I've done some research, and I've watched the various and sundry threads and IRC conversations regarding stock trades, gains/loss accounting, and Lots. I've reached a conclusion that I hope I can persuade others to come to as well. That conclusion is that we should be tracking the dollar amounts of securities, relegating the quantities to an ancillary position (e.g., part of a Lot).
First, let me start off by summarizing the current direction, as I understand it. Derek is developing a concept known as "Lots". The Lots will allow purchases and sales to be grouped together. This allows the FIFO concept of accounting for investments. It associates a sale with a specific purchase, and lets you calculate gains/loss accurately (as opposed to a weighted average--which, for the record, I oppose). You also have the option of realizing a gain against a high-cost purchase, thereby minimizing the gain. Nifty for tax purposes. All that is wonderful, and I'm really looking forward to it. However, it fails to properly record the monetary numbers in an account. The current CVS implementation cannot properly balance a transaction that includes a realized gain. That's because a stock account balance is recorded in number of shares, and you logically cannot sell more shares than you own. For a gain, this is problematic. If I buy 10 shares for $100, and then sell 10 shares for $110, how to I balance the gain? Well, that's what I hope to answer below. It will, however, require a return of currency to a stock account. Please read on... My proposal is this: track the *number* of shares in the Lot, and the *dollars* of shares in the Stock account. This will allow proper accounting of the money trail, while also tracking numbers of shares. It has the side benefit of *not* backtracking to the 1.6.x model of a Security and Currency per account. I'd like to reference a couple of sources to support this. First, http://www.nysscpa.org/cpajournal/2002/0802/dept/d085602.htm provides some insight into how Lots can help, and also some implication about how they should be recorded in an accounting system. It deals specifically with portfolio accounting for indivual investors, which most of us qualify as. If nothing else, it provides an excellent introduction to the subject. The other source I reference is the Wiley GAAP 2003, subt. "Interpretation and Application of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 2003", pub. by John Wiley & Sons, 2002. You ought to be able to find it at a local Barnes & Noble, or perhaps it's already at the library. Specifically of interest is Ch. 10, "Investments". Ok. An objective review will show that the above sources back my proposal. The CPA Journal article (Example 3, specifically) points out that calculating gains/losses and properly recording those is one of the areas most likely to cause discrepancies. It uses an Asset account, "Cost of Investment", to record the monetary amount of stock purchases. The number of shares purchased and the price/share is recorded in the Lot. (as an aside, stock splits could also be recorded in Lots, since they don't change the value any). Now, suppose you sell the stock for a profit. The CPA journal suggests a "Margin Liability" liability account in which to record the net proceeds of the sale (e.g., after transaction fees). The Cost Of Investments Asset account is credited the original purchase price. The "Cumulative Profits" account is credited the realized gain. This results in a balanced transactions. Referring to the CPA Journal article, the reduction in the number of shares is recorded in the Lots, while the actual dollar amounts are recorded the various accounts. Referring to the GAAP reference, the first section of Ch. 10 covers basic equity investment accounting. It is much more granular, perhaps, than is strictly necessary. Following it closely, however, would yield a strikingly accurate picture of your financial status. Anyhow, it presents several examples of double-entry for equity security trades, transfers, and sales. Profits/loss increase/decrease the realized gains (loss) income accounts, and decrease the various "Investment in equity securities" asset accounts (held-for-trading, available-for-sale, etc) Cash received, of course, is recorded in the appropriate bank account. Now, referring to the CPA Journal article, I doubt that many of us buy a whole lot on margin, which begs the question, what to use instead of the "Margin Liability" liability account? Well, referring to the GAAP, one can infer that the "Margin Liability" account should be replaced as appropriate to your situation. In my case, I would debit Cash, since that's where the money goes (I don't buy on margin). So, putting together these concepts, we can picture the following two transactions. The first is a buy, and the second is a sale. Assets Cash COI Income RG(L) Account Debit Credit Bal ------------------------------------------ Cash 100 100 COI 100 100 <--- 10 shares @ $10 ------------------------------------------ RG(L) 100 100 Cash 200 100 <--- 10 shares @ $20 COI 100 0 In the above, the number of shares and the price/share is ancillary information, and properly belongs in the Lot attributes. Therefore, in our "Stock" accounts, we should be tracking the currencty amount instead of the number of shares. And you can use just one COI account for many different stocks. Now, from an implementation perspective, it certainly makes sense to follow the generally accepted accounting principles. To track the dollar amount *instead* of number of shares alleviates the current multi-currency issues with stock accounts. It makes life somewhat easier when generating reports--there is no longer a need to run through many Lots to get a total of realized gains/losses for a period. You can see at a glance the dollar amounts for gains/losses and current invested amount. Net worth calculations are also simpler to implement. Also, Accountants generally are more interested in dollar amounts, not number of shares (I've seen many questions from Gnucash users about how to get info in a form appropriate for Accountants). And to retrieve the number of shares and other Lot information, all you have to do is add the Transaction GUID to the GUID list in whatever Lot, or possibly more appropriately, add the GUID of the Lot as an attribute of the Transaction (foreign key, as it were). I don't know how far Derek has gotten on the Lot development. I believe, though, that it should be relatively easy to update the implementation to the above proposal. The benefits far outweigh the cost of development. It eases accounting for investments. It will be more intuitive. It presents an opportunity to align with proper accounting procedures, and provides the flexibility to the users to be able to do so. We would want to record the number of shares in the Lot, of course, but that is a required interface in any case. The security mnemonic could also be stored in the Lot, which would allow us to combine security investments in one account, instead of a separate account for each security. In the current register, as far as I can tell, the only immediate change that should be made is to record a dollar amount in Balance instead of a number of shares. That's the first step torwards aligning with accounting practices. Derek's work with Lots will go a long way to making this a reality, if he agrees with my assessment (well, he *is* the one writing the code!). Well, I think that about covers it for now. Proper accounting practices, user satisfaction, ease of implementation, all based on common and approved (and logical) accounting practices. Can we do it this way? -- Matthew Vanecek perl -e 'print $i=pack(c5,(41*2),sqrt(7056),(unpack(c,H)-2),oct(115),10);' ******************************************************************************** For 93 million miles, there is nothing between the sun and my shadow except me. I'm always getting in the way of something...
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