Hi, I am trying to create an income statement to keep track on my trading on a monthly basis.
My question is, when it comes to transaction costs for trading companies etc., GAAP wants transaction costs to be booked in the month the trade was open or when it was closed? And, do you book both trade opening and closing cost or only half and book the rest when you close the trade?
I hope you get what I mean. If I am completely wrong with my assumptions please let me know what is the standard approach to create an income statement for a trading company in its simplest form.
Thanks!!
the standard approach is to book all these costs on a year to year basis. you can obtain all the numbers you need (accumulated spreads, commitions, fees, losses, gains etc.) by standard account statements of your broker which can be downloaded (usually as a PDF) in your online portal from the broker.
The easiest way is to do it yearly, if you plan to do it monthly then the authorities will demand of you to pay your taxes monthly as well.
if you have trades which started in one year and ended in another year then the broker will split the comitions by himself into the 2 years, this means that you can deduct half of the commition in the first year and the 2nd half only a year later when the 3rd year beginns.
but in the end its no difference since you wont safe or lose on the year-to-year basis. there is a big benefit to it thou, if you pay taxes at the years end only, then you have the accumulated untaxed profits at your disposal for further trades, which means you can have bigger positions and therefore bigger gains. if you pay your duties on a monthly basis then you do not have this benefit.
HI, thanks for the reply. I understand. I was just curious from a theoretical point of view how an income statement would be structured if done on monthly basis. So it is one half in the period the trade is open and the remainder when it is closed for transaction costs.
I was also thinking about the running profit or loss on the open trades at the end of the month. If i see my open trades as my inventory and at the end of the month i have a running loss of 100$ lets say, do i deduct this loss from my released profit (if any) as if I was charging inventory write down against gross profit? So for example, gross profit +300$ (after deducting transaction costs to close trades) less 100$ (running loss on open trades including transaction costs to open trades ) = net income of 200$??
yes, pretty much. but then no. you must see yur account balance as inventory. the trades itself are “operations” so to say.
about your first question if you want to know it in detail how it could be done on a month-to-month basis:
example: trade which gets open on 20th january and closed on 20th february:
Commisition for opening trade: booked in january as cost
Swaps/Rollovers: booked on a daily basis as costs from 20th till 32st
Swaps/rollovers in feb: booked from 1st till 20th as costs for february
Spread: booked as costs in february (allthought spread gets deducted from your trade it is costs only after the operation is settled as only by then it is deducted from your account balance)
Commision for closing trade: bookd as costs in february
it is just too much work to mess around with it, on a year-to-year basis you will get way less numbers and easier accounting.
OK. thanks so much for helping with this. one final aspect i am a bit confused about. say i have many trades open and at the end of the month i have again a running 100$ loss. in the following month i open and close some trades and I end up with a running loss of 120$. since in the previous period i have already booked a loss of 100$, in order not to double count, do I only book a loss of 20$ (since my inventory has already been written down for 100$) for this period or do i book the whole 120$ against my profits from closed trades for the period??
is the accumulated loss in both months is 120 and not 220 (first month 100 and second month 120 again) then you book a loss of 20.
if in first month you lost 100 and second month 120 again then you book a combined loss of 220.
what matters is what comes out at years end as accumulated p/l
i want to delete the screenshot
I am not sure if im doing it right… can you tell me if this spreadsheet looks right for you?
sure looks good, but for finacial reporting you need more information. add a few rows called “commition for open”, commision for closing, spread paid, swaps paid. as those are your costs you deduct.
if you want to keep track of your trades and how they perfomed then it is completely enough what you did.
Thanks.
you think its fine that i only state that my loss (unreleased) for this period is 28.09 currently even though on my open positions i am actually losing -100.10$? i say 28.09 because it would be the current 100.10 loss + trans. costs to open new trades costing 15.60$ - the loss already recognized in the previous period of 87.61. I am just not sure if that is not misleading or unacceptable to present it that way. if its fine than i end up with a current return of 6.54% considering the opening balance and released gains
Why it is important for both closing and opening. It’s will give you a good out look of what is going on.
Like I might want to say today closing is a thing that is to happen with the tomorrow opening price.