Original text:

This chapter will present some of the techniques used to keep track of the changing values of assets, IE: depreciation, unrealized gains, capital gains.

Certain resellable assets can change value over time, such as stocks, bonds, houses, or cars. Some assets (eg: a stock) could increase in value, some (eg: a car) could decrease in value. It is important to be able to track some of these time-dependent asset valuations, this chapter will show you how.

Probably everything you own will increase or decrease in value over time. So, the question is for which of these assets should you track this changing value? The simple answer is that you only need to track this for items which could be sold for cash in the future or which relate to taxation.

Consumable and disposable items (eg: food, gas for your car, or printer paper) are obviously not involved. Thus, even though the new clothes you recently bought will certainly depreciate, you would not want to track this depreciation since you have no intention of reselling the clothes and there is no tax implications to the depreciation on clothing. So, for this example, the purchase of new clothes should be recorded as a pure expense... you spent the money, and it is gone.

Depreciation is the effect in which the value of an asset decreases with time. The often used example of an asset to which this is often applied is an automobile. An automobile holds retained value after the purchase date, but this value decreases with time. If you hold assets for business purposes, their depreciation can be treated as a deduction for tax purposes.

Depreciation is usually recognized as an ongoing (accrued) expense, gradually reducing the value of an asset toward zero.

Normally, depreciation is 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 usually pointless to bother with the procedure if it's not deductible. The only case where you may want to track depreciation for personal assets would be if you will sell the asset in the future and you want to track your potential personal worth. 

New text:

11.1. Basic Concepts and definitions
There are two reasons that you may wan't to record depreciation:

   1. You are doing bookkeeping for your own personal finances, and you would like to keep track of your net worth,
   2. You are doing bookkeeping for a small busines and need to produce a financial statement from which you will prepare your tax return.

The method of recording depreciation is the same in either case. but the end goal is different.  This section will discuss the differences between the two. But first, some definitions.

Net book value - this is the difference between the original cost and the depreciation taken to date.
Salvage value - this is the value that you estimate the asset can be sold for at the end of it's useful life (to you).
Book depreciation - this is the amount of depreciation that you record in GNUCash.
Tax depreciation - this is the amount of depreciation that you take for income tax purposes.
Original cost - this is the amount that the asset cost you to purchase.  It includes any cost to get the asset into a condition in which you can use it.  For example - shipping, installation costs, special training.
Fair market value - the amount for which an asset could be sold at a given time.

11.1.1 Personal finances

If you are using GNUCash to keep track of your personal finances, you can use depreciation to keep track of the current value of your personal assets.  For example, if you owned a car you can keep track of the current value of it by recording depreciation every year.  To accomplish this, you record the original purchase as an asset and the record book depreciation as an expense each year (See section 11.4 for an example).  This would result in the net book value equalling the fair market value of the asset at the end of the year.

In most countries, assets are recorded at the lower of cost or fair maket value.  This means that if an asset were to increase in value, you would not record this increase on your books.  An example of this would be a house.  If you bought a house for $100,000 this is what you would record it on in the books.  Since, in most places, houses go up in value, it would stay on the books at $100,000 until the day you sold it.  But, because you are using GNUCash for your own personal finances and not for tax purposes, if you wanted to record the increase in value of the house, you could.  The only difference is that you would have to do the opposite of the example in section 11.4.  In other words, instead of debiting the expense and crediting the asset accounts, you would debit the asset account and credit a revenue account.

11.1.2 Small business 

One of the basic concepts in accounting is the matching of revenues and expenses.  When you purchase a capital asset (e.g. car, computer, equipment), you will use this asset to earn income for a number of years.  Instead of expensing the cost of the asset in the year it was purchased, you expense a portion of the cost each year in a manner that matches flow of revenue.   This process is called depreciation.

Now, what purchases should be capitalized?   If you expect something that you purchase to help you earn income for more than just the current year, then it should be capitalized.  This includes things like land, buildings, equipment, automobiles, and computers - as long as they are used for business purposes. It does not include items that would be considered inventory.  So if you made a purchase with the intent to resell the item, it should not be capitalized. 

In addition to the purchase of the asset itself, any costs associated with getting the asset into a condition so that you can use it should be capitalized.  For example, if you buy a peice of equipment and it needs to be shipped from out of town, and then some electrical work needs to be done so you can plug the machine in, and some specialized training is needed so you know how to use the machine, all these costs would be included in the cost of the equipment.

You also need to know the estimated salvage value of the asset.  Generally, this is assumed to be zero.  The idea behind knowing the salvage value is that the asset will be depreciated untill the net book value (cost less depreciation) equals the salvage value.  Then, when the asset is written off, you will not have a gain or loss resulting from the disposal of the asset.

The last step is to determine the method of depreciation that you want to use.  This will be discussed on the next few pages.