Hello fellow GnuCash users,
Per the subject, I'm somewhat confused by the impact of the report "Price
Source" when recording Bills received in a foreign currency.
I'm using GnuCash for a UK business (all accounts in GBP) for very simple
affairs.
I use the services of a US business which invoices everything in USD.
To account for this GnuCash, I've done the following:
* Enabled Trading Accounts
* Created an A/Payable account in USD ("Liabilities:Current
Liabilities:Trade Creditors USD")
* Created a USD expenses account for the company ("Expenses:US Company USD")
* Created a Vendor for the company and set its payment currency to USD
When I receive an invoice from the company, I do the following:
* Create a Bill for the invoice, with the USD amount shown on the invoice,
for the Vendor
* Post the Bill to the Trade Creditors USD (Liability) / US Company USD
(Expense) accounts
When I pay the invoice, I do the following:
* Credit Bank (GBP) and debit Trade Creditors USD (USD)
* GnuCash prompts for the exchange rate; I input the GBP amount which was
taken from the bank account for the payment
An example of three invoices received:
1. Invoice 1: $14.40
2. Invoice 2: $14.40
3. Invoice 3: $14.40
* Balance of US Company USD (Expense): $43.20
When credited from Bank (GBP), the amounts respectively are:
1. £10.60
2. £10.87
3. £11.02
* Total expenses paid from bank in GBP: £32.49 - this is the figure I
expect to see on the P&L
These figures match up with what is shown in the trading accounts: GBP £32.49,
USD -$43.20.
Generating P&L
When I now go and generate a report (e.g. Profit & Loss), the default options
seem to be showing the expenses at the most recent exchange rate.
I see expenditure of e.g. £32.61, with a £0.12 currency trade. This means the
P&L is wrong and the balance sheet won't balance, because the expenditure from
Bank was actually only £32.49.
It seems the multi-currency features in GnuCash are geared towards actual
currency trading/asset tracking etc., not my simple "I've got a USD invoice"
scenario.
To me, the £32.61 figure seems blatantly incorrect; I haven't spent that much
money. My understanding is the P&L needs to show £32.49, which is how much was
actually taken from the Bank and debited to "Trading:Currency:GBP" from
"Trading:Currency:USD".
It seems GnuCash is forcing automatic currency conversions onto me when I don't
need them, and breaking things in the process, but my understanding may be
wrong, which is why I'm asking this.
By changing "Price Source" in the report options to either "Average Cost" or
"Weighted Average," I can get the P&L to show £32.49 as expected.
However, I don't understand why this works, or what these two price sources are
actually calculating. I've read the documentation and don't fully understand
the language so could really benefit from some clarification.
Although it is currently working, I need to understand why it is working and
whether it will continue working, in order to have peace-of-mind that the P&L
will continue to show the expected figure when using these options in the
future, after adding further transactions.
The documentation says this of "Average Cost":
The amount-weighted net average of all splits exchanging the
commodity for another regardless of account. Gain/loss splits are included in
the calculation.
While this does produce the value I expect to see on the report (in my trivial
experiments), I'm concerned about the "average" labelling as I don't understand
what is actually being averaged or how it's ending up producing the correct
value, when the defaults don't. The same is true of "Weighted Average" - again,
it gives me the figure I want to see, but I don't know why. What is it
averaging? What is it weighting with respect to what? How will the output of
these two options differ, if at all, as I add more transactions in this manner?
My questions
1. Please provide a simple explanation of the "Average Cost" / "Weighted
Average" price sources. Which is most appropriate for my scenario? Why do they
give me the correct value, and will they continue to do so down the line? Is
there a risk future transactions will throw off the "average" and create an
incorrect P&L in the future, which I won't necessarily immediately spot?
2. Is there anything wrong with my process here?
The confusing thing for me is that everything is displayed as expected with the
figures in the chart of accounts, but I'm getting thrown by the default report
options and the labelling of the price sources. I believe this is just
GnuCash's default multi-currency/trading handling conflicting with my
requirements but need to make sure.
I just want to confirm if it is safe for me to record USD bills in this manner
when my books are in GBP, and then how I should go about generating a P&L which
shows the total expenses in GBP as actually paid out of the bank.
Kind regards,
James Walker
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