How to account for Capital Gains (Losses) in double-entry accounting?
"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: 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) 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." 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)
In addition to the adjustment type in NL7's answer, there are a host of others.  If there are any adjustments, form 8949 is required, if not, the gains can be separated into short and long-term and added together to be entered on Schedule D.  Anything requiring an adjustment code in column F of the 8949 requires an entry in column G.   Some other example entries for column F include: (see the 8949 instructions for a complete list) **A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. (from Pub17) "The bank will make this even more confusing because they use the terms from their own perspective. From the bank's perspective  (printed on your statements) credit: Money into your account  (increases the bank's liabilities) debit: Money out of your account  (decrease bank liabilities) From your perspective: It depends on the nature of the transfer of money, but here are the most common for a personal account. Income into your account: Credit Expenses out of your account: Debit Payment on a loan made for an asset (house/car): Credit for the loan account, debit for the equity account for the car/house/etc. Yes, it's complicated. Neither credits nor debits are always a + or -. That's why I agree with the advice of the others here that double-entry accounting is overkill for your personal finances. Note: I simplified the above examples for the purpose of clarity. Technically every transaction in double entry accounting includes both a credit and a debit (hence the ""double"" in the name). In fact, sometimes a transaction involves more than one credit or debit, but always at least one of each. Also, this is for EACH party. So any transaction between you and your bank involves at least FOUR debits and/or credits when all involved are considered." In my opinion, every person, regardless of his or her situation, should be keeping track of their personal finances.  In addition, I believe that everyone, regardless of their situation, should have some sort of budget/spending plan. For many people, it is tempting to ignore the details of their finances and not worry about it.  After all, the bank knows how much money I have, right?  I get a statement from them each month that shows what I have spent, and I can always go to the bank's website and find out how much money I have, right?  Unfortunately, this type of thinking can lead to several different problems. Overspending.  In olden days, it was difficult to spend more money than you had.  Most purchases were made in cash, so if your wallet had cash in it, you could spend it, and when your wallet was empty, you were required to stop spending.  In this age of credit and electronic transactions, this is no longer the case.  It is extremely easy to spend money that you don't yet have, and find yourself in debt.  Debt, of course, leads to interest charges and future burdens. Unpreparedness for the future.  Without a plan, it is difficult to know if you have saved up enough for large future expenses.  Will you have enough money to pay the water bill that only shows up once every three months or the property tax bill that only shows up once a year?  Will you have enough money to pay to fix your car when it breaks?  Will you have enough money to replace your car when it is time?  How about helping out your kids with college tuition, or funding your retirement?  Without a plan, all of these are very difficult to manage without proper accounting.   Anxiety.  Not having a clear picture of your finances can lead to anxiety.  This can happen whether or not you are actually overspending, and whether or not you have enough saved up to cover future expenses, because you simply don't know if you have adequately covered your situation or not.  Making a plan and doing the accounting necessary to ensure you are following your plan can take the worry out of your finances. Fear of spending.  There was an interesting question from a user last year who was not at all in trouble with his finances, yet was always afraid to spend any money, because he didn't have a budget/spending plan in place.  If you spend money on a vacation, are you putting your property tax bill in jeopardy?  With a good budget in place, you can know for sure whether or not you will have enough money to pay your future expenses and can spend on something else today. This can all be done with or without the aid of software, but like many things, a computer makes the job easier.  A good personal finance program will do two things: Keeps track of your spending and balances, apart from your bank.  The bank can only show you things that have cleared the bank.  If you set up future payments (outside of the bank), or you write a check that has not been cashed yet, or you spend money on a credit card and have not paid the bill yet, these will not be reflected in your bank balance online.  However, if you manually enter these things into your own personal finance program, you can see how much money you actually have available to spend. Lets you plan for future spending.  The spending plan, or budget, lets you assign a job to every dollar that you own.  By doing this, you won't spend rent money at the bar, and you won't spend the car insurance money on a vacation. I've written before about the details on how some of these software packages work.  To answer your question about double-entry accounting: Some software packages do use true double-entry accounting (GnuCash, Ledger) and some do not (YNAB, EveryDollar, Mvelopes).  In my opinion, double-entry accounting is an unnecessary complication for personal finances.  