Hello everyone! I'm not an accountant, so I apologize if my question seems trivial or unclear. I'm trying to understand trading accounts used for transactions involving different currencies. My main source of knowledge on this is Peter Selinger's tutorial on multiple currency accounting (https://www.mathstat.dal.ca/~selinger/accounting/).
While I grasp the technical aspects, I'm unsure about the actual significance of these accounts (I understand that their main purpose is to calculate gains and losses) and I don't know how to close them.
For example, in Table 4.4 "USD Trading (trading)" account balance reads "USD 0, +CAD 7". What does it represent? If there were no other transactions in the accounting period, how would the closing entry be journaled? How does this account affect the Balance Sheet? I understand how gains and losses are calculated in the Table 5.1, but the house prices there are tracked and all the houses are sold eventually.
Let's say that I earn in CUR1 and keep the cash in a CUR1 account, but my expenses are in CUR2. Over time, my currency trading account would accumulate "-CUR1, +CUR2" entries from purchases (unlike the house example where they're sold). What do these sums/accumulations represent? The effective balance can't be zero, as currency rates constantly fluctuate, but there's no gain/loss for me (I'm not going to sell my groceries). I guess it's unrealized gain/loss and I should put it under Equity, but how to balance it? How should I journal the closing entries and how does this impact the Balance Sheet? How would it impact the opening balances in the next accounting period? As I was purchasing goods (so there's no CUR2 in my possession that I could sell to "realize" the gains/loses), would unrealized gains/loses accumulate indefinitely?
I'm wondering if I've missed the broader point. Any insights or guidance would be really appreciated. Thank you!
While I grasp the technical aspects, I'm unsure about the actual significance of these accounts (I understand that their main purpose is to calculate gains and losses) and I don't know how to close them.
For example, in Table 4.4 "USD Trading (trading)" account balance reads "USD 0, +CAD 7". What does it represent? If there were no other transactions in the accounting period, how would the closing entry be journaled? How does this account affect the Balance Sheet? I understand how gains and losses are calculated in the Table 5.1, but the house prices there are tracked and all the houses are sold eventually.
Let's say that I earn in CUR1 and keep the cash in a CUR1 account, but my expenses are in CUR2. Over time, my currency trading account would accumulate "-CUR1, +CUR2" entries from purchases (unlike the house example where they're sold). What do these sums/accumulations represent? The effective balance can't be zero, as currency rates constantly fluctuate, but there's no gain/loss for me (I'm not going to sell my groceries). I guess it's unrealized gain/loss and I should put it under Equity, but how to balance it? How should I journal the closing entries and how does this impact the Balance Sheet? How would it impact the opening balances in the next accounting period? As I was purchasing goods (so there's no CUR2 in my possession that I could sell to "realize" the gains/loses), would unrealized gains/loses accumulate indefinitely?
I'm wondering if I've missed the broader point. Any insights or guidance would be really appreciated. Thank you!