Unit Cancellation

From Timetotrade

Unit Cancellation is part of the Unit Valuation System.

Purpose

Unit Cancellation is typically used if either:

you want an expense to be allocated equally amongst club members, rather than in proportion to their unit holding, or

you do not want the expenditure to change / reduce the Unit Value.

Whereas, Unit Addition is typically used for non-investment related income (eg 'appearance' fees paid to the club for speaking at an event), in which case the unit value does not change, but instead the number of units held by each member increases.

The Unit Value is calculated as: the total assets divided by the number of units allocated.

Let us use as an example the purchase of stationery for the club. If you deduct this expense from the total club assets, without changing the number of allocated units, then the unit value will decrease. And so in turn, investment performance would appear to decrease. In addition, the expense is allocated in proportion to each members' unit holding, so those members with a higher number of units incur a higher proportion of the expense than those with fewer units. Whilst this is a perfectly fair arrangement for those expenses that are incurred in direct proportion to a member's investment holding (eg stamp duty / brokers' commissions) the club might decide that other 'non-direct trading' expenses, like stationery or room hire should be paid for equally by club members.

And so, if preferred, a commonly used solution is to allocate the expense by cancelling units equally amongst members, such that the number of allocated units is reduced in line with the reduced value of the club assets. The net effect being that the Unit Value remains constant.

Conversely, Unit Addition would result in the number of units increasing in relationship to the value of the income.

If you do not want income or expenditure transactions to change the Unit Value, or you want the transactions allocated equally amongst club members, you can either:

set up a separate Ledger that is not included in the UVS calculations, such as a Petty Cash Ledger
or for specific transactions within the unit value system, you can choose the uvs action: cancel units for specific expenditure transactions, or the uvs action: add units for specific income transactions

[edit]

How it works

If unit cancellation or addition is selected when entering a transaction, the number of allocated units are effectively decreased or increased in proportion to the decrease or increase in the overall asset value; the net effect being that the unit value remains unchanged. For investment clubs, each member's units are decreased or increased equally during unit cancellation or addition regardless of the number of units owned by each club member.

For example if your total assets are worth £1,000 and there are 1,000 units allocated, the resulting unit value will be £1. If you add an income transaction of £100 pounds without changing the number of allocated units, then the unit value will increase to £1.10 i.e. (£1,000 + £100) / 1,000 units. Alternatively if you add an expenditure transaction of £100 pounds without changing the number of units, the unit value will drop to £0.90 i.e. (£1,000 - £100) / 1,000 units.

If you select 'add units' or 'cancel units' when entering an income or expenditure transaction, not only will the asset value be increased or decreased, but the number of allocated units will be increased or decreased proportionately. For example if your total assets are worth £1,000 and there are 1,000 units allocated, the resulting unit value will be £1. If you then add an income transaction of £100 pounds and select to 'add units', the resulting unit value will remain unchanged i.e. the assets will be increased to £1,100 and the number of allocated units will be increased to 1,100. If you are in an investment club, all club member unit allocations will be increased equally when you add an income transaction of the type 'add units'. In this example if 100 units are added and there are 10 club members, the number of units owned by each club member is increased equally by 10 units.

Alternatively if you enter an expenditure transaction of £100, the asset value will be decreased to £900 and the number of allocated units will be reduced to 900 units, therefore keeping the unit value consistent. In this example if 100 units are cancelled and there are 10 club members, the number of units owned by each club member is reduced equally by 10 units.

Unit Cancellation or addition, as in 'cancel units' or 'add units', is now commonly used in place of traditional 'Petty Cash' ledgers that were kept outside of the Unit Valuation System. Historically non-trading related expenses where paid out of a 'Petty Cash' ledger to prevent the unit value becoming skewed, however with the introduction of 'Unit Cancellation' all income and expenditure transactions can now be dealt within the Unit Valuation System ledgers. As a rule of thumb Unit Cancellation should be used for all income or expenditure transactions that are to be allocated equally between members.

For an example of unit valuation calculations please go to the "Unit Valuation System" help page.

