mirror of https://github.com/Gnucash/gnucash
You can not select more than 25 topics
Topics must start with a letter or number, can include dashes ('-') and can be up to 35 characters long.
716 lines
20 KiB
716 lines
20 KiB
<!DOCTYPE html PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN">
|
|
|
|
<html>
|
|
<head>
|
|
<meta name="generator" content="HTML Tidy, see www.w3.org">
|
|
<link rel="stylesheet" title="normal" type="text/css" href=
|
|
"gnucash.css">
|
|
|
|
<title>Depreciation and Capital Gains</title>
|
|
</head>
|
|
|
|
<body>
|
|
<h1>Depreciation and Capital Gains</h1>
|
|
|
|
<p>This section provides a treatment of the handling of
|
|
depreciation and appreciation of assets in GnuCash.</p>
|
|
|
|
<p>It also provides a brief introduction to the related tax
|
|
issues.</p>
|
|
|
|
<p><b>Warning:</b> <em>Be aware that different countries can
|
|
have <b>substantially</b> 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.</em></p>
|
|
|
|
<p>Note that appreciation and depreciation of assets tend to be
|
|
treated somewhat differently:</p>
|
|
|
|
<ul>
|
|
<li>
|
|
<a href="#depr">Depreciation</a> is <em>usually</em>
|
|
recognized (the technical term is <b>accrued</b>) as an
|
|
expense on an ongoing basis, gradually reducing the value
|
|
of an asset towards zero.
|
|
|
|
<p>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.</p>
|
|
</li>
|
|
|
|
<li>
|
|
In contrast, <a href="#appr">Capital Gains,</a> which could
|
|
be called <em>asset value appreciation,</em> are typically
|
|
<em>not</em> recognized until some time down the road when
|
|
the asset is sold, and at that <em>instant,</em> the entire
|
|
gain becomes income.
|
|
|
|
<p>Unlike depreciation, governments tend to be <em>quite
|
|
interested</em> in taxing capital gains in one manner or
|
|
another.</p>
|
|
|
|
<p>(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 <em>accrued interest,</em> or <em>imputed
|
|
interest</em> are often there to scare those that are
|
|
sensitive to such things...)</p>
|
|
</li>
|
|
</ul>
|
|
|
|
<h1>Capital Gains - Asset Appreciation</h1>
|
|
<a name="appr"></a>
|
|
|
|
<p>Appreciation 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 <em>until you actually sell the asset.</em></p>
|
|
|
|
<p>If you invest in <a href="xacc-ticker.html">securities</a>
|
|
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 <b>Market Order.</b></p>
|
|
|
|
<p>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.</p>
|
|
|
|
<p>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.</p>
|
|
|
|
<p>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 <em>worthless</em> outside of that very
|
|
specific context. In such cases, there several conflicting
|
|
values might be attached to the asset, <em>none</em> of them
|
|
unambiguously correct.</p>
|
|
|
|
<p>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.)</p>
|
|
|
|
<p>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):</p>
|
|
|
|
<ul>
|
|
<li>An <em>Asset Cost</em> asset account to track the
|
|
original cost of the painting,</li>
|
|
|
|
<li>An <em>Accrued Unrealized Gains on Asset</em> asset
|
|
account to keep track of increases in value, and</li>
|
|
|
|
<li>An <em>Accrued Gain On Asset Income</em> income account
|
|
in which to record the income side of the annual gains in
|
|
your riches, and</li>
|
|
|
|
<li>A <em>Realized Gain On Asset Income</em> income account
|
|
in which to record the realized income when you sell the
|
|
asset.</li>
|
|
</ul>
|
|
|
|
<p>The <em>accrued gains</em> likely won't affect your taxable
|
|
income for <em>income</em> tax purposes, although it could have
|
|
some effect on <em>property</em> taxes.</p>
|
|
|
|
<h2>The handling of capital gains in GnuCash</h2>
|
|
|
|
<h3>The Acquisition</h3>
|
|
|
|
<p>The first thing you have to do is to create the <em>asset
|
|
cost account</em>, then transfer the sum you paid for this
|
|
painting from your bank account to this asset account to record
|
|
the purchase.</p>
|
|
|
|
<p>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 <em>accrued gains on asset</em>
|
|
income account to your asset account.</p>
|
|
|
|
<p>Your main window will resemble this:</p>
|
|
<img src="appr-main1.gif" alt=
|
|
"Main window after purchase and appreciation">
|
|
|
|
<p>and your asset account will resemble this:</p>
|
|
<img src="appr-asset1.gif" alt=
|
|
"Asset account after purchase and appreciation">
|
|
|
|
<h3>While You Hold the Asset</h3>
|
|
|
|
<p>Asset appreciation is a sort of income but it is <em>
|
|
not</em> cash in hand.</p>
|
|
|
|
<p>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
|
|
<em>theoretically</em> valued at millions of dollars USD.</p>
|
|
|
|
<p>That doesn't mean that they are actually millionaires; the
|
|
principal participants have to hold their stock for at least
|
|
six months before selling <em>any</em> of it. The fact that
|
|
they <em>can't</em> 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 <em>get</em> those
|
|
millions.</p>
|
|
|
|
<h3>Selling the Asset</h3>
|
|
|
|
<p>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.</p>
|
|
|
|
<p>Now there arise three possibilities:</p>
|
|
|
|
<ol>
|
|
<li>
|
|
Your optimistic estimate of the painting´s value was
|
|
correct.
