@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.