If you don't already know what double-entry accounting is, stick with one of the simpler solutions. Edited in response to JoeTaxpayer's comment and OP Tim's additional question. To add to and clarify a little what littleadv has said, and to answer  OP Tim's next question: As far as the IRS is concerned, you have at most one Individual Retirement Account of each type (Traditional, Roth) though the money in each IRA can be invested with as many different custodians (brokerages, banks, etc.) and different investments as you like. Thus, the maximum $5000 ($6000 for older folks) that you can contribute each year can be split up and invested any which way you like, and when in later years you take a Required Minimum Distribution (RMD) from a Traditional IRA, you can get the money by selling just one of the investments, or from several investments; all that the IRS cares is that the total amount that is distributed to you is at least as large as the RMD. An important corollary is that  the balance in your IRA is the   sum total of the value of all the investments that various custodians are holding   for you in IRA accounts. There is no loss in an IRA until every penny has been withdrawn from every investment in your IRA and  distributed to you, thus making your IRA balance zero.  As long as you have a positive balance, there is no loss: everything has to come out. After the last distribution from your Roth IRA (the one that empties your entire Roth IRA, no matter where it is invested and reduces your Roth IRA balance (see definition  above) to zero), total up all the amounts that you have received as  distributions from your Roth IRA. If this is less  than the total amount of money you contributed to your Roth IRA  (this includes rollovers from a Traditional IRA or Roth 401k  etc., but not the earnings within the Roth IRA that you re-invested inside the Roth IRA), you have a loss that can be deducted on Schedule A as a Miscellaneous Deduction subject to the 2% AGI limit. This 2% is not a cap (in the sense that no more than 2% of your AGI can be deducted in this category)  but rather a threshold: you can only deduct whatever part of your total Miscellaneous Deductions exceeds  2% of your AGI. Not many people have Miscellaneous Deductions whose total exceeds 2% of their AGI, and so they end up not being able to deduct anything in this category. If you ever made nondeductible contributions to your  Traditional IRA because you were ineligible to make a  deductible contribution (income too high, pension plan  coverage at work etc), then the sum of all these contributions is your basis in your  Traditional IRA. Note that your deductible contributions, if any, are not part of the basis.  The above rules apply to  your basis in your Traditional IRA as well.  After the last distribution from your Traditional IRA (the one that empties  all your Traditional IRA accounts and reduces your Traditional IRA balance to zero), total up all the distributions that you received (don't forget to include the nontaxable part of each distribution that represents a return of the basis). If the sum total is less than your basis, you have a loss that can be deducted on Schedule A as a Miscellaneous  Deduction subject to the 2% AGI threshold. You can only deposit cash into an IRA and take a distribution in cash from an IRA. Now, as JoeTaxpayer points out, if your IRA owns stock, you can take a distribution by having the  shares transferred from your IRA account in your brokerage to your personal account in the brokerage.  However, the amount of the distribution, as reported by the brokerage to the IRS, is the value of the shares transferred as of the time of the transfer, (more generally  the fair market value of the property that is transferred out of the IRA) and this is the amount you report on your income  tax return. Any capital gain or loss on those shares remains inside the IRA because your basis (in your personal account) in the  shares that came out of the IRA is the amount of the distribution.  If you sell these shares at a later date, you will have a (taxable) gain or loss depending on whether you sold the shares for more or less than your basis. In effect, the share transfer transaction is as if you sold the shares in the IRA, took the proceeds as a cash distribution and immediately bought the same shares in your personal account, but you saved the transaction fees for the sale and the purchase and avoided paying the  difference between the buying and selling price of the shares as well as any changes in these in the microseconds that would have elapsed between the execution of the sell-shares-in-Tim's-IRA-account, distribute-cash-to-Tim, and buy-shares-in-Tim's-personal account transactions.  Of course, your broker will likely charge a fee for transferring ownership of the shares from your IRA to you.  But the important point is that any capital gain or loss within the IRA cannot be used to offset a gain or loss in your taxable accounts.  What happens inside the IRA stays inside the IRA. "A nondividend distribution is typically a return of capital; in other words, you're getting money back that you've contributed previously (and thus would have been taxed upon in previous years when those funds were first remunerated to you). Nondividend distributions are nontaxable, so they do not represent income from capital gains, but do effect your cost basis when determining the capital gain/loss once that capital gain/loss is realized. As an example, publicly-traded real estate investment trusts (REITs) generally distribute a return of capital back to shareholders throughout the year as a nondividend distribution. This is a return of a portion of the shareholder's original capital investment, not a share of the REITs profits, so it is simply getting a portion of your original investment back, and thus, is not income being received (I like to refer to it as ""new income"" to differentiate). However, the return of capital does change the cost basis of the original investment, so if one were to then sell the shares of the REIT (in this example), the basis of the original investment has to be adjusted by the nondividend distributions received over the course of ownership (in other words, the cost basis will be reduced when the shares are sold). I'm wondering if the OP could give us some additional information about his/her S-Corp. What type of business is it? In the course of its business and trade activity, does it buy and sell securities (stocks, etc.)