[Fwd: Depreciation]

[Carol Champagne]

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>From - Mon Mar 19 17:07:42 2001
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Date: Mon, 19 Mar 2001 17:07:38 -0600
From: Carol Champagne <carol@gnumatic.com>
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To: ghaverla@freenet.edmonton.ab.ca
CC: gnucash-user@gnumatic.com
Subject: Re: Depreciation
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ghaverla@freenet.edmonton.ab.ca wrote:

> How does one combine an capital account, and the 3 
> depreciation accounts (accumulation, asset and expense)
> to track how capital purchases depreciate?  The manual
> mentions the 4 accounts, but I can't see how there
> is an example anywhere of how this works.

I think the 4 types of GnuCash accounts you need are:
Cash or Bank (for the money to buy the asset)
Asset (for the asset you are purchasing)
Asset (for the accumulated depreciation)
Expense (for the yearly depreciation expense)

According to my accounting textbook, this is what you do:

1. Buy the asset:

Dr. Asset (purchase price)  $10000
      Cr. Cash (or Bank)             $10000

2. Record each year's depreciation:

Dr. Depreciation expense   $1800
       Cr. Accumulated depreciation  $1800

Accum. depreciation is classified as a "contra asset" account.
It is an asset account that carries a credit balance instead of a
debit balance, so it works opposite a regular asset account.  On the 
balance sheet, the accumulated depreciation balance is subtracted
from the asset balance to get the asset's book value.  Each year the 
balance of the accum. dep. account increases until the end of the 
asset's useful life. At that point, the asset's book value is
called its salvage value (amount it's worth at the end of its life).

In the example above, I buy an asset for $10000 and estimate its
salvage value at $1000.  The asset has a 5-year life, so the 
straight-line dep. is (10000 - 1000)/5 = 1800. At the end of the
first year, the asset balance is 10000 and the accum. dep. balance is 
1800.  The balance sheet would show the book value as
  10000 - 1800 = 8200.  At the end of 5 years, the balance sheet shows 
the book value as 10000 - (1800 x 5) = 1000--the salvage value.

I think (but am not sure) that once the asset is fully depreciated
down to salvage value, you don't have to record anything else until
you get ready to sell it or dispose it.

3. Sale of asset at a gain
If you sell the asset at a gain, you need an additional account for the 
gain:

Dr. Cash (amount received)        5000
Dr. Accum. dep. (account balance) 9000
           Cr. Asset (account balance)            10000
           Cr. Gain on Disposal(an income account) 4000

4. Sale of  asset at a loss
If it's sold at a loss:

Dr. Cash (amt. received)              500
Dr. Accum. dep.(bal. in account)     9000
Dr. Loss on Disposal (expense account)500
          Cr. Asset (balance in account)          10000
	

Hope that helps--I'm not an accountant, so somebody jump in if this is
incorrect.

Carol Champagne



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