assets, etc. more newbie questions

[Carol Champagne]

Brian Craft wrote:


> hmm.... ok. So there are two transactions. One tracks the incoming money.
> The other tracks the cost of materials. "cost of goods sold" is an expense
> account tracking your decreasing inventory. The difference between the
> two transactions is whatever profit/loss you made on the finished product.
> 
Looks that way in the example I see..


> Anyway, this sounds pretty complex for a hobby. ;)
Yes it does.  Depends on whether you want to track it like a business 
tracks inventory.  As a home user, you could probably just record the 
purchases as Quilt Expense and the income as Quilt Income.  Then you 
could run a report or graph to show your profit by selecting those two 
accounts in the report parameters.

> What happens when something breaks? Like say you're in a car accident, and
> you get some insurance. You can fix the car, or sell the car and keep the
> money, or keep the car and keep the money.
> 
> If you keep the car and keep the money, your "car" asset has decreased in
> value, and your cash asset has increased. Is the insurance payment a
> transfer from "car" asset to "cash" asset? Or is there an "insurance"
> income account that you transfer to cash, and a "stuff gets broke" expense
> account that you transfer "car" assets to? And in the latter case, how do
> you decide the amount to transfer from "car" to "stuff gets broke"? Do you
> just make it the same as the insurance payment? This would be another case
> of two related transactions that aren't actually connected in the books.

Hmmm...I don't know. :-) The main things you have to do are adjust your 
car asset down and adjust your cash asset up.   I don't think of the 
insurance payment as income, but I'm not sure.  I'd probably do a 
transaction that increases the cash account by the insurance amount, 
decreases the car asset by the "value lost" amount, and then put the 
difference between those two amounts in an expense account (auto loss, 
auto misc., stuff gets broke, etc.)  Of course, I'm assuming that the 
insurance company wouldn't pay enough to cover the loss of value on the 
car, so you'd have a net loss.  In the rare event that they pay more 
:-), I guess you'd call that difference insurance income.

 
> Is "stuff gets broke" the same thing as "depreciation"? Is depreciation an
> expense account?
Depreciation is an expense, but it's one primarily used by businesses 
because they can deduct it.  Home users usually can't, so it's not worth 
the trouble to calculate it.

Depreciation is the allocation of an asset's cost over the estimated 
life of the asset.  It has nothing to do with an asset's market value, 
so if the asset gets broken the depreciation doesn't change (unless the 
business writes down the asset and takes a loss.)  Accounting/govt. 
tables specify the estimated life based on the type of asset, and they 
also specify what depreciation formula should be used.  Instead of 
buying a piece of machinery and charging it to an expense account, a 
business is supposed to call that machinery an asset.  Each year, the 
business is allowed to deduct part of the cost of that asset as an 
expense, until the machine is fully depreciated.   Each year the 
business reduces the asset's value by the depreciation amount, which is 
expensed.  So if a business buys a $10K machine with est. life of 5 
years and uses straight-line dep., it can depreciate $2K of the machine 
each year until the machine is fully depreciated.  At that point, the 
machine is probably still worth something in the market, but its book 
value is 0.

Depreciation isn't really relevant to a home user unless there's some 
tax benefit to it (in the U.S., I don't think there is.) If an asset you 
own, like a car, has declined quite a bit in book value and you want to 
adjust the account to reflect the change, you can just do a transfer 
from the car asset account to an expense type account (call it 
depreciation or auto misc. or whatever you choose.)  This will adjust 
the value of the asset to the current book value and transfer the 
difference to expense, so you are effectively depreciating the asset. 
It's not necessary to use dep. tables or do regular depreciation as a 
home user, because this expense is not going to be tax deductible.

> Depreciation seems pretty magical to me. It seems very, very hard to know
> the "value" of something over time, and it seems like you might want different
> numbers for different purposes. Like from a tax perspective, you probably
> use the max percentage of depreciation allowed, to get the best write-off. But
> if you really want to assess where you stand, financially, you probably want
> a more conservative measure of depreciation. Like your "computer" assets may
> drop very low from the tax perspective, and on paper it may look like you
> need to buy more computers. But if they're actually in good condition, you
> don't want to waste money on new equipment you don't need.
Again, businesses depreciate asset cost based on govt. or accounting 
guidelines for the type of asset.  My understanding is that home users 
don't get a tax benefit out of doing this.

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