I’m wondering if anyone has an idea how to set up the accounts to show separate long term and short term gains and losses.
Long term means the stock was held for over a year before selling.
Short term means the stock was held under a year before selling.
I would enter a credit to either long term sales account or short term sales account.
I’m using the inventory module.
The thing that is bothering me is that when I buy a stock, I don’t know in advance whether I would need to debit a long term cost of goods sold account or debit a short term cost of goods sold account.
I’m okay with making a correcting entry or adjusting entry once I know whether the sale turns out to be long term or short term.
But then, would I have a report to run that would show the total of all long term sales, total of all long term cost of goods sold, total of all short term sales, total of all short term cost of goods sold, net long term, and net short term?
Or maybe books are not kept this way? And instead the sale details are kept in separate spreadsheets?
I’m hoping someone can post something that gets me through the fog. What kinds of options would I have?
Under these conditions you don’t have cost of goods sold, you just have nett proceeds. Therefore upon disposal just change the custom income / expenses accounts for the Inventory Item to the same account.
If you forget to amend, no problem they will be highlighted in the “Stock Trades Clearing” section.
Thank you. Your post helped me get started thinking.
I was thinking, maybe the situation is like having some of the stock (securities) located in the “Long Term” warehouse and others located in the “Short Term” warehouse. However, I don’t see any reports that would separate Profit and Loss by warehouse. The Inventory Profit Margin seems like the report I want. But it does not separate by warehouse.
What you said about using a custom income and custom expense account seems to work better. I could have a Sales of Securities, Short Term and Sales of Securities, Long Term account. And I could have a Cost of Securities Sold, Short Term and Cost of Securities Sold, Long Term account. When I find out whether the inventory item is sold long term or short term, I can flip the income and expense account that the inventory item uses to the correct one for the sale. For that, looks like I would also need to have short term and long term inventory items, such as ABC Long Term stock and ABC Short Term stock. Looks like the Journal Entries would allow me to make adjustments and corrections to inventory items.
A third way I’m thinking about is using Tracking Codes. In this case, I don’t have to tag the securities until I want to get reports. Looks like the Inventory Profit Margin report does not separate the tracking codes. But I can generate Profit and Loss reports for each tracking code which would give me what I want–I think.
I have not yet figured out whether I would need two or three tracking codes. The two tracking codes would be Short Term and Long Term. A third tracking code would be Undetermined Term. I think that when I run a P&L without specifying a tracking code, the report includes all tracking codes.
I probably have not been too clear because I’m thinking in general terms. I figure that if I basically have a good general approach, I will be able to work out the details.
The general approaches are (1) use warehouses, (2) use custom income and expense accounts for the inventory items (3) use tracking codes.
I think #1 probably does not work. #2 and #3 look like they could work. #3 might be easier.
Maybe there is some other way to separate reporting of long term and short term sales?
You could setup such Inventory Locations but that is really complicating things as intentions change.
Alternatively, you could set up Custom Control Accounts so the values of the Long Term and Short Securities can be seen separately on the Balance Sheet.
Your Sales of Securities accounts for both Short & Long Term, need to be split into two.
For Short Term - Profit on Sale & Loss on Sale.
For Long Term - Capital Gain & Capital Losses.
These separations will greatly assist with the Tax Return Preparation
You need to completely get rid of this “cost of sale” notion as it doesn’t exist with securities.
Whilst you may be using Inventory to individually record the ownership of the Securities at the end of the day you are trading financial instruments not actual inventory, so there is no cost of sale.
Initially all security acquisitions are short term (even if the intention is hold them long term) until 12 months have past.
The problem with designating them long term on purchase causes problems if they don’t last the distance - you have to untangle artificial pre-set parameters to match reality. Furthermore, the Balance Sheet should reflect the correct status of the security holdings - not the proposed intention of the security holding. Once the 12 months has past then the status and the intentions can be aligned via the Custom Control Accounts mentioned earlier.
If you review the Chart of Accounts in the referred to topic you will see that tracking codes aren’t required as the Short & Long are already recorded independently within the P&L, which is exactly the same result as tracking codes.
As for #1 & #3 - not required, #2 is best used on disposal with the exact same account allocated to both Income & Expense, which greatly simplifies tax return preparation.
I am interested in using more standard terminology and accounting. I can see you are correct that financial instruments are different from manufactured goods in process and finished goods, and different from store inventory.
In the investment-speculation world, I can carry negative counts by shorting a stock. So, that means I sell the stock, then the next day or next year, or whenever I get around to it, I buy enough stock to cover the shares that I already sold–and only then do I know whether a profit or loss resulted.
If I am doing Put and Call options, I can buy the options giving me a positive inventory count. And I can write the options giving me a negative inventory count (“writing” being “shorting” the call or put option). Maybe I can record the expiring of options using Inventory Write-Offs? Or, I could use the Journal Entries.
When the inventory count is negative, the value is a credit instead of the normal inventory debit balance. I suppose that really, the negative inventory count and credit represents a liability instead of an asset. But then, a liability could be thought of as an a negative asset. And assets can be thought of as unexpired expenses.
Maybe what I should be saying instead of Cost of Securities Sold is Cost Basis of Securities Sold? One of the things I would always want to know is how much profit or loss on each individual round-trip (purchase and sale regardless of which event was first). And I would also need to know in aggregate for a period how much profit or loss on all the round-trips.