|
|
|
|
<p>The income account is left alone (or perhaps gets
|
|
transferred from an <em>Accrued Gain</em> income to a <em>
|
|
Realized Gain</em> income account), and the recording is
|
|
rather like:</p>
|
|
|
|
<table summary="BIGGAIN">
|
|
<tr>
|
|
<th>Account</th>
|
|
|
|
<th>Amount</th>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Cash</td>
|
|
|
|
<td>$16055</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Painting</td>
|
|
|
|
<td>-$11000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Realized Gain Income</td>
|
|
|
|
<td>-$5055</td>
|
|
</tr>
|
|
</table>
|
|
|
|
<p>And if any amounts had been accrued as <em>Accrued
|
|
Gains,</em> the asset amount should be closed out, offset
|
|
by a <em>negative</em> value for <em>Accrued Gain</em>
|
|
income. If the total that had been accrued was $5000, then
|
|
the transaction might look like the following:</p>
|
|
|
|
<table summary="BIGGAINACCRUEDTOO">
|
|
<tr>
|
|
<th>Account</th>
|
|
|
|
<th>Amount</th>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Cash</td>
|
|
|
|
<td>$16055</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Painting</td>
|
|
|
|
<td>-$11000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Accrued Gain Asset</td>
|
|
|
|
<td>-$5000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Realized Gain Income</td>
|
|
|
|
<td>-$5055</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Accrued Gain Income</td>
|
|
|
|
<td>$5000</td>
|
|
</tr>
|
|
</table>
|
|
|
|
<p>Note that the two income accounts offset one another so
|
|
that the <em>current</em> income resulting from the
|
|
transaction is only $55. The remaining $5000 had previously
|
|
been recognized as <em>Accrued Gain Income.</em></p>
|
|
</li>
|
|
|
|
<li>
|
|
You were over-optimistic about the value of the painting.
|
|
|
|
<p>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.</p>
|
|
|
|
<p>The numbers change a little bit, but not too
|
|
dramatically.</p>
|
|
|
|
<table summary="SMALLGAINACCRUEDTOO">
|
|
<tr>
|
|
<th>Account</th>
|
|
|
|
<th>Amount</th>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Cash</td>
|
|
|
|
<td>$15000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Painting</td>
|
|
|
|
<td>-$11000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Accrued Gain Asset</td>
|
|
|
|
<td>-$5000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Realized Gain Income</td>
|
|
|
|
<td>-$4000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Accrued Gain Income</td>
|
|
|
|
<td>$5000</td>
|
|
</tr>
|
|
</table>
|
|
|
|
<p>Note that the two income accounts offset one another so
|
|
that the <em>current</em> income resulting from the
|
|
transaction turns out to be a <em>loss</em> of $1000.
|
|
That's fine, as you had previously recognized $5000 in
|
|
income.</p>
|
|
</li>
|
|
|
|
<li>
|
|
You manage to sell your painting for more than you thought
|
|
in your wildest dreams.
