QUESTION: Accounting and reporting: how to account for deposits and withdrawals?

Proper accounting of brokerage account deposits and cash withdrawals is the basis for reliable calculation of investment returns and correct interaction with tax authorities. For maintaining quality reporting regarding accounting and reporting, it is extremely useful to develop a procedure in advance for recording all cash flows so that each movement of funds does not disrupt the overall picture of your investment portfolio's performance.

The first step in this direction is the creation of a mathematical model for the base investment scenario and a stress scenario for unforeseen circumstances. Allocate a mandatory cash reserve of 10-20 percent of the total capital volume in case of the need for emergency withdrawal of funds or making unplanned profitable trades. Clearly determine in advance which specific expenses or regular investment contributions you will cut or temporarily freeze first if the financial situation worsens.

When making deposits and withdrawals, it is important to separate operating income from the appreciation of the assets themselves. When you deposit additional money into your brokerage account, the total value of the portfolio increases, but this is not the merit of successful investments. If this factor is not taken into account, you can get distorted return indicators that will show false portfolio growth at the expense of your own external savings.

Similarly, the withdrawal of funds reduces the working capital of the portfolio. With partial or full withdrawal of money, it is necessary to record the realized profit or loss, as well as calculate the amount of personal income tax if the broker does not withhold it automatically. Using specialized software for portfolio accounting allows you to automatically tag each capital input and output operation, freeing the investor from routine calculations and reducing the risk of errors in the annual tax return.