Unrealized gains

[Charles Day]

On Mon, Jun 30, 2008 at 8:37 AM, Charles Day <cedayiv at gmail.com> wrote:

> On Mon, Jun 30, 2008 at 7:09 AM, Derek Atkins <warlord at mit.edu> wrote:
>
>> Charles,
>>
>> Are you mixing Realized and Unrealized gains?  Unrealized gains
>> (or losses) occur every day when the value of an asset changes.
>> However you don't record unrealized gains.  You record REALIZED
>> gains, when you actually exchange one asset for another.
>>
>
> Recording only the realized gains will put the books out of balance. When
> you sell, you have a realized gain on the quantity sold and an unrealized
> gain on the quantity remaining. You have to record them both.
>
> Try removing the unrealized gain splits from either of the examples I
> attached previously and look how it throws off the trial balance.
>

Just to (hopefully) clarify, unrealized gains that occur PRIOR to a sale
don't have to be recorded until a sale actually occurs. I think that might
be what's throwing you off.

-Charles


> I just want to make sure you're using the correct terms before
>> we continue this discussion.
>>
>> -derek
>>
>> "Charles Day" <cedayiv at gmail.com> writes:
>>
>> > On Sun, Jun 29, 2008 at 3:46 PM, Charles Day <cedayiv at gmail.com> wrote:
>> >
>> >> I have attached a couple of examples of how messy it can become in the
>> >> current version of GnuCash when you sell currency or investments for a
>> gain
>> >> and keep the books in balance.
>> >>
>> >> The first file, 2eur, is an example of currency gains. The "home"
>> currency
>> >> is USD and there is a bank account named "USD Bank" that starts with
>> $1400.
>> >> $700 is converted to Euros and transferred to "EUR Bank". The remaining
>> $700
>> >> is also converted to Euros and transferred to "EUR Cash". What happens
>> if
>> >> the exchange rate changes slightly, and we spend some of that Euro cash
>> to
>> >> buy a nice dinner? It turns out that to keep the books in balance, I
>> had to
>> >> enter quite a complicated transaction involving a complete revaluation
>> of
>> >> all Euros held, regardless of which account they are held in.  That
>> >> transaction was tough to key in, too, as I had to fight with the
>> register,
>> >> and on some of the splits the exchange rate had to be zero!  (I wonder
>> if
>> >> this might cause a divide-by-zero crash at some point.) If any of these
>> >> splits are removed, the trial balance will fail. Imagine the nightmare
>> if I
>> >> had Euros in asset accounts instead of just two.
>> >>
>> >
>> > ... that should have been "ten accounts instead of just two."
>> >
>> >
>> >> Just in case I did this the really hard way, if anyone has a suggestion
>> on
>> >> how to enter this transaction more easily and without changing the
>> currency
>> >> that each account is denominated in, please let me know. Of course,
>> there
>> >> would have been no need to calculate any gains if Expense:Dining was
>> >> denominated in EUR instead of USD, but that assumes that you are happy
>> to
>> >> manage separate expense accounts for each currency you use.
>> >>
>> >> The second file, 2brokers, is an example of accounting for investment
>> >> gains. Stock in XYZ corporation has been purchased in two separate
>> broker
>> >> accounts. At one broker, a few of the shares are then sold for a
>> profit. To
>> >> keep the books in balance, the sell transaction needed 8 splits. Again,
>> take
>> >> a look at the trial balance. Remove any of those splits and the books
>> become
>> >> unbalanced.
>> >>
>> >> In both these examples, if trading accounts had been used there would
>> be no
>> >> need to calculate unrealized gains, as that would happen automatically.
>> >> Putting in the realized gain would just be a transfer from the
>> unrealized
>> >> gains account to the realized gains account (essentially just
>> reclassifying
>> >> some of the unrealized gain as realized, which also avoids doing your
>> own
>> >> subtraction).
>> >>
>> >> Cheers,
>> >> Charles
>> >>
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>>
>> --
>>       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
>>       Member, MIT Student Information Processing Board  (SIPB)
>>       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
>>       warlord at MIT.EDU                        PGP key available
>>
>
>