How to account for Capital Gains (Losses) in double-entry accounting?

External question — Personal Finance Stack Exchange Author: William Breathitt Gray Original post: https://money.stackexchange.com/questions/22258 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. After taking an introductory financial accounting class, I decided to use GnuCash to keep track of my personal finances. I have 5 major accounts in my general ledger: Equity Currently only used to record opening balances for other accounts. Assets Subaccounts for Bank , Cash , etc. Liabilities Subaccounts for Credit Cards Income Sources of income, such as Salary and Gifts . Expenses Sources of expense, such as Groceries and Gas . This worked out well for the past year. However, I've recently had to record the capital losses I made on a short-term forex trade, but I can't remember how to record this. In particular, do I use two separate accounts as such: Income > Capital Gains Expenses > Capital Losses Or just one Capital Gains (Losses) account where a negative balance indicates a capital loss ? if just a single account, would this account be under Equity or Assets ?

External answer — Personal Finance Stack Exchange Author: Darcys22 Original post: https://money.stackexchange.com/a/22259 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Capital is an Asset. Decreasing value of capital is the decreasing value of an asset. When you buy the forex asset * DR Forex Asset * CR Cash When you sell * DR Cash * CR Forex Asset The difference is now accounted for Here is how: Gains (and losses) are modifications to your financial position (Balance sheet). At the end of the period you take your financial performance (Profit and Loss) and put it into your balance sheet under equity. Meaning that afterwards your balance sheet is better or worse off (Because you made more money = more cash or lost it, whatever). You are wanting to make an income account to reflect the forex revaluation so at the end of the period it is reflected in profit then pushed into your balance sheet. Capital gains directly affect your balance sheet because they increase/decrease your cash and your asset in the journal entry itself (When you buy and sell it). If making money this way is actually how you make you make an income it is possible to make an account for it. If you do this you periodically revalue the asset and write off the changes to the revaluation account. You would do something like *DR Asset *CR Forex Revaluation account; depending on the method you take. Businesses mostly do this because if the capital gains are their line of business they will be taxed on it like it is income. For simplicity just account for it when you buy and sell the assets (Because you as an individual will only recognise a profit/loss when you enter and exit). Its easier to think about income and expenses are extensions of equity. Income increases your equity, expenses decrease it. This is how they relate to the accounting formula (Assets = Liabilities + Owners Equity)

External answer — Personal Finance Stack Exchange Author: user9302 Original post: https://money.stackexchange.com/a/22266 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. First, the balance sheet is where assets, liabilities, & equity live. Balance Sheet Identity: Assets = Liabilities (+ Equity) The income statement is where income and expenses live. General Income Statement Identity: Income = Revenue - Expenses If you want to model yourself correctly (like a business), change your "income" account to "revenue". Recognized & Realized If you haven't yet closed the position, your gain/loss is "recognized". If you have closed the position, it's "realized". Recognized Capital Gains(Losses) Assuming no change in margin requirements: Increase/decrease the "recognized capital gains" account under assets by the increase/decrease in the value of the position Increase/decrease equity by the increase/decrease in the value of the position Margin interest should increase margin liabilities thus decrease equity and can be booked as an expense on the income statement. Margin requirements for shorts should not be booked under liabilities unless if you also book a contra-asset balancing out the equity. Ask a new question for details on this. Realized Capital Gains(Losses) Credit off the position (the initial cost & any accumulated recognized capital gains/losses) under assets Debit off any liabilities (margin) due the position Debit cash in the amount of the liquidated position Increase/decrease equity by the gain/loss due to the position if they haven't been marked under "recognized capital gains/losses" Mark the sale of the position as "Revenue" Mark the buy of the position as "Expenses" Balance Sheet Identity Concepts One of the most fundamental things to remember when it comes to the balance sheet identity is that "equity" is derived. If your assets increase/decrease while liabilities remain constant, your equity increases/decreases. Double Entry Accounting The most fundamental concept of double entry accounting is that debits always equal credits. Here's the beauty: if things don't add up, make a new debit/credit account to account for the imbalance. This way, the imbalance is always accounted for and can help you chase it down later, the more specific the account label the better.