Accounting Entry in QB for Stock (Short Selling)

@winnie-lim 

There are a number of ways this can be entered.  I generally avoid journal entries but if you want to record it that way, let me know.  Also, I'm not exactly sure how many transactions are involved in short selling (are the original borrow and sale transactions one or two separate transactions, for example) so you my need to modify these.

When you borrow the stock:

Use a $0 Expense transaction (it's not technically and expense but that form work the best IMO).  On line 1, enter the investment asset account for the stock as a positive amount.  On line 2, enter the liability account that you owe for the stock as a negative amount. 

When you sell the stock:

If there's a gain, use a Bank Deposit transaction.  On line 1, enter the investment asset account (at original cost) as a positive amount.  On line 2, enter the amount received as gain to a Gain/Loss on Sale of Investment other income account as a positive amount.  If there's a loss on the sale, change line 2 to a negative amount.

When you repurchase the stock:

Use an Expense transaction.  On line 1, enter the investment asset account at the repurchase price as a positive amount.

A this point, you now have the repurchased stock at (hopefully) a lower cost than the liability account from when you borrowed the stock. 

When the shares are returned:

Close out the investment asset account against the liability account and book the difference to the Gain/Loss on Sale of Investment other income account.  To do that, use an Expense transaction.  On line 1, enter the investment asset account as a negative amount at the repurchased price to close it out. On line 2, enter the liability account that you owe on the stock as a positive amount.  On line 3, enter the gain using the Gain/Loss on Sale of Investment as a negative amount.

Thank you so much for your solution. I am trying to avoid to use JV for this transaction hence seek for alternative. 

Hi Rainflurry,

Thank you so much in providing me a solution.  The transactions volume are quite high hence i am not certain whether this solution is going to work effectively.

Back to your solution.  I would appreciate if you can confirm my understanding with the entries please.

Assume the short selling of shares borrow was USD5000.  The repurchase was USD4800.  The gain was USD200.

When borrow the stock:

Entry 1: Use Expense Transaction

Line 1: Investment Account 5000

Line 2: Shares Short Sell 5000

When sell the stock:

Entry 2: Use Bank Deposit

Line 1: Investment Account 5000

Line 2: Other Income 200

When repurchase the stock:

Entry 3: Use Expense Entry

Line 1: Investment Account 4800

When shares are returned:

Entry 4: Use Expense Entry

Line 1: Investment Account -4800

Line 2: Shares Short Sell 5000

Lime 3: Other Income -200

Looking forward to your reply.  Truly appreciate your help on this transaction.

@winnie-lim 

"When borrow the stock:

Entry 1: Use Expense Transaction

Line 1: Investment Account 5000

Line 2: Shares Short Sell 5000"

Line 1 is correct just make sure it's an other current asset (OCA) account.  Line 2 should be -$5,000 and is a liability account since you owe the broker.  The Expense transaction should total $0 since you did not pay for the shares.  At this point, you have $5,000 in your OCA Investment Account and $5,000 in your Shares Short Sell liability account

"When sell the stock:

Entry 2: Use Bank Deposit

Line 1: Investment Account 5000

Line 2: Other Income 200"

The bank deposit amount will equal the sale price of the stock.  Line 1 is correct.  Line 2 is not $200, it is the difference between $5,000 and what you sold them for.  If you sold them for $5,100, line 2 is $100 to other income.  If you sold them for $4,900, line 2 is -$100 to other income.  The $200 gain is recorded when you return the shares in entry #4.  At this point, you have the cash from the sale of the stock, the OCA Investment Account is $0 (or reduced by $5,000) and the difference was recorded as gain/loss.

"When repurchase the stock:

Entry 3: Use Expense Entry

Line 1: Investment Account 4800"

Yes, that's correct.  

"When shares are returned:

Entry 4: Use Expense Entry

Line 1: Investment Account -4800

Line 2: Shares Short Sell 5000

Lime 3: Other Income -200"

You got it.  Just to confirm, Other Income is recorded as -$200 but it is actually a $200 gain.  That's because this is an Expense transaction in QB but I suspect you know that.  Nice work.