Concepts guide - Depreciation

[Jon Lapham]

David Harrison wrote:
> On Fri, 29 Oct 2004 09:59:29 -0300, Jon Lapham <lapham at jandr.org> wrote:
>>Basic Concepts:
>>http://www.gnucash.org/docs/v1.8/C/gnucash-guide/dep_concepts1.html
>>
>>1) I added the first sentence definition "Depreciation is the account
>>method for tracking the decreasing value of an asset over time."  I know
>>that you do not like the "decreasing value" part of that definition, so
>>please suggest something else.  But, I think it is important that the
>>first sentence define in some way what we are talking about.  Remember,
>>this will be the first time many people read about this topic.
> 
> 
> The way that we have made the distinction between personal and
> business makes this a difficult definition.  On the personal side,
> your definition is correct. On the business side it's not.
> 
> So, on the business side, it's not so much that *I* don't like the
> "decreasing value" part, it's just that that's not the reason for
> depreciation.  If you were to buy a house as rental property, you
> would record depreciation on the house.  This would cause the net book
> value of the asset to go down.  However, in real terms the value of
> the house is going up (hopefully).
> 
> So a better definition would be "depreciation is the process of
> expensing capital purchases over time" or "the matching the expense of
> a capital purchase to the revenue generated by that asset".  My
> problem is wording it in such a way that the person reading it for the
> first time would understand it.  I look at the definition I just
> wrote, and I'm not sure if it's understandable enough for our reader. 
> What do you think?

Well, I think it is better to be accurate/complex than simple/wrong. 
So, I changed the definition to your "...expensing capital purchases 
over time...".

>>3) The list of terminology is great!
> 
> Thanks

Oh, I forgot to ask before.  The definition of "Book depreciation" 
should mention something about accurately reflecting resale value?  (as 
opposed to "tax depreciation") Or is that not true?

>>4) Do you think it is necessary to have the last paragraph for the
>>Personal Finances section that discusses estimating capital gains?
>>There is another chapter that talks about the subject... maybe we should
>>add a link to that chapter?
> 
> You're right.  I think a link to the unrealized gains section would be
> appropriate.

Okay, I just removed the paragraph.

>>6) I added the opening paragraph "Whereas in the personal finance world
>>depreciation is used to estimate net worth, in the business world
>>depreciation is used as a mechanism for receiving a tax deduction. As
>>such, it is highly regulated by tax laws."  I'm not sure this is the
>>best openning paragraph, but I think we need something that summarizes
>>the differences between personal finance and business finance.
> 
> 
> You're right, a summary is necessary.  In the business world, though,
> you are free to choose whatever depreciation scheme you want for your
> financial statements.  However, for tax purposes, the method is set. 
> What this leads to is a difference between net income on the financial
> statements and taxable income.  This isn't a problem, it's actually
> the norm.  In fact, at least here in Canada (and probably every
> country), there is a schedule on the corporate tax return that
> reconciles the difference.  On the personal tax return (for businesses
> that aren't incorporated) there is no such schedule, but the
> depreciation is calculated on it's own schedule and subtracted from
> your business income schedule after net income - in other words you
> don't enter on the tax return the depreciation that you entered into
> GNU Cash anyway.

All right, I re-wrote the openning paragraph.  Let me know what you think.

>>http://www.gnucash.org/docs/v1.8/C/gnucash-guide/dep_value1.html
>>
>>8) For the estimating depreciation, I was not sure if you wanted to
>>remove the section at the beginning that starts with "A central issue
>>...".  I think it is important that we mention some places you can go to
>>to get estimations of valuation (blue book for cars, tax laws).
> 
> I had intended to remove it.  I'll work these issues into the other
> sections.  The blue book value belongs in the "personal" section,
> while the tax law part belongs in the "business" section.

Okay, I'll leave it in for now, and remove it when it exists somewhere else.

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  Jon Lapham  <lapham at jandr.org>                Rio de Janeiro, Brasil
  Personal: http://www.jandr.org/
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