Question on how to record share losses

Linas Vepstas linas@linas.org
Wed, 1 Aug 2001 12:10:10 -0500


On Wed, Aug 01, 2001 at 05:29:24PM +0200, TrackerChamp was heard to remark:
> 
> Hi,
> 
> > On Wed, Aug 01, 2001 at 03:53:04PM +0200, TrackerChamp wrote:
> > > 2) In June, you realize (by using the price editor), that the share went
> > > up to 11$ a piece. So you have a (unrealized) gain of 100$ because your
> > > shares are now worth 1100$ The price editor (and Gnucash) shows you this
> > > in the balance for your shares. They are now worth $1100. BUT there is no
> > > booking that actually says, that you had an (unrealized) gain of $100. If
> > > you open the wins/losses report, there should somewhere be a win of $100.
> > > This could be an income account called "share wins".
> >
> > Income represents money received from outside sources.  You aren't
> > actually receiving any money when the paper value of your stock goes
> > up, so it's not appropriate to represent it in an income account.
> > Unrealized gains should show on a balance sheet, but not as ledger
> > entries for your income and expense accounts.
> 
> I agree with you. But why does the online help example with the painting do 
> exactly the opposite? If the painting you bought for 5000$ is revalued and 
> found to be worth $5500, the example says to book the $500 as unrealized gain 
> in an income account! So, although you actually don't have the additional 
> $500 in your hands, it should (and probably does because you set the account 
> type to be income) appear in a gain/loss balance.
> The only thing I am pointing out, that either the online help example is 
> chosen confusingly or the unrealized gains of assets other than funds or 
> share (i.e. the painting) are treated differently from the unrealized 
> gains/losses from funds. This makes no sense to me. Although - I must repeat 
> - I am not an accountant.
> To make it short: there should be some sort of price-editor for assets as 
> well. 

If you want to, you can use the current price editor. Record the
painting as an asset of '1 unit', create a made-up currency 
name for it: 'my painting', exchange code 'sotheby's', and occasionally
set the price. 

> This could be handy for depreciation as well. Or am I just terribly 
> confused?

Well, its a bit more subtle than that, *and* this is a kind of 
short-coming in gnucash.  GnuCash should be able to mark certain 
income/expense account types as 'unrealized gains/losses', and then 
use this marker to generate apropriate reports.

Contrary to what others said in responding to this note, 'unrealized
gains' are still very 'real':  When I pay property tax, I pay on the 
*current* value of the house, even though I may have bought it ten years
ago for 1/3 of that valuation.  When my business pays proerty taxes,
it pays a rate based on the *current* value of any paintings it owns.

The change in the valuation of the house is not 'realized' income, and
luckily, I don't pay income tax on it. (others may not be so lucky--
there are stock option plans which can make the holder of the stock
option need to write large checks to the IRS despite the fact that the
holder of the option hasn't realized a dime. )

However, the change in the valuation of my house is indeed a change
in my assets, at least as far as the tax assesor is concerned. 

Depreciation is similar: tax laws usually allow depreciation to be
treated  **as if** it was 'realized', (i.e. you use depreciation 
to offset income) although it in a certain sense, its not 'realized'
until you've sold or junked the item.

In short, its quite OK, depending on the situation, to record 
apreciation/depreciation as income/loss.  Remember, accounting is meant
to help *you* understand.   You *can* keep two sets of books: the
one that makes sense *to you*, and the one that the *tax authories*
insist on.  Its ok to think that 'geee my painting is worth millions'
(and to write that down) even as you tell that tax assesor that its 
worthless shlock.  When you finally sell it for millions, you just
screw up your face: 'who knew'?

(alternately, keep one set of books, and note appreciation as 'income'.
Its just not 'taxable income'.)

--linas


-- 
I'm very PUBLIC-MINDED, I'm helping a NIGERIAN get his $25,000,000 back!