I am using a double-entry bookkeeping system.

Currently, only actual journals (purchases, sales, credit notes, cheques, deposits, transfers, etc.) are recorded in the system. Reports like Trial Balance and Balance sheet work out Opening Balances, Retained Earnings, Net income for the year on the fly by summing appropriate journal records.

I now have a new desire to account for shares purchased. Tracking share purchases in a double-entry bookkeeping system goes outside my knowledge, and I would be glad of advice.

I have created an account which corresponds to my account with a share broker. When I pay the broker money, I do a transfer from my bank account to the broker's account, which leaves a cash balance with the broker.

When the broker purchases some shares on my behalf, I create a journal which takes the share cost plus the fees out of the broker account. I'm assuming the other side of this journal would be an expense account for the fee, and a special account for the individual share - is that right? I am also recording (in a linked record) the quantity of shares purchased and purchase price. Should this special account appear on the balance sheet? If so, under what heading?

Likewise when the broker sells shares on my behalf, there will be a journal which puts the sale value back into the broker account, and puts any fees in expenses. It would also presumably deduct the quantity * selling price from the special account. And the quantity sold and selling price would be recorded in the linked record.

However, this is where I get a bit lost. From this information, how do I work out gains/losses, and where do they appear on the balance sheet & trial balance?

Supplementary question: What is the meaning of "Cost Basis" when showing portfolio value, and how is it calculated? Particularly when there are many buy and sell transactions for the share in question.

closed as off-topic by Dheer, Joe, Ganesh Sittampalam, Chris W. Rea, Dilip Sarwate May 10 '15 at 1:39

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    This is probably the wrong SE site for this question. Maybe one of the database sites would be more appropriate? But it's a very valid question. See this link for some balance sheet examples as you described: bit.ly/1cVJgEW – Rocky Apr 21 '15 at 15:20
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    I'm voting to close this question as off-topic because its about software development – Dheer Apr 23 '15 at 4:34
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    I know how to do software development. I lack some knowledge on accounting for stocks and shares, so I thought it best to ask my question where I can find expertise in accounting. If this is wrong, can you tell me where else I can find accounting experts to ask? – Nikki Locke Apr 28 '15 at 12:06
  • Cost basis and capital gains calculations for tax purposes would dependent on jurisdiction. – Chris W. Rea Apr 28 '15 at 12:58
  • I edited to remove some software development points because this is really a question about how to record share purchases in double entry bookkeeping and portfolio tracking. – Alex B May 4 '15 at 16:52

I’m going to answer this because:

  • this isn’t about accounting, this is about portfolio tracking.
  • you are a sole proprietor.

Accounting books only reflect the dollar value of inventories. Which means if you look at the balance sheet of McDonalds, you will not see how many bags of French fries are remaining at their storage facility, you will only see the total value at cost basis.

Your requirement for noting the number of shares purchased is not part of the double entry accounting system.

When you transfer $10000 from bank to broker, the entries would be:

                                        DR      CR
Current Asset: Investments: Cash        10000
    Current Asset: Bank                         10000

The bank’s name and the broker’s name will not appear on the balance sheet.

When you purchase 50 shares at $40 per share, the accounting system does not care about the number of shares or the price. All it cares is the $2000 total cost and the commission of $10.

You have two choices, either place $10 to an expense account, or incorporate it into the total cost (making it $2010).

The entries for the second method would be:

                                            DR      CR
Current Asset: Investments: Holdings        2010
    Current Asset: Investments: Cash                2010

Now your balance sheet would reflect:

                            Subtotal    Total
Investments                             10000
    Cash                        7990
    Holdings                    2010

What happens if the price increases from $40 per share to $50 per share tomorrow? Do nothing. Your balance sheet will show the cost of $2010 until the shares are sold or the accounting period ends. It will not show the market value of $2500.

Instead, the Portfolio Tracker would show $2500. The most basic tracker is https://www.google.com/finance/portfolio .

Later if you finally sell the shares at $50 per share with $10 commission:

                                            DR      CR
Current Asset: Investments: Cash            2490
    Current Asset: Investments: Holdings            2010
    Income: Profit on Disposal                      480

Again, the number of shares will not be reflected anywhere in the accounting system. Only the total proceeds from the sale matters.

  • Addendum: Many personal finance money management tools build portfolio tracking in along with the accounting stuff, and track market values as part of net worth, not just book value. – Chris W. Rea Apr 28 '15 at 13:01
  • Thanks for that clear answer. I think you saying that share gains should not be shown in the balance sheet until they are realised. That would mean that a person or company that bought 100 shares many years ago at £1, and the shares are now worth £1000 each would show their assets as £100, rather than £100,000. This seems unlikely to me! – Nikki Locke Apr 29 '15 at 10:06
  • That is not what I meant. I said "until the shares are sold or the accounting period ends". When the accounting period ends, it will be revalued using profit and loss or comphrehensive income depending on the purpose of holding investment. – base64 Apr 29 '15 at 10:09
  • Ah, thank you. I am interested in what happens at the end of the accounting period (which is when I usually print my balance sheet). Sorry the question was not more explicit. – Nikki Locke Apr 29 '15 at 10:11
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    You need to consult the accountant of the company regarding FRS 26 (IAS 39). The methods depend on the objectives of the investment and the legal status of the firm. The bottom line is that the number of shares does not matter in double entry accounting. – base64 Apr 29 '15 at 10:34

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