You will need to record changes in the value of your Bitcoin wallet from time to time to account for variations in the exchange rate. You will use a journal entry for this.
- Select “Make General Journal Entries” from the “Company” menu. General journal entries must have two equal parts- a debit and a credit.
- From the account menu on the general journal entry screen, you will select two accounts- the Bitcoin Wallet other asset account and the Bitcoin Exchange Gains income account that you created earlier.
- To increase the balance, post a debit for the amount of the increase to your asset account and an equivalent credit to your income account. To decrease the balance, post the decrease amount to your income account as a debit and an equivalent credit to your asset account. For example, the journal entry for a $100 change in the value of your Bitcoin holdings will look like this:
For Increase
Account Debit Credit
Bitcoin Wallet $100
Bitcoin Exchange Gains $100
For Decrease
Account Debit Credit
Bitcoin Exchange Gains $100
Bitcoin Wallet $100
Eventually, you will want to convert your holdings to dollars or you may want to convert some of your dollars to Bitcoins. You can use another journal entry for this. You will need to account for any fees that you pay for the exchange. This example assumes a $1 transaction fee, accounted for using a service charge general ledger account, but you can create a new general ledger account for this if you want. The journal entry will look like this:
Conversion to dollars
Account Debit Credit
Cash (or Bank Account) $100
Bank Service Charges $ 1
Bitcoin Wallet $101
Conversion from dollars
Account Debit Credit
Bitcoin Wallet $100
Bank Service Charges $ 1
Cash (or Bank Account) $101
Bitcoin exchange gains are taxable as income for business taxpayers and individuals (more on this in a later post). This procedure will post all of your gains and losses to one account which will allow you to declare your gains or deduct your losses at the end of your fiscal year. Note that for tax purposes you will not need to declare income and cannot claim any loss until you convert Bitcoin to dollars (“recognize when realized”). If you are a full or part time Bitcoin trader, you may want to use an equity account to track your unrealized gains or losses as you revalue your wallet over time. As always, this is one of several ways to account for this kind of transaction in QuickBooks. Other procedures may work equally well.
The next part of the series will be “Paying Vendors.” Feel free to contact me with feedback, questions, or requests.
Jason M Tyra also writes: Using BitCoin with Quickbooks Part 3: Paying Vendors: This is the third part of a multi-part series that will explain how to integrate Bitcoin as a payment method using your existing accounting software package. This procedure will allow you to properly account your Bitcoin expenses and integrate those expenses into your business records as if they had originally been made in your home currency.
QuickBooks’ workflow model allows you to track accounts payable by vendor, reminds you when your bills are due and provides an easy to understand way to enter payments. If you are fortunate enough to identify a vendor in your supply chain that accepts Bitcoin, then you may choose to do this instead of converting to dollars. However, you should ensure that your vendor dynamically updates the Bitcoin exchange rate so that prices remain relatively stable in your functional currency.
1. Enter a bill into Quickbooks using the “Enter Bills” function on the home screen. Update the vendor name, address, and payment terms and assign an expense account to the expenditure. This will most likely be a cost of goods sold (“COGS”) account if you are purchasing items for resale. Be sure to enter the amount of the bill in your functional currency; QuickBooks will not allow you to enter bills in other currencies unless the multi-currency function discussed in Part 1 of this series has been activated. Also, don’t forget to enter the due date.
2. At this point, your only options are checking account or credit card account to pay bills. QuickBooks will not allow you to pay using the Bitcoin account that you created previously. When the bill comes due or when you decide to pay, you will need to work around this by creating a general journal entry.
3. Select “Make General Journal Entries” from the “Company” menu. This will open the Journal Entry window. Your entry should look like this:
Account Debit Credit Name_______
Accounts Payable Amount to Pay Vendor to Pay
Bitcoin Wallet Amount to Pay
This entry will post a credit balance to the sub-journal in your accounts receivable ledger for the vendor that you want to pay. Note that this will not work if the vendor is not set up in your QuickBooks file or if you forget to select the correct vendor from the name box.
4. Select the “Pay Bills” option from the home screen. Select the bill that you want to pay by checking the box next to it. Near the bottom of the screen, you should see the amount you just posted for “Total Credits Available.”
5. Click the “Set Credits” button, then check the box next to the credit amount to apply the credit as a payment and click “Done.” Two things should happen – the credit amount you entered should zero out and the bill should now show as paid.
QuickBooks automatically numbers journal entries in the order entered, not by date, so be aware that your entries may appear out of order if you post-date them to reflect a future payment. Also, you may need to revalue your wallet before or after you use it to pay bills to ensure that you don’t end up with an incorrect ending balance for that account. See Part 2 for instructions on how to do this.
As always, this is one of several ways to account for this kind of transaction in QuickBooks. Other procedures may work equally well. Feel free to contact me with feedback, questions, or requests.
You can apply some other method to cash out anonymously for the bitcoin. Bitcoin to bank account transfer is another process of your cash out. Bitcoin ATM Card.
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