>
<ENTRY>4</ENTRY>
<ENTRY>100*2=200</ENTRY>
<ENTRY>100</ENTRY>
</ROW>
<ROW>
<ENTRY>5</ENTRY>
<ENTRY>100*1=100</ENTRY>
<ENTRY>0</ENTRY>
</ROW>
</TBODY>
</TGROUP>
</TABLE>

    </PARA>
</SECT3>
</SECT2>
<SECT2>
<TITLE>The Handling of Depreciation in GnuCash</TITLE>
<PARA>In order to keep track of the depreciation of an asset, you
    need :

    <ITEMIZEDLIST>
<LISTITEM>
<PARA>An <EMPHASIS>Asset Cost</EMPHASIS> asset account to keep track of the
      original value;

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>An <EMPHASIS>Accumulated Depreciation</EMPHASIS> asset account in
      which to collect the sum of all of the years' depreciation
      amounts;

      </PARA>
</LISTITEM>
<LISTITEM>
<PARA>A <EMPHASIS>Depreciation Expense</EMPHASIS> expense account in which
      to record periodic depreciation expenses.
    </PARA>
</LISTITEM>
</ITEMIZEDLIST>

    </PARA>
<PARA>The first step is to record the purchase of your
    asset by transferring the money from bank bank account to the
    <EMPHASIS>asset cost</EMPHASIS> 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.
    <INLINEMEDIAOBJECT>
<IMAGEOBJECT>
<IMAGEDATA FILEREF="image/depr-asset.png">
</IMAGEOBJECT>
<TEXTOBJECT>
<PHRASE>Asset account after depreciation</PHRASE>
</TEXTOBJECT>
</INLINEMEDIAOBJECT>
     <INLINEMEDIAOBJECT>
<IMAGEOBJECT>
<IMAGEDATA FILEREF="image/depr-main.png">
</IMAGEOBJECT>
<TEXTOBJECT>
<PHRASE>Main window after depreciation</PHRASE>
</TEXTOBJECT>
</INLINEMEDIAOBJECT>
    

    </PARA>
</SECT2>
<SECT2>
<TITLE>A Word of Caution</TITLE>
<PARA>Since depreciation and tax issues are closely related, you
    may not always be free in choosing 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 <EMPHASIS>or required</EMPHASIS> to
    use.

</PARA>
</SECT2>
</SECT1>
</ARTICLE>

<!-- Local variables: -->
<!-- sgml-parent-document: "gnucash.sgml" -->
<!-- End: -->