[edit]



timetotrade Unit Cancellation From Timetotrade Jump to: navigation, search Unit Cancellation is part of the Unit Valuation System. [edit] Purpose Unit Cancellation is typically used if either: you want an expense to be allocated equally amongst club members, rather than in proportion to their unit holding, or you do not want the expenditure to change / reduce the Unit Value. Whereas, Unit Addition is typically used for non-investment related income (eg 'appearance' fees paid to the club for speaking at an event), in which case the unit value does not change, but instead the number of units held by each member increases. The Unit Value is calculated as: the total assets divided by the number of units allocated. Let us use as an example the purchase of stationery for the club. If you deduct this expense from the total club assets, without changing the number of allocated units, then the unit value will decrease. And so in turn, investment performance would appear to decrease. In addition, the expense is allocated in proportion to each members' unit holding, so those members with a higher number of units incur a higher proportion of the expense than those with fewer units. Whilst this is a perfectly fair arrangement for those expenses that are incurred in direct proportion to a member's investment holding (eg stamp duty / brokers' commissions) the club might decide that other 'non-direct trading' expenses, like stationery or room hire should be paid for equally by club members. And so, if preferred, a commonly used solution is to allocate the expense by cancelling units equally amongst members, such that the number of allocated units is reduced in line with the reduced value of the club assets. The net effect being that the Unit Value remains constant. Conversely, Unit Addition would result in the number of units increasing in relationship to the value of the income. If you do not want income or expenditure transactions to change the Unit Value, or you want the transactions allocated equally amongst club members, you can either: set up a separate Ledger that is not included in the UVS calculations, such as a Petty Cash Ledger or for specific transactions within the unit value system, you can choose the uvs action: cancel units for specific expenditure transactions, or the uvs action: add units for specific income transactions [edit] How it works If unit cancellation or addition is selected when entering a transaction, the number of allocated units are effectively decreased or increased in proportion to the decrease or increase in the overall asset value; the net effect being that the unit value remains unchanged. For investment clubs, each member's units are decreased or increased equally during unit cancellation or addition regardless of the number of units owned by each club member. For example if your total assets are worth £1,000 and there are 1,000 units allocated, the resulting unit value will be £1. If you add an income transaction of £100 pounds without changing the number of allocated units, then the unit value will increase to £1.10 i.e. (£1,000 + £100) / 1,000 units. Alternatively if you add an expenditure transaction of £100 pounds without changing the number of units, the unit value will drop to £0.90 i.e. (£1,000 - £100) / 1,000 units. If you select 'add units' or 'cancel units' when entering an income or expenditure transaction, not only will the asset value be increased or decreased, but the number of allocated units will be increased or decreased proportionately. For example if your total assets are worth £1,000 and there are 1,000 units allocated, the resulting unit value will be £1. If you then add an income transaction of £100 pounds and select to 'add units', the resulting unit value will remain unchanged i.e. the assets will be increased to £1,100 and the number of allocated units will be increased to 1,100. If you are in an investment club, all club member unit allocations will be increased equally when you add an income transaction of the type 'add units'. In this example if 100 units are added and there are 10 club members, the number of units owned by each club member is increased equally by 10 units. Alternatively if you enter an expenditure transaction of £100, the asset value will be decreased to £900 and the number of allocated units will be reduced to 900 units, therefore keeping the unit value consistent. In this example if 100 units are cancelled and there are 10 club members, the number of units owned by each club member is reduced equally by 10 units. Unit Cancellation or addition, as in 'cancel units' or 'add units', is now commonly used in place of traditional 'Petty Cash' ledgers that were kept outside of the Unit Valuation System. Historically non-trading related expenses where paid out of a 'Petty Cash' ledger to prevent the unit value becoming skewed, however with the introduction of 'Unit Cancellation' all income and expenditure transactions can now be dealt within the Unit Valuation System ledgers. As a rule of thumb Unit Cancellation should be used for all income or expenditure transactions that are to be allocated equally between members. For an example of unit valuation calculations please go to the "Unit Valuation System" help page. [edit] Further Reading Click here to return to the Accounts Help Pages Investment Club User Manual table of contents The Investment Club Directory timetotrade is where private investors and investment clubs manage investment affairs. Consolidate and manage your investments, calculate your Capital Gains and Income tax liabilities, track performance and asset allocation, keep a trading journal, access professional trading tools and create alerts to avoid missed trading opportunities. Click here to create a FREE timetotrade account. Retrieved from "http://www.timetotrade.eu/wiki/index.php/Unit_Cancellation" Help index timetotrade Home © 2005-2008 Sensatus (contact us)

Unit Cancellation

From Timetotrade

Purpose

How it works

Further Reading