Unrealized gains

[Charles Day]

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.

-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
>