Assets purchase - a worked example (v2)

[guangong]

This is a refined version to accomplish the same goal from @simond
Assets - a worked example (feedback, please)

In the "real" world - the purchase
I bought the property for £100,000 on 21 June 2000. I was a "cash buyer" - lucky me. The legal etc. fees for the purchase were £1000. On 19 June the balance in my bank account was more than £102k, and on 20 June I transferred £101k to a conveyancing solicitor, who completed the purchase and registered the property in my name on 21 June. My net worth changed:

• from £102k on 19 June (all in the bank account)

• to £1k on 20 June (in the bank account)

• to a nominal £101k on 21 June (consisting of £1k in the bank account plus the property, assigned a market value of £100k)

In mmex - the purchase
Step 1. I have one bank account, opened before 2000-06-19, whose reconciled balance on 2000-06-19 is more than £101k. I can afford the property purchase.
To keep it simple, an initial balance was used here and we can check it from the dashboard too.

bank_account_creation.jpg

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asset_creation_balance.jpg

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Step 2. On 2000-06-19, I created an asset "property-1" with an initial value of £0 and an associated asset account also named "Property" or "property-1" with an initial balance of £0, i.e., before any property-related transactions.
Here is a recommended way:
We created an Asset Account first, then an asset with the exact name property-1. Both have £0 balance and would be linked via the name.

asset_account_creation.jpg

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asset_creation.jpg

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Step 3, I create a (non-asset) transaction on 2000-06-20 which transfers £100k from the bank account to the asset account and a withdrawal of £1k from the bank account, with payee "solicitor", on the same date.
Here is a recommended way:
transfer £101k only, and we can see the cash movement and will track the fee in an optimized way later.

bank_to_asset_101k.jpg

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dashboard_bank_to_asset_101k.jpg

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Step 4, I create a withdrawal/transfer asset transaction on 2000-06-21 for £100k, with payee "vendor".
Here is a recommended way:
we added an asset transaction to buy with the amount of £101k. then we spent £101k and got an asset worth £101k.

asset_buy_nav.jpg

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asset_buy_txn.jpg

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asset_cur_val_101k.jpg

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Step 5, Revalued the asset to its real worth: £100k. After purchase, the property’s real value was £100k. The £1k legal fee was already included in the £101k total, making this a more accurate reflection of investment cost and ROI or G/L calculations.

asset_revalue_100k.png

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asset_after_revalueation.png

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Step 6, apply 5 percent yearly growth

asset_add_rate_nav.png

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asset_add_rate_5_per_year.png

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asset_after_rate_5_per_year.png

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dashboard_after_rate_5_per_year.png

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At least, we can review all these steps

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[Nickallington]

I think there may be a decimal point in the wrong place in the below screens (10,000 instead of 101,000), but either way, the process is not as complete or simple as it could be. One logical problem is that you can pay FOR an asset, but you can't PAY an asset (as a payee).

In my view, this is one of those situations where an asset account would be opened at the purchase value, and not at zero (unlike bank accounts, which should always open at zero, until you transfer money in). The reason for this is that there is a disconnect between the buyer, the seller, and the asset. The easiest way of dealing with it is to pay the vendor and the solicitor, and separately, create the asset of the house at its purchase value. This keeps the net worth process simple. So assuming you have the money in your bank account, the transactions are:
1. DR bank account 100,000, CR vendor 100,000 (as a payment)
2. DR bank account 1,000, CR solicitor 1,000 (as a payment)
This has reduced your net worth by 101,000

Then, create the asset of the house at 100,000, and set an appreciation factor of x% based on market conditions. MMEX will then keep the value updated. Your net worth is now 1,000 less than it was at the start of the process, being the payment to the solicitor, with the asset offsetting the reduction of 100,000 from the bank account.

The limitation is that periodically you have to revise the actual value of the house, as it may not appreciate at the same rate as the percentage you entered, and I think the only way to get MMEX to display the actual value at any given revaluation date is to get an outside assessment of its value, and then recalculate and enter the percentage rate so that the displayed current value is the same as the external estimate (current value/initial value-1). The limitation is that this way MMEX has only 2 valuations - original purchase, and current estimate. There is no history of intervening adjustments in value, so you can't track when it has been going up faster, or indeed going down and then up again.

[guangong]

Thanks @Nickallington for commenting.

Everything would be better if we thought the asset account was a vendor. so we paid a vendor £101k and the vendor bought the asset worth £100k. with this abstract layer, we can link them well.

Sure, we can track the £1k with details as a separate payment transaction as you mentioned, or think it is part of the asset purchase. Both are supported in MMEX.

[Nickallington]

OK, I tried this and it does work, but it is much more effort than my simplified version! Also, the solicitors fees do not create an asset, so they should really be treated separately as an expense rather than an adjustment to the asset value, as you have to account for the expense.

In some countries, like UK, you don't actually pay the vendor. You pay the solicitor, and the solicitor pays the vendor. So you would actually be able to pay the solicitor and account for both in a split transaction - asset purchase, and fees.

What would be good would be to have the asset purchase function generate the asset at the same time, a bit like buying shares in the proposed update to the investments module.

[guangong]

cool. If we consider the purchase, revaluation, and sale as a whole, this would be much simpler, actually. The asset account itself would have sufficient metrics to indicate its g/l/roi and the necessary operations to trade them.

The £1k fee would be tracked as you prefer and depends on whether you count it as the cost of the asset purchase.

It is true today that asset purchases will update to the linked asset account.
Refer to Step 4 in MMEX Asset Purchase - A Worked Example