The Custom Control Accounts looks like a very good way to implement. In exploring it, I see that I need separate stock items for each control account. I could use a dot L T to indicate the long term stock and dot ST for short term stock, as an example how I could track it. As a specific example, If I buy 100 shares of AMGEN, the symbol is AMGN. So, I could use AMGN.st for the Securities, Short Term control account, and AMGN.lt for the Securities, Long Term account. I can use the Journal Entries to transfer AMGN.st to AMGN.lt when it becomes long term.
I suppose I have not presented anything more than you said; I just expanded.
No, you just need to Edit the Inventory Item itself and change the Code’s suffix along with the Control Account selection
Your problem here is that Manager doesn’t cater for negative inventory counts in a way which matches the positive inventory process, in that, the entering of a purchase with a negative inventory count will cause it to be automatically expensed to the P&L Cost of Sale account.
Also, by short selling, this means that the “inventory” has been sold, so technically there is no inventory to count for even though you require the details of the short selling transaction to be recorded.
Your solution here would be to post the proceeds from the short selling directly to a BS Liability account (Short Sold Proceeds), then when the closing out purchase occurs you would put it to an inventory item as per a normal purchase and then via a zero valued Sales Invoice (in place of a Journal) you would transfer the proceeds from the liability account to the inventory item using the same date as the purchase.
To assist with the individual tracking of short sold transactions the “Short Sold Proceeds” account could be setup as a Custom Control Account and then each short sold transaction would be allocated its own sub-account via the Special Accounts tab.
The Put and Call options are only Rights to a “potential” Inventory Item transactions and are neither positive nor negative counts towards any actual Inventory, that’s notwithstanding that the details of both options do need to be recorded.
Both BS Asset & Liability appropriate accounts need to be created so as to receive the option’s initial financial transaction. If the option becomes unexercised, then the transaction would be transferred to the respective P&L Income & Expense accounts. however if the option is exercised then the transaction would be transferred to the Inventory Item
Once again to assist with the individual tracking of the options, the BS accounts could be setup as a Custom Control Account and then each option transaction allocated to its own sub-account via the Special Accounts tab.
That’s precisely the reason I value your comments. I’m saying that I want myself to speak more standard terminology and accounting. I am learning from you.
Also, I believe you do not need a lot of the explanations I include. Since these posts are for public consumption, I figure there may be some that need more explanation than I am giving.
On the negative counts, I point out that I had the same problem with QuikBooks not being designed to handle securities. When I was exploring around for accounting software, seems like I found software that was priced out of reach for me. So, I did not try those. Then there was expensively priced accounting for traders. Those programs seemed like they are only practical for securities traders. But my impression was that they were not good for much else than trading. Manager Accounting seems at least on par with QuickBooks, is peppier than QuickBooks (QuickBooks has these long freezes), simpler to use for someone with at least an intro-to-accounting course, and seems more pliable than QB.
There is absolutely no problems with Manager handling Securities as has being discussed.
The “problem” is that you are attempting to use negative inventory as your record keeping system where in fact no Inventory exists to record.
When you short sell a stock, the inventory is sold, gone, transferred to the buyer.
Whilst you need to document that “short” to enable the closing out at a later date.
Sub-accounts within a custom control account will enable that management to occur.
Same applies to both options, no inventory exists - just numbers that represent a potential inventory item.
I was able to use QuickBooks for options and short selling. However, I see that Manager Accounting is easier to use, is more flexible, simpler, and more intuitive to me than QuickBooks.
Both QB and Manager Accounting use cost averaging. QB gives you FIFO if you upgrade to QB Enterprise Platinum for $1600 per year. I’m not paying that much just to get FIFO.
My stock brokers use FIFO. Some brokers give you a choice. I like average better. I think average costing gives me the most accurate calculation of whether I am really making a profit or a loss. None of the three brokers that I have offers average costing. I think it is simple to make an adjusting entry to the cost basis of the securities sold to align my books with their statements.
An alternative I have instead of making adjusting entries is to tell the government (when I file taxes) that the reason my broker’s statements do not match my profit and loss report is they use FIFO (i.e. I can do a reconciliation).
Interesting to see that there are several ways to cost inventory that is sold (from the one stock broker that gives you choices):
First In First Out (FIFO) Shares you acquired first are sold first.
Last In First Out (LIFO) Shares you acquired last are sold first.
High Cost Shares with the highest cost are sold first.
Low Cost Shares with the lowest cost are sold first.
Tax Lot Optimizer ™ Lots are selected and sold with the objective of taking losses first (short-term then long-term) and gains last (long-term then short-term). See the order of sales for this method
You can see that the methods offered can be used to distort income in different ways to lower income taxes. The government doesn’t allow switching too often. So, it is interesting that #5 is allowed as a method of costing. You sort of wonder how long this will be allowed.
I am thinking I prefer to let the accounting software use average costing, and make adjusting entries so that the profit and loss and balance sheets and other reports give the effect of whatever costing method you want.
Alternatively make every purchase of a stock a separate Inventory Item.
If you buy BHP on three separate occasions then you have three separate Inventory Items.
If you decide to sell one lot, pick which item best suits your circumstances at the time.
With #5, this allows the investor to manage their financial affairs, it doesn’t apply to those who are deemed as traders.
Why do assume that a stockbrokers statement of position is preferable over your own accounting records.
Every buy and sell has a contract note - your accounting records should reflect those exactly.
As long as they do, then there are no other considerations to be contemplated
For tax purposes your financial records are the essential element, not someone else’s methods / summaries.
To be quite frank, over the past decades one has never had to have these consternations.
Record the buys, record the sells as per the contract notes and hope that there are more greens then reds.