Double Entry Accounting of Unrealized Gains/Losses

[jnw]

Does it make sense to use an Equity account for routine Unrealized Capital Gains/Loss adjustments for investment/retirement accounts?  Seems to me to be the most appropriate place.  That way the adjustments don't show up as expenses or income, since they are not realized.  This is the way I've been doing it so far.

That way the Unrealized Gains/Losses are a part of your Net Worth still in the Balance Sheet.  But don't show up in Profit & Loss Statement since they aren't realized.

When you actually got to sell (say to capital gains/loss harvest), then the appropriate debits/credits would be made to e.g. "Income:Capital Gains:Long Term" as well as "Expenses:Capital Losses:Long Term" accounts not Equity accounts.

[jnw]

Here's an example account structure I am using.  My retirement account is taxable (non IRA / non 401k), and using Schwab -- so it's technically an Investment account and I have it in my books as such.  I have a Cash sub-account along with individual securities sub-accounts.  I will debit and credit between the cash and securities as I buy and sell.  I'll also be debiting/crediting Income:Capital Gains and Expenses:Capital Loss accounts for the difference in buy and sell price.

Notice there is also an account under Schwab for "Unrealized Capital Gains".  This is where I'll make adjustments every so often based on the current unrealized value of the total Schwab account.   I'll debit/credit the Equity:Unrealized Capital Gains account as well.

At the top "Schwab" account level it sums up all the sub accounts:  cash, securities and unrealized capital gains.

I think this will work fine.  What do you do for those using Gnucash or another double entry accounting system?



So in above example Schwab to level account is $252.61 which is the sum of: $24.03 (cash) + $226.97 (securities) + $1.61 (unrealized capital gains).  If you look in VTI sub-account you'll see I bought 1 share yesterday (4/1/2022) for $226.97.  So I debited VTI by $226.97 and credited Schwab:Cash by $226.97.   According to Schwab, my current overall unrealized balance is $252.61.  So I made an adjustment to the Unrealized Capital Gains sub-account to reflect the difference between it and the previous Schwab balance, which was a $1.61 gain on the previous Schwab balance.  I debited Schwab:Unrealized Capital Gains and credited Equity:Unrealized Capital Gains by $1.61.

I'll probably check my Net Worth once per month.  These means I'll just have to to adjust my Unrealized Capital Gains on the Schwab account once per month.  (As well as my two retirement accounts -- not shown above -- which I no longer contribute since I am not getting earned income; i.e. Roth IRA and Solo Roth 401k.)

[jnw]

I also added "Unrealized Interest" accounts for tracking unrealized interest gains in Series I Savings Bonds.  When I go to redeem them that's when I credit the Income:Interest account.   (I'll adjust these as needed as well, after redemption and once per month for Net Worth report.)

[jnw]

Fortunately I don't trade on margin nor do options or futures.. so I don't have all that complexity to think about :)  I like JL Collins advice to keep things simple :)  Passive investing for me :)

[MustacheAndaHalf]

What does double entry accounting help you do that tracking gains & losses would not?

I've written customized spreadsheets to track my investments.  For years, I deliberately did not track gains and losses - only percentage of portfolio.  The goal was to encourage rebalancing, which it did - too often.  I think the tools we use to view our investments can have a significant influence.

In 2020 my approach shifted, and I began tracking my portfolio against a benchmark.  I actually used 3 of the ETFs you list: VTI, VXUS, VTEB.  I wanted to ensure my time spent making active investments was beating the market, and worth the time I spent.

What influence does double entry bookeeping have on your approach to investing?


p.s. Unsolicited investment comment: EDV has lost -13.4% this year because yields keep rising.  I strongly suspect you will have more capital losses if you keep EDV.