|
|
|
|
<p>The extra value is, again, recorded as a gain, <em>
|
|
i.e.</em> an income.</p>
|
|
|
|
<table summary="HUGEGAIN">
|
|
<tr>
|
|
<th>Account</th>
|
|
|
|
<th>Amount</th>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Cash</td>
|
|
|
|
<td>$50000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Painting</td>
|
|
|
|
<td>-$11000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Accrued Gain Asset</td>
|
|
|
|
<td>-$5000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Realized Gain Income</td>
|
|
|
|
<td>-$39000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>Accrued Gain Income</td>
|
|
|
|
<td>$5000</td>
|
|
</tr>
|
|
</table>
|
|
</li>
|
|
</ol>
|
|
|
|
<p>In practice, it truly is important to keep the <em>Accrued
|
|
Gain Income</em> separate from the <em>Realized Gain
|
|
Income,</em> as the former is likely to be ignored by your tax
|
|
authorities, who will only care to charge you on the <em>
|
|
Realized Gain.</em></p>
|
|
|
|
<p>Below, we show the second case discussed.</p>
|
|
<img src="appr-main2.gif" alt="Main window after sale"><br
|
|
clear="ALL">
|
|
<img src="appr-asset2.gif" alt="Asset account after sale">
|
|
|
|
<h2>Caution about Valuation</h2>
|
|
|
|
<p>As we see in this example, for non-financial assets, it may
|
|
be difficult to correctly estimate the ``true'' value of an
|
|
asset.</p>
|
|
|
|
<p>It is quite easy to count yourself rich based on
|
|
questionable estimates that do not reflect "money in the
|
|
bank."</p>
|
|
|
|
<p>Thus, when dealing with appreciation of assets,</p>
|
|
|
|
<ol>
|
|
<li>
|
|
Be careful with your estimation of values.
|
|
|
|
<p>Do not indulge in wishful thinking.</p>
|
|
</li>
|
|
|
|
<li>
|
|
Never, ever, count on money you do not have in your bank or
|
|
as cash.
|
|
|
|
<p>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.</p>
|
|
|
|
<p>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.</p>
|
|
|
|
<p>Be aware: all too many companies that appear
|
|
"profitable" on paper go out of business as a result of
|
|
running out of <em>cash,</em> precisely because "valuable
|
|
assets" were not the same thing as cash.</p>
|
|
</li>
|
|
</ol>
|
|
|
|
<h2>Taxation of Capital Gains</h2>
|
|
|
|
<p>Taxation policies vary considerably between countries, so it
|
|
is virtually impossible to say anything that will be
|
|
universally useful.</p>
|
|
|
|
<p>However, it is <em>common</em> 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.</p>
|
|
|
|
<p>North American home owners <em>usually</em> 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.</p>
|
|
|
|
<p><a href="mailto:cbbrowne@hex.net">I have</a> one story from
|
|
my professional tax preparation days where a family sold a
|
|
farm, and expected a <em>considerable</em> 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 <em>dairy</em> farm, with some <em>really
|
|
peculiar</em> resulting deductions.</p>
|
|
|
|
<p>In short, this presentation is fairly simple, but taxation
|
|
often gets terribly complicated...</p>
|
|
|
|
<h1>Depreciation of assets</h1>
|
|
<a name="depr"></a>
|
|
|
|
<p>Compared to the often uncertain estimates one has to do
|
|
where appreciation of assets is concerned, we are on somewhat
|
|
firmer ground here.</p>
|
|
|
|
<ul>
|
|
<li>Governments tend to set up precise rules as to how you
|
|
are required to calculate depreciation for tax purposes.</li>
|
|
|
|
<li>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.</li>
|
|
</ul>
|
|
|
|
<p>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.</p>
|
|
|
|
<p>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.</p>
|
|
|
|
<h2>Depreciation schemes</h2>
|
|
|
|
<h3>Linear depreciation</h3>
|
|
|
|
<p>Linear depreciation diminishes the value of an asset by a
|
|
fixed amount each period until the net value is zero. This is
|
|
the <em>simplest</em> calculation, as you estimate a useful
|
|
lifetime, and simply divide the cost equally across that
|
|
lifetime.</p>
|
|
|
|
<p><b>Example:</b> 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:<br clear="ALL">
|
|
</p>
|
|
|
|
<table summary="Example 1">
|
|
<tr>
|
|
<th>Year</th>
|
|
|
|
<th>Depreciation</th>
|
|
|
|
<th>Remaining Value</th>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>1</td>
