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Securities Accounting
Available for Sale Securities Accounting
If you have investments in debt and equity securities that are classified as available-for-sale securities, and also if the equity securities have readily determinable fair values, then subsequently record their fair values in the balance sheet. You should exclude any unrealized holding gains and losses from earnings, and instead report them in other comprehensive income until they have been realized (i.e., by selling the securities).
If an available-for-sale security is being hedged in a fair value hedge, then recognize the related holding gain or loss in earnings during the period of the hedge.
For example, Plasma Storage Devices buys $10,000 of equity securities, which it classifies as available-for-sale. After one year, the quoted market price of the securities drops the total investment value to $8,000. In the following year, the quoted market price of the securities increases the total investment value to $11,000, and Plasma then sells the equity securities.
Plasma records the decline in value in the first year with the following entry:
| Debit | Credit | |
| Loss on available-for-sale securities (recorded in other comprehensive income) | 2,000 | |
| Investments – Available-for-sale | 2,000 |
Plasma records the increase in value in the second year, as well as the sale of the investment, with the following entries:
| Debit | Credit | |
| Investments- Available-for-sale | 3,000 | |
| Gain on available-for-sale securities | 1,000 | |
| Loss on available-for-sale securities (recorded in other comprehensive income) | 2,000 |
| Debit | Credit | |
| Cash | 11,000 | |
| Investments – Available-for-sale | 11,000 |
Held to Maturity Securities Accounting
If you have investments in debt and equity securities that are classified as held-to-maturity, then subsequently record them at their amortized cost in the balance sheet. As the name implies, a held-to-maturity security is one that a business has both the ability and the intention to hold until its maturity date.
Trading Securities Accounting
If you have investments in debt and equity securities that are classified as trading securities, and also if the equity securities have readily determinable fair values, then subsequently record their fair values in the balance sheet and record any unrealized holding gains and losses in earnings. A trading security is defined as an investment that the holder intends to sell in the short-term for a profit.
For example, the McGraw Rifle Company has the following experience with its trading portfolio of investments:
| Security | Cost | Fair Value | Difference |
| Minnetonka bonds | $10,000 | $9,000 | $(1,000) |
| New York bonds | 25,000 | 27,000 | 2,000 |
| Okeanos bonds | 15,000 | 10,000 | (5,000) |
| Parsippany bonds | 20,000 | 14,000 | (6,000) |
| $70,000 | $60,000 | $(10,000) |
McGraw records a $10,000 adjustment to recognize the decline in the fair value of its trading portfolio with the following entry:
| Debit | Credit | |
| Unrealized loss on trading securities | 10,000 | |
| Valuation allowance | 10,000 |
In the following month, the trading portfolio’s valuation increases by $3,000, which McGraw documents with this entry:
| Debit | Credit | |
| Valuation allowance | 3,000 | |
| Unrealized gain on trading securities | 3,000 |