[Ramparts]

I use Gnucash - I'll try to explain how I use it. I'm not saying your approach is wrong or mine is the One True Way, but maybe you will find it useful. And if you're not using Gnucash yourself, hopefully your system has similarly named features. Here are a few differences between our approaches:

1) "Income:Capital Gains:Long Term" vs "Expenses:Capital Losses:Long Term" - I don't treat these as separate accounts, but rather put all long term gains & losses in the Income:Capital Gains:Long Term account. A loss just shows up as a negative income, so the Long Term account for the year would always show the total taxable LTGC income. Probably not a big deal either way, but for me it makes it easy to run a report with the various income accounts (eg: Salary, LTGC, STGC, other income, etc) to see what my taxable income is looking like for the year.

2) Based on your picture, it looks like you're tracking securities as if they're USD accounts, is that correct? I think you will find it easier if you setup the stocks/ETFS/funds to use the stock ticker as the "currency", rather than USD. In Gnucash when creating an account, you could set the AAPL account type to be a Stock (instead of the default Asset), and then create a new security type to track AAPL directly. Your VTI purchase would look a little different in the VTI account. Instead of showing an increase of $226.97, it would show an increase of 1 VTI, for a price of 226.97 and a Buy amount of 226.97. (The Buy amount matches the value from the Cash account, the 1 VTI is what you actually purchased, and I let the price auto-fill in since that's just the Buy amount / number of shares.)

  With this approach you have an accurate accounting of the number of shares you own (which is what you actually have, not some amount of dollars). Prices are updated whenever you make a transaction, or you can also have Gnucash pull quotes from an online source. In my overview I have both a Total column which shows the underlying asset, and Total (USD) which shows the equivalent dollar value based on the latest available price. Your accounts would look something like:

Code: [Select]

Name           Total      Total (USD)
Schwab         $251.00      $251.00
   Cash         $24.03       $24.03
   ETF         $226.97      $226.97
      VTI        1 VTI      $226.97

Note that because you are now tracking shares, not dollars, you don't actually need to use those unrealized capital gain accounts at all. If VTI goes up in value so that you now have that $1.61 unrealized gain, when you fetch the latest price of VTI (or make a new transaction to set the price), the Total (USD) columns will update automatically to reflect the new dollar totals.

Hope that helps!

[jnw]

What does double entry accounting help you do that tracking gains & losses would not?

I use Gnucash (which is double entry bookkeeping software) to track all my assets, equity, expenses, income and liabilities.  It's similar to Quicken in that I track every type of income and expenses.  Gnucash uses "accounts" instead of "categories" which Quicken uses, but they essentially serve the same purpose for accurately tracking where every penny comes from, where it goes.

I also use Gnucash to track all my assets including valuable discretionary assets which I will depreciate (or appreciate) over time to the proper expense categories.  This way I can actually see how much I am spending in a particular hobby for example, because the equity in an asset is not an expense, only until it depreciates.. the depreciated portion is the expense. These discretionary assets are "current assets", i.e. like cash, because I can easily sell them if needed in an emergency etc..

I even sub-categorize (sub-accounts in Gnucash) my grocery bill line by line so I can get a lot of categorical data to see how I can improve areas of my spending.  It's nice knowing exactly where eveyr single penny is going.

At any time, in Gnucash, I can run a "Balance Sheet" report and it shows me my current assets , equity and liabilities.  It gives me my total Net Worth (Total Equity) in that report.  I want this report to reflect all my assets, both realized and unrealized.  So this is why I created these "Unrealized Capital Gains" and "Unrealized Interest" investment sub-accounts in Gnucash.

Every penny is accounted for with respect to assets, equity, expenses, income , liabilties. Even unrealized gains.  I love this Gnucash software.  I realize for some, they dont both to track personal finances and only track their portfolios, that's fine if they are content with that.  But I am on very limited income and I tend to let things get out of hand with spending not knowing how much i am really spending in each category.   By tracking everything, every single penny in the proper sub-accounts (sub-categories), I know exactly how much -- and it has already helped me tremendously.