|
|
|
|
<td>300</td>
|
|
|
|
<td>1200</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>2</td>
|
|
|
|
<td>300</td>
|
|
|
|
<td>900</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>3</td>
|
|
|
|
<td>300</td>
|
|
|
|
<td>600</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>4</td>
|
|
|
|
<td>300</td>
|
|
|
|
<td>300</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>5</td>
|
|
|
|
<td>300</td>
|
|
|
|
<td>0</td>
|
|
</tr>
|
|
</table>
|
|
|
|
<h3>Geometric Depreciation</h3>
|
|
|
|
<p>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 ( <em>i.e.</em> - a resale
|
|
value).</p>
|
|
|
|
<p><em>Beware: Tax authorities may require (or allow) a larger
|
|
percentage in the first period.</em> On the other hand, in
|
|
Canada, this is reversed, as they permit only a <em>half</em>
|
|
share of "Capital Cost Allowance" in the first year.</p>
|
|
|
|
<p>The result of this approach is that asset value decreases
|
|
more rapidly at the beginning than at the end which is <em>
|
|
probably</em> more realistic for most assets than a linear
|
|
scheme. This is certainly true for automobiles.</p>
|
|
|
|
<p><strong>Example:</strong> We take the same example as above,
|
|
with an annual depreciation of 30%.</p>
|
|
|
|
<table summary="Example 2">
|
|
<tr>
|
|
<th>Year</th>
|
|
|
|
<th>Depreciation</th>
|
|
|
|
<th>Remaining Value</th>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>1</td>
|
|
|
|
<td>450</td>
|
|
|
|
<td>1050</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>2</td>
|
|
|
|
<td>315</td>
|
|
|
|
<td>735</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>3</td>
|
|
|
|
<td>220.50</td>
|
|
|
|
<td>514.50</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>4</td>
|
|
|
|
<td>154.35</td>
|
|
|
|
<td>360.15</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>5</td>
|
|
|
|
<td>108.05</td>
|
|
|
|
<td>252.10</td>
|
|
</tr>
|
|
</table>
|
|
|
|
<h3>Sum of digits</h3>
|
|
|
|
<p>A third method most often employed in Anglo/Saxon countries
|
|
is the "sum of digits" method. Here is an illustration:</p>
|
|
|
|
<p><strong>Example:</strong> First you divide the asset value
|
|
by the sum of the years of use, <em>e.g.</em> 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:</p>
|
|
|
|
<table summary="Example 3">
|
|
<tr>
|
|
<th>Year</th>
|
|
|
|
<th>Depreciation</th>
|
|
|
|
<th>Remaining Value</th>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>1</td>
|
|
|
|
<td>100*5=500</td>
|
|
|
|
<td>1000</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>2</td>
|
|
|
|
<td>100*4=400</td>
|
|
|
|
<td>600</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>3</td>
|
|
|
|
<td>100*3=300</td>
|
|
|
|
<td>300</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>4</td>
|
|
|
|
<td>100*2=200</td>
|
|
|
|
<td>100</td>
|
|
</tr>
|
|
|
|
<tr>
|
|
<td>5</td>
|
|
|
|
<td>100*1=100</td>
|
|
|
|
<td>0</td>
|
|
</tr>
|
|
</table>
|
|
|
|
<h2>The handling of depreciation in gnucash</h2>
|
|
|
|
<p>In order to keep track of the depreciation of an asset, you
|
|
need :</p>
|
|
|
|
<ul>
|
|
<li>An <em>Asset Cost</em> asset account to keep track of the
|
|
original value;</li>
|
|
|
|
<li>An <em>Accumulated Depreciation</em> asset account in
|
|
which to collect the sum of all of the years' depreciation
|
|
amounts;</li>
|
|
|
|
<li>A <em>Depreciation Expense</em> expense account in which
|
|
to record periodic depreciation expenses.</li>
|
|
</ul>
|
|
|
|
<p>The first step, again, is to record the purchase of your
|
|
asset by transferring the money from bank bank account to the
|
|
<em>asset cost</em> account. Afterwards, in each accounting
|
|
period you record the depreciation as an expense in the
|
|
appropriate account.</p>
|
|
|
|
<p>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.</p>
|
|
<img src="depr-asset.gif" alt=
|
|
"Asset account after depreciation"><br clear="ALL">
|
|
<img src="depr-main.gif" alt="Main window after depreciation">
|
|
|
|
|
|
<h2>A word of caution</h2>
|
|
|
|
<p>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 <em>or required</em> to
|
|
use.</p>
|
|
|
|
<p>Return to <a href="xacc-main.html">Main Documentation
|
|
Page.</a></p>
|
|
</body>
|
|
</html>
|
|
|