Investment income (was Re: Questions About Investment Accounts)

[John Ralls]

On Apr 6, 2013, at 11:22 AM, Ian Konen <iankonen at gmail.com> wrote:

> On Fri, Apr 5, 2013 at 11:15 PM, John Ralls <jralls at ceridwen.us> wrote:
> 
> On Apr 5, 2013, at 10:23 AM, Ian Konen <iankonen at gmail.com> wrote:
> 
> > Well now I'm confused.  I don't think I was wrong to say "the accounting
> > equation is a mathematical identity", but it does seem like that
> > contradicts your answer, at least in this example.  Isn't an increase in
> > share prices of a stock you own an income whether you realize the gain or
> > not?  I haven't used commodity / share prices in GnuCash myself and hadn't
> > though about the implications of changing values, but it seems like you
> > could unbalance your books if you don't record the value change as coming
> > from an income account.
> 
> You're right and so is Derek.
> 
> The key is that  "current value" and "book value" are different. Book value (also called "basis") is what you paid when
> you bought the security. Current value is what you would have gotten had you sold the security at the price of its most
> recent trade. The difference between the two is the "unrealized gain or loss".
> 
> If you maintain a separate account for each security and maintain the price database with its current price then Gnucash
> will report the current value on the Accounts page and in the portfolio reports. That's separate from the book value, which
> is what's reflected in the register and on the business reports.
> 
> 
> I've kind of hijacked Mark's thread here, so I edited the subject.  I understand your point about about the difference between book and current value...I seem to recall there was a fight about changing this standard so banks with toxic securities could pretend they were well capitalized.  
> 
> What I still don't get is that regardless of how current positions *should* be treated, once you sell the stock and realize that capital gain, GnuCash is still treating these two methods very differently, and I don't know if that's just a missing feature in GnuCash or if I'm not setting report options correctly.  
> 
> So out of curiosity I created a security for a fake company, and purchased 100 shares at $10 / share (with a balancing transaction from a cash account).  Then I put some manual entries in the price editor so that it was later valued $15/share.  Generating a balance sheet at that point in time has a line called "Unealized Gains" worth $500, as well as a line for the security with shares and total current value (after I set the commodity option to use "nearest price").  So far so good. But then if I sell those stocks at $20 / share and enter a $2000 transfer back to the cash account, the balance sheet at a later time still labels that $1000 profit as "unrealized gains" even though it has quite clearly been realized at that point, and the calculation is (correctly IMO) using the share price of the sale transaction instead of the value from the price editor ($15/share) at the time.  If I generate a profit and loss statement covering that entire period, it shows 0 income/profit whatsoever even though there was a real $1000 profit.  
> 
> It's those last two points that seem wrong to me.  I guess I had assumed that GnuCash would automagically create a realized gains income account and fill it to reflect stock price changes at sale, but perhaps that's too complicated to code.  
> 

You also forgot to CC the list...

I've never looked at the logic for the Balance Sheet report and I don't usually care about it for my household accounts. I agree that that result doesn't agree with my understanding of how it's supposed to work. 

Regards,
John Ralls