How to track depreciation?

[David Harrison]

On 9/30/05, Mark Johnson <mrj001 at shaw.ca> wrote:
>
> David Harrison wrote:
>
> >
> > 1) Should I have been tracking depreciation on some regular basis over
> > the past years, to properly reflect its current value in
> > net-worth
> > statements? If so, how is that done?
> >
> >
> >
> > For an individual, I wouldn't normally track depreciation. For a
> > business, set up two accounts. The first is a sub account of the
> > asset account (call it accumulated depreciation), the second an
> > expense account (call it depreciation expense). Each year, make an
> > entry to credit the accumulated depreciation account and debit the
> > depreciation expense account. For tax purposes, the rate of
> > depreciation is set by tax law. For financial statement purposes, you
> > can pick whatever rate you want - as long as it is consistant and
> > reasonable (for the most part, we just match for financial statements
> > what we do for tax purposes).
> >
> As an individual (not an accountant), I did choose to estimate
> depreciation on my car. I did not want its purchase to show up as a
> one-time expense, as that would be very unrealistic for both expenses
> and assets. So I used an asset account, and an expense account
> (auto:depreciation). As it is a Pontiac, which I bought three years old
> for about half price, I estimated depreciation at 1.7% per month and
> have been entering monthly transactions ever since. I think this better
> reflects the ongoing cost of running the car, even though depreciation
> is not a cash expense for the month.
>
> Sadly, between moving and the car rusting faster than I had hoped, I now
> believe that it is significantly overvalued on my books. So I when I
> sell it, I will be doing what Marc is proposing as well - a large charge
> (though smaller than Marc's) to depreciation in one month.
>
> When you track it all, it's scary how much cars cost, isn't it? I've
> come to believe that they are a bad deal.


I hope not to confuse the issue more, but true depreciation (more correctly
called amortization now) isn't meant to write the asset down to reflect it's
value. It is, rather, the matching of expenses to revenue. To get even
deeper into it, you have to ask the question, what is the difference between
expenses and capital assets? Expenses are items purchased in order to
generate income in the current year. Assets are items purchased to generate
income in the current year and in future years. So in order to properly
reflect the expenses associated with the revenue generated in any given
year, you amortize the capital assets in a manner that matches the revenue
they generate.

Now, I know you're going to argue that my explanation is from a business
perspective, but you are keeping books for your own personal non-business
activities, and you're right. From a personal perspective, what I want to
know in regards to my assets is what are they worth. What I would do in that
case is record depreciation in a manner that reflects the value of the asset
at a particular time. For example, for my car I might look up the blue book
value of it at the end of the year and record depreciation to make the net
book value (cost less accumulated depreciation) equal the blue book value.

This method works fine for assets that depreciate, like cars and computers.
But, what about my house, or another asset that goes up in value? Would you
then record "negative depreciation"? If you are recording depreciation for
your car, then I would argue that you should.

I trust I haven't confused the issue more ;)

--
David Harrison, BAccS, CGA
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