All of the data is manually entered into Gnucash -- no automatic bank account syncing -- and the data is stored locally on my hard drive.  This allows for me to have extremely accurate (to the penny), up to date, records and structure the account hierachy (expense/income categories) as I see fit.  I love the privacy, accuracy, categorical flexibility, and lack of account connection problems compared to what all the online services offer -- e.g. Mint, Personal Capital etc.

To me Gnucash is the best personal finance software ever and also happens to be free.  (I used to use it for bookkeeping for my schedule c sole proprietorship when I resold used items on ebay, so that's how I got familiar with double entry accounting software.)

I've written customized spreadsheets to track my investments.  For years, I deliberately did not track gains and losses - only percentage of portfolio.  The goal was to encourage rebalancing, which it did - too often.  I think the tools we use to view our investments can have a significant influence.

What influence does double entry bookeeping have on your approach to investing?

Mainly the bookkeeping software helps me with saving money by tracking income and expenses, and tracking all my valuable assets, including personal property at home.   By saving more, I have more to invest.

p.s. Unsolicited investment comment: EDV has lost -13.4% this year because yields keep rising.  I strongly suspect you will have more capital losses if you keep EDV.

Those tickers I have listed in the screen shot above, were just added the other day, as ones to research.  Many of them I am not familiar with especially bonds.  I just put them in there because these are ones people have suggested on bogleheads.   My current IPS / plan is currently only in I-Bonds, VTI & BRK-B; I've never invested in any bonds other than I-Bonds.  Of those listed above, I have only invested in BRK-B and VTI.

Here's my plan I made up the other day.. first plan I ever made:

https://drive.google.com/file/d/1d29YnOHH7bLAyurDQcbZ2k6aJOQ7Sjm5/view?usp=sharing

[Sibley]

I don't want to spend all the time writing out the journal entries. If you're determined to do full double entry accounting for your personal finances (I really don't recommend it, but it's your time), then go find the local college bookstore and ask what textbooks the accounting classes need. Unless  they've significantly reordered since I was in college, I think the investment accounting was in the intermediate classes, not principles.

Given that it's not a business, you don't care if you're following current standards so you can find an older textbook much cheaper.

You may also find the journal entries online, look for websites geared towards small businesses since they're less likely to have an accountant and need detailed explainations.

[jnw]

I don't want to spend all the time writing out the journal entries. If you're determined to do full double entry accounting for your personal finances (I really don't recommend it, but it's your time), then go find the local college bookstore and ask what textbooks the accounting classes need. Unless  they've significantly reordered since I was in college, I think the investment accounting was in the intermediate classes, not principles.

Given that it's not a business, you don't care if you're following current standards so you can find an older textbook much cheaper.

You may also find the journal entries online, look for websites geared towards small businesses since they're less likely to have an accountant and need detailed explainations.

I don't need any books. I figured out with respect to what I posted here about unrealized capital gains -- after some more searching on the internet I found others came up with same solution.. to use equity account.

And I think it's a mistake not to track everything you spend, personally.  I know where every penny is going now. Helps tremendously with cutting spending.  I also can catch any fraud or errors where bank records conflict with what really happened.

Doesn't take me any time to make a journal entry when recording a purchase.   There is no difference in time requirement between full doubly entry accounting and quicken when recording personal finance transactions.  With quicken you do split transactions with categories.. with double entry accounting you do multiple lines as well involving potentially several accounts (instead of categories).

I already did enough double entry accounting with my business that I understand debits and credits for various accounts. 

[MustacheAndaHalf]

All of the data is manually entered into Gnucash -- no automatic bank account syncing -- and the data is stored locally on my hard drive.  This allows for me to have extremely accurate (to the penny), up to date, records and structure the account hierachy (expense/income categories) as I see fit.  I love the privacy, accuracy, categorical flexibility, and lack of account connection problems compared to what all the online services offer -- e.g. Mint, Personal Capital etc.

