[COMMENT: The more I think about my two experiences dealing with my QuickBooks Support and the more I learn about using QuickBooks, the more I realize that they can't handle anything more the run-of-the-mill question.]
In the course of my business, I sometimes use money from my company to make investments in other companies. Also, sometimes I am given a "kicker" as a bonus on top of another transaction (e.g. a loan to finance a PO). Sometimes I act as an angel venture capitalist, sometimes I'm a lender, and the rest of the time I'm a consultant. It's all pretty small time but I still need to track it properly.
In the first case, I am actually buying stock or equity in the other company. (I tried to explain to what a "stock certificate" was to the the support tech but he ultimately tried to get me to record it as an "Expense" called "Stock Certificates" which I don't think was correct.) I think I need to create an "Other Asset" account and show the transfer of the cash to the company (via a Check) and apply it to the Other Asset account. Does that seem correct?
In the second case, equity as a kicker, can I just record the addition to an other asset account without any other flows of cash (even though it is associated with a loan) or do I need to record it as part of the repayment of the loan transaction?
Finally, I'm trying to figure out how to organize the accounts and manage the value of those equity assets. I was thinking about creating a parent account called "Other Company Equity" and creating "Company A" and "Company B" as subaccounts. I don't think there would be any problem having multiple equity transactions (e.g. series A equity and series B equity) for the same company in the same account.
However, it seems natural that I should be able to record adjustments in the value (similar to how we record depreciation for fixed assets). In this case, I'm thinking of when there has been a material change in the other company and the stock can no longer be fairly valued at the orginial price. It's not a depreciation but shouldn't that be recorded in the asset account of that company? I don't need to create corporte equity accounts like we do fixed asset accounts by having to subaccounts, do I?
I'll address warrants in another message at a later date.
Please let me know if I'm even close to being on the right track. Any and all suggestions and bits of information will be greatly appreciated -- references especially.
Chip, you create a current asset account called Investments @ Cost or Marketable Securities and then I would make a sub account for each one to track them separately. Record the purchase of the investment with Write Checks and charge the investment account. That is all you do until you sell the investment. You don't make entries for the market fluctuations on your books.
At such time as you sell the asset, then you record the gain or loss on the transaction. You would have an additional Income type account for Capital Gains & Losses and may want to separate the Long Term from the Short Term sales.
Thank you Joey for your response -- it was certainly helpful.
I do have a follow-on question or two though. I need to clarify that this investment is not in marketable securities but is in a private, pre-public, company. So, is it really correct to identify this as a "current asset" since I have no expectation of converting this to cash within a year? In fact, I have owned this investment for around 4 years.
Secondly, if there has been a material change in the value of the company, isn't it appropriate to "write down" those changes? For example, a significant change in their market (e.g. the telecom meltdown) led to a significant reduction in income, layoffs, cancelling projects, etc. and resulted in a dramatic reduction in their valuation based upon generally accepted methods (e.g. Price-to-Sales ratio).
In this unfortunate case, I don't expect to recoup my full investment. I still carry the stock on my books, so to speak but I have very low expectation of a payout much less a capital gain. I guess it doesn't really hurt to continue to carry the stock at its initial value but it seems to artificially inflate the value of my own company.
