Gnucash: How to track similar expenses in two currencies appropriately?

Question

Suppose that someone spends most of their life in one country with currency X, and a few years in another country where they have currency Y. Let's suppose also that the person earns a similar income and has similar types of expenses in both countries (such as rent and groceries).

From what I understand searching the internet, there are two different ways to structure this person's Gnucash accounts in order to track expenses and income. So far though, I've unfortunately not been able to find information on the advantages and disadvantages of these methods.

Option A: Either you create duplicate accounts, e.g.:

• (asset) Bank Account X (in currency X)
• (asset) Bank Account Y (in currency Y)
• (income) Income X (in currency X)
• (income) Income Y (in currency Y)
• (expense) Rent X (in currency X)
• (expense) Rent Y (in currency Y)
• (expense) Groceries X (in currency X)
• (expense) Groceries Y (in currency Y)

Option B: Or, one does not split the expenses and uses the main currency X for the similar expenses:

• (asset) Bank Account X (in currency X)
• (asset) Bank Account Y (in currency Y)
• (income) Income X (in currency X)
• (income) Income Y (in currency Y)
• (expense) Rent (in currency X)
• (expense) Groceries (in currency X)

I also gather that in both cases the person should enable the "Use Trading Account" option in Gnucash to ensure that the books balance due to fluctuating exchange rates*.

Question: From an accounting perspective, and when often examining expense reports etc, which method would be most appropriate for the situation?

*For background see question Good way to record currency conversion transactions in personal accounting software? and specifically the references http://www.mathstat.dal.ca/~selinger/accounting/tutorial.html and http://www.mathstat.dal.ca/~selinger/accounting/gnucash.html noted there.

Answer 1

You are making a False Dichotomy.

Consult IAS 21 http://www.iasplus.com/en/standards/ias/ias21

A double entry accounting system should only have one currency.

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If you spend 51% time in Country X and 49% in Country Y, the most ideal way is to create separate books, with a holding entity, and use inter-company accounts for transfers.

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If your income source is highly concentrated in Country X, and you only spend time in Country Y occasionally, the correct way is to use Currency X for everything, but treat your Foreign Currency in Bank as Inventory. When you purchase Currency Y with Currency X, you record double entry in Currency X, but note down the cost.

When you spend your Currency Y, credit that Foreign Bank at cost (in Currency X), debit expense at market value (still in Currency X), put difference in Currency Gain.

You have to decide between First in First Out and Weighted Average method to measure the cost.