I think I can save you one heart attack by reducing the risk of your only hard drive failing.  I'd suggest uploading encrypted files into free cloud storage.

I recall reading that TruCrypt went through a security audit, and a story of the FBI being unable to crack the encryption.  That's not my goal - I just want identity thieves to look elsewhere.  TruCrypt is free but outdated, replaced by VeraCrypt (also free).

I loads the data into a drive letter, like maybe drive "T:" for taxes.  Tax software doesn't need to do anything special - it just reads or writes files there.  When I'm done updating files, I can close everything - or just shutdown.  It seems to save as I go.

Finally, the best part: Google, Amazon and Box all offer free online storage.  It varies between 2Gb and 5Gb, but free is free.  So I login to each account, upload the encrypted folder, and now I have my data replicated across 3 different providers!  I also save the folders on a couple USB sticks for added safety.

I'll go months without saving, but after completing taxes I definitely upload everything to keep it safe.   Similarly, I would think years of manually entered data would be worth protecting in 3 different online locations for the low price of $0.

[RWD]

Based on your picture, it looks like you're tracking securities as if they're USD accounts, is that correct? I think you will find it easier if you setup the stocks/ETFS/funds to use the stock ticker as the "currency", rather than USD. In Gnucash when creating an account, you could set the AAPL account type to be a Stock (instead of the default Asset), and then create a new security type to track AAPL directly. Your VTI purchase would look a little different in the VTI account. Instead of showing an increase of $226.97, it would show an increase of 1 VTI, for a price of 226.97 and a Buy amount of 226.97. (The Buy amount matches the value from the Cash account, the 1 VTI is what you actually purchased, and I let the price auto-fill in since that's just the Buy amount / number of shares.)

This. It's way too much of a pain to keep adjusting account values based on price swings. Just track the number of shares you own and GnuCash can automatically pull in the prices and calculate how much they are worth. When realizing gains just look at the transaction when you purchased the shares if you want to see what the profit/loss was.

By the way, tracking number of shares in GnuCash is still double-entry accounting.

[RWD]

Example of how the accounting looks:

[jnw]

All of the data is manually entered into Gnucash -- no automatic bank account syncing -- and the data is stored locally on my hard drive.  This allows for me to have extremely accurate (to the penny), up to date, records and structure the account hierachy (expense/income categories) as I see fit.  I love the privacy, accuracy, categorical flexibility, and lack of account connection problems compared to what all the online services offer -- e.g. Mint, Personal Capital etc.

I think I can save you one heart attack by reducing the risk of your only hard drive failing.  I'd suggest uploading encrypted files into free cloud storage.

I recall reading that TruCrypt went through a security audit, and a story of the FBI being unable to crack the encryption.  That's not my goal - I just want identity thieves to look elsewhere.  TruCrypt is free but outdated, replaced by VeraCrypt (also free).

I loads the data into a drive letter, like maybe drive "T:" for taxes.  Tax software doesn't need to do anything special - it just reads or writes files there.  When I'm done updating files, I can close everything - or just shutdown.  It seems to save as I go.

Finally, the best part: Google, Amazon and Box all offer free online storage.  It varies between 2Gb and 5Gb, but free is free.  So I login to each account, upload the encrypted folder, and now I have my data replicated across 3 different providers!  I also save the folders on a couple USB sticks for added safety.

I'll go months without saving, but after completing taxes I definitely upload everything to keep it safe.   Similarly, I would think years of manually entered data would be worth protecting in 3 different online locations for the low price of $0.

Thanks. I keep all my data backed up regularly.  I think it's important as well :)

[Sibley]

I don't want to spend all the time writing out the journal entries. If you're determined to do full double entry accounting for your personal finances (I really don't recommend it, but it's your time), then go find the local college bookstore and ask what textbooks the accounting classes need. Unless  they've significantly reordered since I was in college, I think the investment accounting was in the intermediate classes, not principles.