? Does it sell assets or business property? Does it own interests in other corporations or partnerships (sales of those interests are one form of capital gain). Long-term capital gains are taxed at rates lower than ordinary income, but the IRS has very specific rules as to what constitutes a capital gain (loss). I hate to answer a question with a question, but we need a little more information before we can weigh-in on whether you have actual capital gains or losses in the course of your S-Corporation trade." "I would suggest you forget everything you learned in economics. The only applicable knowledge is Accounting 101.  Step 1: An accrual basis financial statement. There is no step 2 if you don't do this. Most small business do everything cash basis. Simpler, cheaper but useless for analysis. You would get better answers from the local fortune teller than a cash basis statement.   Make one change from the general rules. If you have debt or are paying interest for inventory include that in your cost of sales. This is actually proper but the rule is little known and often ignored. Interest on debt up to the amount of inventory is a cost of inventory.  Step 2: Gross profit. If you seem to be working hard and still losing money it may be because you are selling products for less than they cost you. In this case the more you sell the more you lose. So suggestions like advertising or doing anything to increase sales are actually destructive.  Step 3 Price products at the level necessary to turn a profit at current sales and overhead. 'When we have enough sales we will make a profit"" is the philosophy of a start up business. It is toxic for a going concern.  Step 4 If sales are unsustainable at the price that produces a profit have the courage to sell or close the business. I have seen people waste their lives on futile endeavors just because they can't make that tough decision.  Finally Step 0: Ignore all other suggestions but this. They are well meaning but ill informed. To reiterate, growing sales while losing money on every transaction is a huge mistake. Trends, books, charts and graphs, analytics and market research are the tools of con-men and fortune tellers. Business is arithmetic and nothing more or less.  FYI if I don't get at least one upvote, this is the last time I am giving my valuable professional advice away for free on reddit. Folks will have to rely on the suggestions of their fellow college kids." When you sell a stock that you own, you realize gains, or losses. Short-term gains, realized within a year of buying and selling an asset, are taxed at your maximum (or marginal) tax rate. Long term-gains, realized after a year, are taxed at a lower, preferential rate. The first thing to consider is losses. Losses can be cancelled against gains, reducing your tax liability. Losses can also be carried over to the next tax year and be redeemed against those gains. When you own a bunch of the same type of stock, bought at different times and prices, you can choose which shares to sell. This allows you to decide whether you realize short- or long-term gains (or losses). This is known as lot matching (or order matching). You want to sell the shares that lost value before selling the ones that gained value. Booking losses reduces your taxes; booking gains increases them. If faced with a choice between booking short term and long term losses, I'd go with the former. Since net short-term gains are taxed at a higher rate, I'd want to minimize the short-term tax liability before moving on to long-term tax liability. If my remaining shares had gains, I'd sell the ones purchased earliest since long-term gains are taxed at a lower rate, and delaying the booking of gains converts short-term gains into long-term ones. If there's a formula for this, I'd say it's  (profit - loss) x (tax bracket) = tax paid "Not to detract from the other answers at all (which are each excellent and useful in their own right), but here's my interpretation of the ideas: Equity is the answer to the question ""Where is the value of the company coming from?""  This might include owner stakes, shareholder stock investments, or outside investments.  In the current moment, it can also be defined as ""Equity = X + Current Income - Current Expenses"" (I'll come back to X). This fits into the standard accounting model of ""Assets - Liabilities = Value (Equity)"", where Assets includes not only bank accounts, but also warehouse inventory, raw materials, etc.; Liabilities are debts, loans, shortfalls in inventory, etc.  Both are abstract categories, whereas Income and Expense are hard dollar amounts.  At the end of the year when the books balance, they should all equal out. Equity up until this point has been an abstract concept, and it's not an account in the traditional (gnucash) sense.  However, it's common practice for businesses to close the books once a year, and to consolidate outstanding balances.  When this happens, Equity ceases to be abstract and becomes a hard value: ""How much is the company worth at this moment?"", which has a definite, numeric value. When the books are opened fresh for a new business year, the Current Income and Current Expense amounts are zeroed out.  In this situation, in order for the big equation to equal out: Assets - Liabilities = X + Income - Expeneses the previous net value of the company must be accounted for.  This is where X comes in, the starting (previous year's) equity.  This allows the Assets and Liabilities to be non-zero, while the (current) Income and Expenses are both still zeroed out.  The account which represents X in gnucash is called ""Equity"", and encompasses not only initial investments, but also the net increase & decreases from previous years.  While the name would more accurately be called ""Starting Equity"", the only problem caused by the naming convention is the confusion of the concept Equity (X + Income - Expenses) with the account X, named ""Equity""."