RFC: Chapter 8 Tutorial/Guide

[Jon Lapham]

Wow, Chris, thanks for all the feedback.  This is exactly what I was
hoping for.

Chris Lyttle wrote:
> On Thu, 2003-07-10 at 08:43, Jon Lapham wrote:
> 
> 
>>=================================
>>assetloan_concepts1.html
>>compare to:
>>
>>This is the intro to the chapter.  My only question to the list for this 
>>page is whether you think these 3 subjects belong in the same chapter 
>>(asset depreciation, asset appreciation, and loans).  It seems to me 
>>that loans are a different animal?  No?
>>
> 
> Well, the title of the chapter does have 'loans' in it, I think that
> even though you have renamed the chapter to 'Monitoring Assets and
> Loans' (I'm not sure what 'monitoring' means in this context, it doesn't
> seem to me to clearly state what the chapter is about) that it should
> generally be a chapter about how to deal with 'things that affect the
> value of what you own' and to me that's loans, interest, appreciation
> and depreciation. 

Except that a loan is (I imagine) a liability, not an asset.  So,
really, this is a chapter on the changing values of things you *own or
owe*.  Right?

Yeah, I do not like the title either.  Hmmm, what was it called
before... ah, here it is.  "Chapter 8: Assets and Loans".  The reason I
changed the title was because by chapter 8 the users have already worked
quite a lot with "Assets", so it didn't seem clear to me from the title
what new territory this chapter dealt with.  So, I stuck the word
"monitoring" in front... to imply that the chapter is about the
*changing values* of assets and loans.  No, not very good is it?

Other ideas:
Assets and Loans (the original)
Asset Appreciation/Depreciation and Loans
Handling Changing Values of Assets and Loans
Changing Values of Assets and Loans
Asset Depreciation, Capital Gains, and Loans

Ah, hell, maybe the original title is the best.  Short and sweet.

> BTW, I really think you should try to rewrite these
> rather than cutting and pasting them as is (if that's what you've done).

I put most of the original text in, and added some of my own.  I wanted
to make sure to begin without losing any of the original work.  Now, I
can go though and rewrite parts once I fully grok the concepts.

> My comments on the text of this section are;
> - A lot of the language used here is technical and vague, for example
> 'The prototypical example of a asset to which this is often applied is
> an automobile.' 

Ah, yes, this would be one of my gems.  I'll rewrite this to be less
technical.  s/prototypical/often used/

> and 'Usually asset appreciation is called Capital Gains,
> and are typically not recognized until the asset is sold. At the instant
> the asset is sold, the entire gain becomes income.' 

This is pretty much directly from the 1.6 documentation.

It just occured to me what is the difference between asset appreciation
and capital gains.  Asset appreciation is the theoretical concept of the
increasing value of an asset (ie: the price of a stock you own
increases).  Capital gains is the hard nosed *real* profit you made when
selling the asset.  The reason why people never really talk about asset
appreciation is because asset appreciation is not taxed, while capital
gains is.  Correct?

Lets rewrite this intro:

Original:
When an asset increases in value over time, it undergoes appreciation.
Usually asset appreciation is called Capital Gains, and are typically
not recognized until the asset is sold. At the instant the asset is
sold, the entire gain becomes income. 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 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 used to scare those who
are sensitive to such things...)

Rewrite:
Asset appreciation occurs when something you own increases in value over
time.  When you sell this asset for more than you paid, the difference
is known as "capital gains".  An example of an asset from which you
could receive capital gains is a stock.  The accounting methods for
handling asset appreciation differs somewhat from depreciation because
usually you are only concerned with the moment you sell the asset and
receive capital gains (as opposed to the continuous nature of tracking
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 often require that you recognize interest each
year, and refuse this to be treated as a capital gain.)

better?


> Try to approach this
> as a user who doesn't understand accounting concepts such as asset
> appreciation and explain in relatively simple terms what a concept means
> when it must be used. Really the people who understand accounting are
> not going to spend much time in the tutorial, they'll basically be
> looking for 'how do I do this' type help. Also try to avoid big words
> like 'prototypical' no one really knows what they mean (I had to look it
> up) and using simpler words gets your meaning across far better. The
> above sentence would easily get its meaning across without that word.
> 

okay.


> 
>>=================================
>>asset_dep1.html
>>
>>This is the section on asset depreciation.  My questions for the list 
>>here is in section "8.2.3 Handling Depreciation in GnuCash".  This is 
>>directly copied from the 1.6 documentation, and it mentions that you 
>>need 3 accounts: "Asset Cost", "Accumulated Depreciation", and a 
>>"Depreciation Expense" account.  I do not understand what the 
>>Accumulated Depreciation account does.  It does not appear in the 
>>example.  Ideas?
>>
>>Also, if you have multiple assets you want to track, obviously you need 
>>multiple "Asset Cost" accounts.  But, can they share the same 
>>depreciation expenses account, or should they each have their own 
>>depreciation expense accounts?
>>
> 
> I like the way you have set out this chapter, it clearly define's at the
> beginning what depreciation is and why you would use it, then goes on to
> give concrete examples in section 8.2.2 on different schemes for
> depreciation. I think, though, in section 8.2.3 you didn't depreciate
> your asset correctly. Looking at my accountant's financial reports, he
> includes depreciation as an _asset_ in the balance sheet which is in the
> negative to offset the value of the asset. 

So, in other words, you have 2 asset accounts.  One is the asset with 
the value fixed at the purchase price (and never changes value), and a 
second with an increasing-with-time negative value to reflect the 
depreciation.

Something like this:

-Assets           + $300
   -Computer       + $1500   <- the "asset cost" account
   -Computer depr  - $1200   <- the "accumulated depreciation" account
-Expenses
   -Depreciation   + $1200   <- the "depreciation expense" account

For me, it seems that the "depreciation expense" account is always equal 
(but opposite sign) to the "accumulated depreciation" account... in this 
simple example anyway.

> If I'm correct about this (I
> may be wrong) Asset Cost would have the initial value and the
> depreciation would be put into the Accumulated Depreciation. The
> Depreciation Expense account would be used for expenses such as repairs
> on your car that increase its value (slightly) and therefore change its
> depreciation schedule. For example, if I buy a car it starts to
> depreciate the day I buy it. If I then go out and spend $$$ putting
> chrome wheels and a turbocharged engine in it this is an expense I pay
> out that increases it's resale value but the car in general will keep
> depreciating so the expense is 'periodic'.

Ugh, this is a bit more complicated... Maybe in this first example we 
should assume that there are no "upgrades" to the depreciating asset.  I 
could make a second example which contains this extra complication.

You need an expense account to double-entrify the accumulated 
depreciation account, no?  So, I figured that the Expenses:Depreciation 
account would be for that.

Chris-

let's get this depreciation stuff ironed out before dealing with the 
capital gains issues.  I'll respond to the rest of your email later.

Thanks a million!
-Jon


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  Jon Lapham  <lapham at extracta.com.br>          Rio de Janeiro, Brasil
  Work: Extracta Moléculas Naturais SA     http://www.extracta.com.br/
  Web: http://www.jandr.org/
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