Trading accounts - when do they make sense?

[Ian K]

I am of the strong opinion that if you have accounts in more than one
currency then you really should use Trading Accounts. The main reason is so
that your Balance Sheet report makes sense - it's the only way of
maintaining correct double-entry accounting in GnuCash with multiple
currencies.
My opinion is that without Trading Accounts if you have moving exchange
rates then the Balance Sheet report is wrong.

Take a simple example. I'm assuming base/reporting Currency USD.
Account Chart:
Assets:Current Assets:Checking Account (USD)
Assets:Current Assets:EUR Checking (EUR)
Expenses:Dining (USD)
Imcome (USD)

Into these accounts we'll put 3 transactions using Trading Accounts:
Checking Account +$1000, from Income (USD) 'Receive $1000 Income
Checking Account -$500, to EUR Checking @1.25 'Convert $500 to EUR 400 (you
put in 0.8 in transfer window as you are doing this from a USD account)
EUR Checking -EUR 100 Expenses:Dining @1.25 'Spend EUR 100 on Dining ($125
expense - you put in 1.25 as you are doing this from a EUR account)

If you run an Income Statement you see Revenue of $1000, Expenses of $125,
Net Income $875.
If you run a Balance Sheet (I had to put the Commodities/Price source to
Most Recent), then you see Total Assets = Total Equity = $875.

So far so good.

Now in the Price Editor, add a new price for EUR of 1.10 (i.e. the EUR
weakens from 1.25 to 1.10)

The Income Statement should remain unchanged if you run it (as we have
'locked in' the exchage rate on the Dining expense at 1.25, when we spent
the EUR)

The Balance Sheet now shows Total Assets $830 (this is because the remaining
EUR 300 are now only worth $330, instead of $375).
Retained Earnings is still $875, as you Received $1000, and spent $125 (at
the time) worth of EUR.
Trading Losses shows $45 (that's the loss on the remaining Euros in the
checking account as the exchange rate has declined)
So Total Equity is also $830, - the Balance Sheet balances.

Incidentally, the Trading Accounts have balances of -EUR 300 and USD 375 -
they are just the offsetting sides of the currency transactions - you don't
need to worry is these account balances get bigger).

Without Trading Accounts the same scenario leads to a counterintuitive
Balance Sheet report (IMO):
Putting in the same transactions, and exchange rates, running a Balance
Sheet gives the following:

Total Assets $830

Retained Earnings $875
Unrealised Losses $60
Total Equity $815.

That doesn't balance. It seems to have included the other EUR 100 that was
spent (when the rate was higher), and still thinks that there is a loss on
it. This is clearly wrong.





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