Sound advice - blog

I'm gathering confidence that my understanding of international accounting or accounting for commodities or for inventory is the correct one. This kind of accounting is where you carry shares, foreign currency, bicycles, whatever that can't be described strictly in the (australian) dollar sense. Nonetheless, your accounts must track their value in order to be correct.

I've been using Accounting 3[1] as my main reference tome. It has sections on inventory and international business, but always talks about them in dollar terms. This is clearly correct, but is not the whole picture. The book explains how when you purchase inventory at a particular cost price all the costs of that inventory go into your inventory asset account. When you sell the item you take the cost of the item out of your inventory, and record the income event in the same transaction:

This is actually really simple. You spend some money to get something, but it's actually going to bring in some income pretty soon. You don't want to record the expense event until you can match it to the income event. It brings some balance to your chaotic accounting system. It can get more complicated when you don't sell all your books at once, and it can also get more complicated when you buy some more books before you've finished selling the old ones. You might buy and sell some of the books at different prices, so it can be tricky to keep track of things.

One way of keeping track is to take every indivdual book and record its indivdual cost and sale price. That can get overly weary, so mostly you take your idential books and put them in a single pool. You use some standard methods for guessing the actual cost of each single book you sell, based on how many books are left and how much the whole lot cost you. You can see what's missing, though.

We haven't actually recorded the number of books we have on hand in a machine-readable way!

This brings us to the crux of this issue. You've got a complete, self-consistent set of accounts in aussie dollars which track the cost value of the books you own. They don't track the number of books, and can't tell you anything about the books themselves. What you needs to do is to keep another set of records.

This second record set looks very much like a set of accounts, but it tracks a different kind of commodity. In this case your identical set of books. I see this again as a self-contained accounting system:

Notice the parallels with the "real money" transactions. So we now have two sets of accounts that track the same thing, but in different quantities. As in this example you will often have the two amounts vary at the same time. On the other hand, they may vary independently. You might be given 5 books for free. This doesn't change the cost basis of your (now) 10 books. It does change the amount you have on hand, though.

I think this concept of a separate set of accounts stands up across all kinds of commodities, and even stacks up in a system of barter where you buy commodities with other commodities... or you buy US stocks with US dollars. Every commodity you carry has its own set of accounts to deal with them.

I see real deficiencies in the way gnucash deals with multiple currencies. Under its current system, a transaction involving multiple currencies has a "home" currency. All components of the transaction must have home currency equivalent value attached to them and no checking is done to ensure that the foreign currency amounts actually balance. I think what will be needed in the future accounting system is to allow a single transaction to affect accounts in several currencies, and ensure that each currency's total balances correctly.

The other impact this all has is at query time. Queries can only really occur over transaction entries in the same set of accounting records. You can't compare apples and oranges (except perhaps in terms of taste, size, tangyness, and texture). So you can see how your net worth is doing based on the cost value of your shares... or you could see how many shares you have. You might even pull in current market data to do that apples and oranges comparison and try to see how much you would be worth if you sold your shares. In the end, though. It is the accounts that I'm trying to defined. They're the sacred... uhh... apple. The accounts themselves will be consistent for each currency represented.

[1] From inside the front cover:
Accounting.

3rd ed.
Includes index.
ISBN 0 7248 0500 1.

1. Accounting. I. Horngren, Charles T., 1926-.

657.046