Investments-The Paper That It Generates
- Jake Chazan
- Jan 22, 2016
- 3 min read
Recording keeping for investment portfolios and other investments is an important aspect of keeping track of your money. Quite often we seem to neglect documentation on our portfolios. My experience is that active or large portfolios need constant management-trade confirmations, monthly statement, the movement in an out of cash, withholding taxes for example. Private illiquid investments such as residential and commercial mortgages also generate an substantial amount of paper-legal documents, amortization schedules, payout statements and the like.
You cannot allow yourself to get behind on this as it creates a host of problems. The more time passes, the greater the problems.
There is one important aspect of maintaining books on investments that you need to be aware of. Much like many assets such as receivables, inventory and equipment, it's important to maintain a "subledger" of all the investments no matter what form they take. A subledger is a record of each asset that is owned. Entires are made to the subledger accounts and to the control account in the general ledger. So entries are recorded twice, once in the subledger and a second time in the general ledger. It's good practice to then reconcile the subledger to the general ledger each month or quarterly depending on the level of activity. It is this reconciliation that ensures that all entries recorded in the general legder and the subledger agrees.
In addition, it's important to make sure that items are recorded in the correct individual account and that errors are not made which misclassifies items between investments.
A simple example would be a basic portfolio. Let's assume that we own three stocks. One is 1,000 share of Apple, the second is 1,000 shares of Costco and the third 1,000 shares of Canadian Tire Class A. The subledger would have three accounts labeled Apple, Costco and Canadian Tire Class A. In the general ledger one would record the three investments. Assume that my purchase price of Apple is $100, Costco $150 and Canadian Tire Class A at $105.00.
The firrst thing to note is that two of the shares are listed in the United States, the third is listed in Canada. Two stocks are denominated in US dollars, one in Canadian dollars. Let's assume that the books of account are in Canadian dollars. The share purchases for "book" purposes need to be recorded in Canadian dollars. So we need to know the exchange rate. Presumably we used Canadian dollars to make the purchase (an added complication would be having an existing portfolio of US dollar denominated shares and cash. Let's ignore that complicating factor for now, namely an existing pool of US dollars). Your accountant will need that historical rate in order to do any calculations on the eventual disposal of the shares. So having the exchange rate on the day the trade was executed is important.
In the subledger and ledger conversions will need to be made to track the cost of any shares. You can see that leaving this for another day becomes problematic. It's not that we can't go back and get the exchange rate from another source, but with the passage of time it may become more difficult to find it. If we do it right the first time, we don't have an issue at a later date.
Similarly, there may be a foreign exchange component with respect to dividends (withholding taxes) and other items that may come up.
It sounds like an overwhelming task, but think what might happen if you let this slide for years. Complicated. So why not do it right from the start?
Existing portfolios become a whole other matter. Try fixing this up after the passage of time-five or ten years. A headache. If your accountant has to do it then you'll add considerable cost to the process. Your investment advisor statements may or may not help. The balances on their reports may or may not have the historical information that you need. Just a number. Yikes. What a potential headache.
Aside frrom any adjustments that your accountant will need to make, the bookkeeping on an ongoing basis becomes critical. The bookkeeper needs to be understand the underlying deal not matter what it is, stocks, bonds, mortgages, venture capital investments, whatever. For large and diverse portfolios it can be challenging.
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