Given that it's not a business, you don't care if you're following current standards so you can find an older textbook much cheaper.

You may also find the journal entries online, look for websites geared towards small businesses since they're less likely to have an accountant and need detailed explainations.

I don't need any books. I figured out with respect to what I posted here about unrealized capital gains -- after some more searching on the internet I found others came up with same solution.. to use equity account.

And I think it's a mistake not to track everything you spend, personally.  I know where every penny is going now. Helps tremendously with cutting spending.  I also can catch any fraud or errors where bank records conflict with what really happened.

Doesn't take me any time to make a journal entry when recording a purchase.   There is no difference in time requirement between full doubly entry accounting and quicken when recording personal finance transactions.  With quicken you do split transactions with categories.. with double entry accounting you do multiple lines as well involving potentially several accounts (instead of categories).

I already did enough double entry accounting with my business that I understand debits and credits for various accounts.

Cool, you do you. However, don't mistake not doing full double entry accounting with not knowing where your money is going. Or vice versa. I know plenty of companies with full accounting systems in place who have no clue what they're spending money on. I know people who use random scraps of paper to write things down who know to the penny where the money is going. The method of tracking really doesn't matter much.

[jnw]

I don't want to spend all the time writing out the journal entries. If you're determined to do full double entry accounting for your personal finances (I really don't recommend it, but it's your time), then go find the local college bookstore and ask what textbooks the accounting classes need. Unless  they've significantly reordered since I was in college, I think the investment accounting was in the intermediate classes, not principles.

Given that it's not a business, you don't care if you're following current standards so you can find an older textbook much cheaper.

You may also find the journal entries online, look for websites geared towards small businesses since they're less likely to have an accountant and need detailed explainations.

I don't need any books. I figured out with respect to what I posted here about unrealized capital gains -- after some more searching on the internet I found others came up with same solution.. to use equity account.

And I think it's a mistake not to track everything you spend, personally.  I know where every penny is going now. Helps tremendously with cutting spending.  I also can catch any fraud or errors where bank records conflict with what really happened.

Doesn't take me any time to make a journal entry when recording a purchase.   There is no difference in time requirement between full doubly entry accounting and quicken when recording personal finance transactions.  With quicken you do split transactions with categories.. with double entry accounting you do multiple lines as well involving potentially several accounts (instead of categories).

I already did enough double entry accounting with my business that I understand debits and credits for various accounts.

Cool, you do you. However, don't mistake not doing full double entry accounting with not knowing where your money is going. Or vice versa. I know plenty of companies with full accounting systems in place who have no clue what they're spending money on. I know people who use random scraps of paper to write things down who know to the penny where the money is going. The method of tracking really doesn't matter much.

I agree, you do you.

The way I do accounting, I know exactly where every penny goes.  I am not one of those companies you know, who obviously don't care about spending or what they are spending money on.  I guarantee you I know better where every cent is going vs. writing it down on random pieces of paper laying around -- which to be honest sounds irresponsible and inaccurate. I am insanely articulate and use many subcategories to track every sort of spending.  No data gets lost or has a chance to.  The accounts have to balance to the penny.  I make sure to enter in each transaction accordingly into the right accounts so I have very good data to help me with my spending / budgeting etc..  Heck I even enter my groceries in line item by line item (with the sales tax applied to each line item as I do it), to get an accurate history of spending in all categories of food, sundries etc..  When I buy motor oil from Walmart while buying groceries, that motor oil doesn't get entered under Expenses:Groceries.. it gets put under Expenses:Auto:Maintenance.  When I buy a case of Pork Loin it doesn't go under Expenses:Groceries, it goes under Expenses:Groceries:Meat:Pork.  I can tell you to the penny how much I spend on pork, meat, or groceries each year.

Even my bookkeeping for my business when I did it was so well thought out I could generate an entire Schedule C from the Balance Sheet and Profit & Loss statement within 5 minutes, without a single calculation / subtotaling.